The net profit of 2022Q2 Company doubled compared with Q1, and the increase of labor costs and subsidies contributed to the increase of management expenses under the background of local epidemic situation. The VLCC market has improved significantly recently, with the average daily earnings of VLCC in the week of August 19 up 91% from the previous week. Revenue from 2022H1's foreign trade crude oil and oil products business increased by 50.2 per cent and 70.7 per cent respectively compared with the same period last year. The company reduces the traditional capacity input and adjusts the capacity of ships engaged in both domestic and foreign trade to improve the overall fleet income. Fuel and labor costs drive cost growth, and the company's cost side is expected to be optimized in the second half of the year. The proportion of VLCC orders on hand continues to decline, continue to go to the warehouse to accumulate momentum, and look forward to the landing of the Iran nuclear agreement to optimize oil supply and demand. It is suggested that we should pay attention to the approaching inflection point of inventory replenishment cycle and the impact of geopolitical events on transportation distance and ship breaking volume, look forward to the release of a new round of cyclical elasticity of foreign trade oil transportation performance, and maintain the "buy" rating.

The net profit of Q2 increased by 106% compared with Q1, the increase in labor costs pushed up the management expenses, and the VLCC market improved significantly recently. 2022H1's revenue and net profit increased by 22.8% year-on-year,-53.9% to 7.51 billion yuan and 330 million yuan, of which Q2 revenue and net profit increased by 32.8%,-27.7% to 4.04 billion yuan and 220 million yuan, respectively, and net profit increased by 106.0% compared with Q1. We judge that mainly under the influence of the "Russian-Ukrainian conflict", Western countries imposed energy sanctions on Russia and changed the pattern of international oil trade. The demand for international transportation of crude oil and oil products has picked up. Q2 management expenses increased by 61.6% to 320 million yuan compared with the same period last year, and the increase in management expenses was the main source of cost increment, which is mainly due to the increase in labor costs and subsidies in the context of the epidemic. The VLCC market has improved significantly recently. With the increase in US Bay crude oil exports, the Atlantic market is active, attracting capacity to shift westward while leading to a tightening of eastward transport capacity. The average daily earnings of VLCC increased 91 per cent to $44601 per day from August 15 to August 19, while the average daily earnings of TD3C (Middle East-China) increased 100 per cent to $51256 per day. If the Iran nuclear agreement hits the ground in the future, it is expected that the optimization of supply and demand of oil transportation will resonate with the inflection point of replenishment. It is expected that at that time, VLCC freight rates will usher in a jump phase, and oil transportation will usher in a cyclical market in annual units.

Foreign trade crude oil-refined oil business both grow, the company reduces the traditional capacity investment, the use of domestic and foreign trade ships for capacity adjustment, to enhance the overall fleet income. 2022H1's foreign trade tanker revenue increased 45% to 3.94 billion yuan compared with the same period last year, of which foreign trade crude oil and foreign trade oil products increased by 50.2%, 70.7% to 2.8 billion yuan and 780 million yuan respectively. In the overall downturn of the VLCC market in the first half of the year, the company reduced its traditional capacity to capture market opportunities, and the number of cargo operation days in the Atlantic region increased by 5.9% compared with the same period last year. At the same time, the company makes use of ships engaged in both domestic and foreign trade to adjust the transport capacity, changing the three ships from domestic trade to foreign trade, so as to enhance the overall fleet income. In terms of fleet optimization, the company ended six VLCC leases in the first half of the year, sold one old Suezmax tanker and connected to one LNG dual fuel VLCC and one MR.

Q2 main business cost growth is higher than revenue 11.3pcts, fuel and labor costs drive cost growth, the company's cost side is expected to be optimized in the second half of the year. In the first half of the year, the cost of the main business increased by 32.1% compared with the same period last year, of which the cost of the main business of Q2 increased by 44.1% compared with the same period last year, which is higher than the income 11.3pcts. In the first half of the year, fuel charges increased by 62.9% to 2.36 billion yuan, crew fees increased by 33.4% to 1.1 billion yuan, and ship charter increased by 89.7% to 850 million yuan. We judge that it is mainly due to the rise in energy prices, the increase in labor costs, and the increase in demand for oil transportation. driving up charter prices and other factors. 2022H1 financial expenses fell 9.6 per cent year-on-year to 370 million yuan, which is expected to be mainly affected by an increase in exchange gains caused by the rise in the exchange rate of the US dollar against the renminbi. In the second half of the year, the company will make every effort to tap the potential of cost reduction and efficiency, scientifically implement long-term oil locking and spot procurement, and do a good job in the lean management of regular fuel consumption, and the cost side is expected to be optimized.

The proportion of VLCC orders on hand continues to decline, continue to go to the warehouse to accumulate momentum, and look forward to the landing of the Iran nuclear agreement to optimize oil supply and demand. On the supply side, VLCC new ship orders remained zero as of July 2022, while the proportion of VLCC orders on hand fell to 4.8 per cent from 7.7 per cent in January 2022. At present, the proportion of on-hand orders can no longer meet the demand for replacement of old VLCC ships over the age of 20. On the demand side, according to EIA data, the current US crude oil inventory (including SPR) has dropped to the 2003 level. In addition, natural gas prices remain high or push some European countries to increase crude oil reserves through the winter, leading to an increase in demand for some oil shipments. At the same time, the Iranian nuclear agreement continues to move forward, and if the Iranian nuclear agreement is reached, the high freight rates brought about by the black market will disappear, the income of old oil tankers may not be able to cover operating costs, and the superimposed new environmental protection convention is approaching, and it is difficult to refit old oil tankers with low performance-to-price ratio. it is expected to accelerate the withdrawal of some old oil tankers. Under the background that the berth of the shipyard is scheduled to wait until 2024 and the rising cost of new ships leads to the stagnation of new ship orders, the supply and demand structure of oil transportation is expected to be improved.

Risk factors: the failure of negotiations on the Iranian nuclear agreement; the dismantling of old ships is not as expected; the price of crude oil remains high; the decline in consumer demand for crude oil is higher than expected; the capacity of shipyards is greatly expanded; and the global epidemic control is not as expected.

Profit forecast, valuation and rating: 2022Q2's net profit doubled compared with Q1, and the increase in labor costs and subsidies contributed to the increase in management expenses under the background of local epidemic. The VLCC market has improved significantly recently, with the average daily earnings of VLCC in the week of August 19 up 91% from the previous week. Revenue from 2022H1's foreign trade crude oil and oil products business increased by 50.2 per cent and 70.7 per cent respectively compared with the same period last year. The company reduces the traditional capacity input and adjusts the capacity of ships engaged in both domestic and foreign trade to improve the overall fleet income. Fuel and labor costs drive cost growth, and the company's cost side is expected to be optimized in the second half of the year. The proportion of VLCC on-hand orders continues to decline, and the proportion of on-hand orders dropped to 4.8% in July 2022. We continue to go to the warehouse to accumulate kinetic energy, and we look forward to the landing of the Iranian nuclear agreement to optimize the supply and demand of oil transportation. It is suggested that attention should be paid to the approaching inflection point of inventory replenishment cycle and the impact of geopolitical events on transport distance and ship breaking volume, and look forward to the release of a new round of cyclical elasticity in foreign trade oil transportation performance. According to the results of the China report, we adjust the company's net profit forecast from 2022 to 2024 to 100 million yuan on 14-42-56 (the original forecast is 12-28-43 billion yuan), corresponding to the EPS forecast of 0.28 yuan 0.87 pound 1.18 yuan (the original forecast is 0.26 pound 0.58 pound 0.90 yuan), continue to recommend and maintain the "buy" rating.