The VLCC market gradually improved, and small and medium-sized crude oil tankers and finished oil tankers continued to boom. Cosco Marine Energy released interim results: the net profit of 1H22 was 160 million yuan, down 70.8% from the same period last year, in line with the performance forecast, and the decline in net profit was mainly due to the downturn in the VLCC market. Since the beginning of this year, the conflict between Russia and Ukraine has brought structural changes to the global oil trade, resulting in differences in freight rates for different ship types. On the whole, the freight rates of small and medium-sized crude oil and finished oil tankers jumped sharply in the first half of the year, and the VLCC deficit narrowed. Oil transportation is affected by oil prices, geopolitics and other factors, and short-term freight rates are highly volatile. In the medium to long term, we believe that oil transportation has come out of the doldrums and profits will continue to improve. We downgrade our 22-year net profit forecast to $1.45 billion to reflect the drag on our first-half results (the previous value is $2.78 billion) and maintain a net profit of $4.49 billion / $5.64 billion for 23 pounds. Based on the average PB of 2.6x/1.0x22-23 (the BVPS average is 6.77 yuan), the target price is raised to 17.6 yuan / 7.7 Hong Kong dollars (corresponding to the company's three-year PB average plus 5 standard deviations, the valuation premium is mainly due to the upward boom in the industry, profits are expected to increase; the pre-target price is 7.6 yuan / 4.60 Hong Kong dollars), maintain the "buy".
Profit improved compared with the previous month, and the freight rates of small and medium-sized ships increased significantly.
2Q22, the company achieved a net profit of 130 million yuan, significantly improved month-on-month (1Q22 net profit of 25.03 million yuan), mainly due to the conflict between Russia and Ukraine led to a substantial increase in exports from the United States Bay and West Africa to European pallets, pushing up the price of small and medium-sized crude oil ships (Suezmax/Aframax ships). In terms of finished oil tankers, oil consumption in Europe and the United States gradually recovered, superimposed by Europe to reduce Russian oil imports, and turned to third countries to buy, pushing up trade activity and freight rates (MR ships). In the first half of the year, the average freight rate of VLCC/Suezmax/Aframax/MR ships rose 183%, 906%, 664%, 226% compared with the same period last year (a low base in the same period last year). Overall, 1H22's foreign trade crude oil business lost 410 million yuan (mainly due to VLCC losses), foreign trade oil products business realized a gross profit of 90.2 million yuan.
Domestic trade, oil transportation and LNG contribute stable income
The company's domestic trade oil business is profitable, mainly through signing COA contracts with a number of core customers, locking more than 90% of the basic supply. As of June 2022, the company's market share in domestic crude oil transportation has reached 57%. In the first half of the year, the company's domestic trade and oil transportation business achieved a gross profit of 730 million yuan. In terms of LNG transportation, the company has participated in investing in 49 LNG vessels, all of which have signed long-term charter contracts to achieve stable ship charter and investment income. In the first half of the year, the LNG transportation business contributed a net profit of 380 million yuan.
The VLCC freight rate has bottomed out and rebounded, and its demeanor has improved from 2023 to 2024. as of June 2022, the company has operated a total of 109crude oil tankers and 52 finished oil tankers. Among them, 54 VLCC tankers (49 self-owned + 5 chartered) have a direct impact on the company's profits. The deep downturn in the VLCC market from 2020 to 2021 led to a loss in the company's crude oil wheel business. We believe that with the gradual tightening of the supply of crude oil tankers, the recovery of global oil production and the demand for replenishment of inventories, VLCC freight rates are expected to rebound significantly in 2023-2024, which will promote the company's profit growth.
Risk tips: 1) freight rate growth is lower than expected; 2) crude oil demand is lower than expected; 3) geopolitical risk; 4) natural disasters.