1. How to understand investment opportunities in marine transportation of refined oil products. 1. Characteristics of marine transportation of refined oil products: 1) Types and trade routes are more diverse than crude oil. The direction of crude oil trade is to be shipped from crude oil producing countries to refining China, while trade in refined oil flows in multiple directions due to global energy refining imbalances and differences in terminal demand. 2) Trade demand for refined oil products is mainly within the region, such as within the Asia-Pacific region, the Baltic Sea/Black Sea/Mediterranean region, and the United States-Latin America.

Among long-distance trade routes, the Middle East-Asia and transatlantic routes account for only 6.2% and 5.7% of traffic. 3) The refined oil shipping industry is less concentrated and the competitive pattern is scattered. The total capacity of the top 10 tanker owners is about 18.6%, and CMB ranks 8th in the world in total capacity, accounting for about 1.2% of the world's total capacity. 4) Finished oil tankers are usually smaller than crude oil tankers. Among them, MR tankers are the main ship type. 2. Demand: Refining energy transfer combined with trade route restructuring, with strong support on the demand side. 1) Global refinery production capacity is shifting eastward, supporting the increase in demand for tons and nautical miles. Due to environmental requirements such as carbon peaks, energy refining in Europe and the US is gradually declining. Australia is also reducing production capacity, while new refining energy is mainly concentrated in the Middle East and the Asia-Pacific region. There is a marked trend in refinery production capacity moving eastward. This also means that transportation routes for refined oil products are expected to be restructured, and long-distance routes from the Middle East and Far East to Europe are expected to gradually increase. 2) After the Russian-Ukrainian conflict, the trade pattern was restructured to lengthen the flight distance. 3) Global stocks of refined oil products are at a low level, and potential demand for replenishment may further support traffic. 3. Supply: New supply is relatively limited, and old ships may be cleared at an accelerated pace. 1) In-hand orders: The number of in-hand orders for the MR type was only 8.4%, which is at an all-time low. Recent new orders will need to be gradually delivered until 2025 at the earliest. It is expected that new supply will be limited in the industry until 2026, and there is a high degree of certainty that the supply growth rate will run low in the medium term. 2) New environmental regulations: speed reduces loss efficiency, and old ships may be cleared faster. 4. Future market outlook: The improvement of the industry's supply and demand structure is expected to start an upward cycle. 5. Short-term catalysis: Continue to pay attention to the impact of the Red Sea. Recently, routes related to refined oil products have increased significantly. We recommend continuing to focus on the consumption of effective capacity by detours.

2. China Merchants CNPC: A liquid cargo transportation service provider for small and medium-sized vessels under China Merchants Group, the largest MR shipowner in the Far East. 1. The company focuses on small and medium-sized oil tankers and chemical tankers, and the volume of traffic volume and capacity is growing steadily. The company currently has the largest fleet of MR refined oil products in the Far East, and is involved in both domestic and foreign trade. Crude oil transportation is mainly domestic trade transportation, and the business scale ranks second in the country. It ranks among the top three in the country in terms of chemical transportation capacity. Gas transportation operates domestically unique ethylene vessels. 2. Financial analysis: Oil transportation accounts for the highest proportion, and foreign trade oil transportation contributes to strong elasticity.

1) 2023H1 oil transportation contributed 2.63 billion, accounting for 83.2%; in terms of gross profit composition, the oil transportation business contributed an absolute share. Looking at gross margin, the oil transportation business is significantly affected by fluctuations in foreign trade oil freight rates, and the gross profit from domestic trade chemical transportation is relatively stable. 2) The company operates both domestic and foreign trade business, and is stable and flexible. In 2022, foreign trade accounted for about 55.1% of revenue, and domestic trade accounted for 44.9%. The domestic trade business contributed to a stable basic market, with the domestic trade business contributing an average of 600 to 900 million gross profit in 2019-2022; however, due to strong fluctuations in freight rates, the foreign trade business can contribute strong profit flexibility during the industry boom period. In 2021-22, the foreign trade business surged from a contribution of 108 million to 1,068 million, and gross margin increased from 9.1% to 31.0%, an increase of 21.9pct. 3. Company highlights: Remarkable advantages in domestic and foreign trade combined, stable and flexible. 1) The company has the largest MR fleet in the Far East. We estimate that the MR ship's TCE fluctuates at 10,000 US dollars/day, and the corresponding MR net profit elasticity is 610,000 yuan: 2) Domestic trade business contribution stable basic market: a) Domestic trade crude oil: high industry barriers, excellent competitive pattern; b) Domestic trade chemicals: specialized transportation qualifications are high and demand is growing steadily; c) Gas transportation: operating domestic unique ethylene vessels. 3) Profit calculation: Considering that the capacity and freight rate of the domestic trade business are basically stable, the net profit is about 670 million yuan: when MR's average daily revenue TCE reaches 30,000 US dollars, the corresponding company's profit level is 1.64 billion yuan; the average daily revenue TCE value reaches 50,000 US dollars, and the corresponding company's profit level is 2.85 billion yuan.

Investment advice: 1) Profit forecast: Based on current market demand and freight rate levels, we give a profit forecast for 23-25 to achieve net profit of 16.0, 21.5, and 2.31 billion yuan, corresponding to EPS of 0.33, 0.44, and 0.48 yuan, corresponding to 9, 7, and 6 times PE. 2) Valuation understanding: The company combines domestic and foreign trade, and domestic trade business profits are stable, and foreign trade MR contributes flexible returns. We use a cyclical stock boom cycle of 10 times PE to give 2024 performance 10 times PE, corresponding to a target market value of 21.5 billion yuan and a one-year target price of 4.43 yuan. The company's promotion of share repurchases shows confidence in future development. For the first time, we have covered and given a “recommended” rating.

Risk warning: Demand for oil transportation falls short of expectations, risk of oil price fluctuations, old ship dismantling process falls short of expectations, geopolitical risks, etc.