1H performance declined year-on-year, mainly due to improvements in export demand compounded by a fall in high investment income. SIPG released 1H23 results: 1) Operating income fell 19.8% year on year to 16.11 billion yuan; 2) Net profit from Gimu fell 32.2% year on year to 7.33 billion yuan. Among them, investment income fell 36.2% year on year to 4.17 billion yuan. 2Q23 achieved net profit of 3.78 billion yuan, a year-on-year decrease of 29.0%, but an increase of 6.4% over the previous year. The overall year-on-year decline in the company's performance in the first half of the year was mainly due to weak global macroeconomics suppressing export demand in China's manufacturing industry. High freight rates fell, and the company's shipping company Dongfang Overseas's revenue and profit scale fell sharply year on year. Since the second quarter, the company's profit improvement has mainly been due to improved port throughput, and consolidated freight rates have stabilized month-on-month. We maintain our 2023/2024/2025 net profit forecast of 15.4 billion/17.3 billion/18.4 billion yuan and target price of 6.6 billion yuan (based on 10.0x 2023E PE, the average PE value for three years in the company's history), and maintain “buying”.

1H throughput performance exceeded the industry average. 2Q throughput rebounded significantly by 1H23 over the same period. The company completed cargo/container throughput of 280 million tons/23.74 million TEUs, an increase of 13.6%/5.3% over the previous year (national ports during the same period: 8.0%/4.8% year on year). Among them, 2Q23 completed a cargo throughput of 140 million tons, an increase of 31.3%/8.0% year over year; completed container throughput of 12.26 million TEUs, an increase of 19.3%/6.9% year over year. The company's main port business throughput grew steadily in the first half of the year, and its performance was superior to the overall level of ports in the country. The company's port throughput increased year-on-year in the second quarter, mainly due to the low base effect of the previous year; the month-on-month increase was mainly due to the seasonality of the port industry, compounded by the recovery in China's post-epidemic economic activity, driving demand for bulk goods imports and driving marginal improvements in manufacturing exports.

Investment income from Dongfang and Overseas declined sharply year over year

In 1H23, the company's investment income fell 36.2% year on year to 4.170 billion yuan. Among them, investment income from Dongfang Overseas fell 78.8% year on year to 700 million yuan. The overall decline in the company's investment income is mainly due to the decline in the shipping market since the second half of last year, and the sharp drop in freight rates has dragged down the revenue and profit levels of the container shipping company Dongfanghai. Looking ahead to 2H23, considering marginal improvements in the global macro environment, and compounding the high prices of leading container shipping companies, we believe there is a marginal stabilization trend in consolidated freight rates. Since August, the average Shanghai Export Container Freight Index (SCFI) has risen 5.7% month-on-month; the latest US freight rate (August 29) has risen 71.0% from the June low.

Optimistic about the company's position as a hub port, with medium- to long-term development improving

We are optimistic that Shanghai Port will rely on the economic hinterland of the Yangtze River Delta, radiate the Yangtze River Economic Belt and the “Belt and Road”, attract global liner companies, increase connectivity to foreign trade routes, and consolidate its status as a hub port. The advantages of Shanghai Port as a “bridgehead” linking China's dual cycle strategy and the fulcrum of the “Belt and Road” strategy are prominent, and the company's long-term development has been improving.

Risk warning: port throughput falls short of expectations; investment returns fall short of expectations; natural disasters; policy risks.