2023 results in line with our expectations

Zhonggu Logistics announced its 2023 results: Revenue fell 12.5% YoY to Rmb12.44bn and attributable net profit declined 37.4% YoY to Rmb1.72bn or Rmb0.82/sh. In 4Q23, revenue fell 4.9% YoY but increased 0.02% QoQ to Rmb3.15bn, while attributable net profit dropped 3.7% YoY but rose 73.8% QoQ to Rmb525mn. Excluding gains from ship sales, net profit rose 43.1% QoQ in 4Q23, and the firm’s 2023 results were in line with our expectations. We attribute the QoQ earnings growth in 4Q23 to higher freight rates during the peak season in 4Q23 (PDCI index up 7.8% QoQ, down 31.2% YoY).

Full-year dividend beat expectation; dividend attractive. In 2023, the firm’s dividend payout ratio reached 88.05%, beating our expectations. As the firm gradually launches large vessels, we believe its future capex will be relatively limited. Assuming a dividend payout ratio of 70% in 2024, its dividend yield will likely be 6.3% in 2024, which is attractive.

Trends to watch

Shift from bulk shipping to container shipping paid off; large-vessel strategy materializing; costs to improve further. In 2023, the firm’s throughput rose 22% YoY to 14.83mn TEU, with the container throughput of goods previously transported as bulk cargo up 29% YoY, accounting for 22% of its total cargo volume. According to the firm’s announcement, 15 new 89,000t large vessels have been put into operation, and the remaining three are scheduled to be start operation in 1H24. We see further upside in the firm’s cost cuts in 2024 as it launches large vessels and operating efficiency improves.

Supply of new shipping capacity limited; demand to benefit from shift from bulk shipping to container shipping in the long term. As the firm’s large vessels have gradually started operation, we think there is little new shipping capacity in 2024. We also believe that it is unlikely that the transport capacity will return from export market to domestic trade market, since the freight rates for foreign trade have relatively improved.

We expect market demand to increase in the long term, driven by the shift from bulk shipping to container shipping. Data from yearbooks for the port industry shows the containerization rate of cargo throughput at ports in China was about 20.5% in 2021, compared with over 50% in developed　　countries. The proportion was even lower for coal transport at low single digits. We believe the market share of container transport may continue to increase, as container shipping is an efficient mode of transportation.

Financials and valuation

As freight rates have been lower than expected YTD, we cut our 2024 net profit forecast 12.3% to Rmb1.64bn and introduce our 2025 net profit forecast at Rmb1.77bn. The stock is trading at 10.9x 2024e and 10.1x 2025e P/E. We maintain an OUTPERFORM rating and cut our target price by 8.0% to Rmb11.5/sh, implying 14.8x 2024e and 13.7x 2025e P/E, offering 35.1% upside.

Risks

Domestic demand weakens; transport capacity shifting from export market to domestic trade market.