Qingdao Port has long been a major port in the north with the highest ROE level. Qingdao Port is the fourth largest coastal port in the world and the second largest foreign trade port in China. In 2022, it completed a cargo throughput of 627 million tons and a container throughput of 26.82 million TEU. The total number of routes ranked first among northern Chinese ports. 1) In terms of performance, Qingdao Port is leading the industry. The company's ROE level ranked first in the industry in 2018-20, 12.4% in '22, and second in the industry. Revenue in 2022 was 19.3 billion yuan (the port's main business revenue industry third), three-year CAGR of 16.6% (industry average 6.1%), and net profit of 4.5 billion yuan (second in the industry, second only to SIPG).

2) Looking at the business structure: liquid bulk goods accounted for the highest profit contribution. The profit before tax in 2022 was 2.3 billion yuan, accounting for 34%, the container business was 1.67 billion yuan, accounting for 24%, logistics and value-added services accounted for 22%, and the dry bulk business accounted for 7%. 3) Occupy a location advantage and lead in operational efficiency. a) Geographical location: A natural deep-water port located at the confluence of land and sea on the “Belt and Road”. The waters are wide and deep, and navigable in all seasons. b) Shandong Province, which is backed by a well-developed economy and transportation network. The province with the largest total economy in the north, has a complete range of industries and a well-developed transportation network, providing support for the throughput and balanced cargo structure of Qingdao Port. c) The company is one of the main integrated ports in the Bohai Rim region. The cargo types at Qingdao Port are dominated by foreign trade, and the structure is balanced. It can smooth out the cyclical fluctuations of a single type of cargo. Container throughput in the Bohai Rim port area accounted for 34% of the market in '22, an increase of 3.3 pct over three years. d) Leading efficiency: Terminal handling operations lead the world in efficiency.

How to understand the investment opportunities of Qingdao Port: Looking for dual catalysis under a valuation system with Chinese characteristics? In the in-depth industry report “Quality Ports Have Major Opportunities to Reinvent Value — How to Understand the Port Industry under a Valuation System with Chinese Characteristics”, we put forward two core opinions: First, we believe that high-quality port assets are not weaker than highways. The reason is that from business model analysis, port enterprises are asset-heavy, have core barriers, and will eventually become cash bulls. Currently, China's port industry is undergoing a new cycle of regional integration and steady increase in rates. Second, we believe that the “Belt and Road” and “regional port integration” are two major catalytic clues under the valuation system characteristic of China. Specifically, in the case of Qingdao Port: 1) Catalysis 1: The potential for pattern optimization brought about by the promotion of regional port integration. From an industry perspective, the “one province, one port” model establishes a steady rate upgrade cycle. Looking at the Shandong Port Group, over the past three years, the integrated development of ports in Shandong Province has unleashed a multiplier effect. After the establishment of the provincial port group, operating revenue and profits grew rapidly, and profitability improved markedly. The province played a game of chess, and each port carried out its duties. “With Qingdao Port as the lead, Rizhao Port and Yantai Port as the two wings, and Bohai Bay Port as an extension” pattern, if further collaboration can be achieved in the future, it will better enhance the competitiveness, influence and profitability of Shandong Port in the Bohai Rim region. 2) Catalysis 2: “Belt and Road” opens a window of opportunity. Foreign trade along the 2023Q1 “Belt and Road” continues to maintain a high growth rate. In the import and export structure of Shandong Province, the import and export value of regions along the “Belt and Road” route accounts for 38%. Qingdao Port will continue to benefit from macro-changes in industrial structure and export direction. At the same time, the 10th anniversary of the “Belt and Road” is also expected to bring new momentum to high-quality ports.

Investment suggestions: 1) Profit forecast: We expect the company to achieve net profit of 50.8, 567, and 6.35 billion yuan respectively in 2023-25, up 12.2%, 11.6%, and 12.1%, respectively. The corresponding EPS is 0.78, 0.87 and 0.98 yuan respectively, and PE is 10, 9, and 8 times respectively. 2) Target price: The company emphasizes the view that leading high quality ports should be valued closer to highways. The average PB of the six highway companies with a market value of 10 billion or more is 1.4 times, while the Wantong Expressway and Ninghu Expressway, which have ROE levels similar to Qingdao Port, all reached 1.5 times PB. Therefore, we gave an estimated net asset of 1.5 times PB in 2023, corresponding to a target price of 9.4 yuan, which is expected to cover 26% of the current price, covering a “recommended” rating for the first time.

Risk warning: The economy has declined, and the hinterland economy has clearly fluctuated.