High industry thresholds achieve high profits

The entry threshold for coastal hazardous chemicals transportation is high, the industry has a tight balance between supply and demand, and the profitability of enterprises is strong. Coastal liquid cargo dangerous goods transportation is strictly regulated, and both operating enterprises and operating vessels are required to obtain a license to operate the liquid cargo dangerous goods water transport business. The new capacity added to the market mainly comes from new shipbuilding capacity, and the scale and target allocation of this capacity is approved by the Ministry of Transport every year. In 2014-2022, the annual growth rate of coastal inter-provincial chemical shipping capacity was 3.5%, far lower than the 9.2% annualized growth rate of traffic volume. Due to tight supply in the industry, the ROE and ROIC of leading companies are above 10%, and their profitability is strong.

Weak periodicity, stable ship value

The release of production capacity in the petrochemical industry has led to an increase in transportation demand, and the supply of capacity is strictly controlled, so domestic chemical ship freight rates are relatively stable. Judging from market rate fluctuations since 2017, cyclicality is weak, fluctuation is small, and stability is strong. At the same time, Shenghang Co., Ltd. and Xingtong Co., Ltd. have established good cooperative relationships with large petrochemical companies. Signing COA contracts with shippers can cover most of the capacity, keeping the company's actual freight rates stable. Stable freight rates bring more stable profits to ships, and make ship values more stable. Therefore, ship value is suitable as an anchor for a company's reasonable valuation.

The market value is already below the replacement value

Domestic trade chemical tankers are franchised, and the book value may be lower than the replacement value. We collected the transaction price data of domestic and foreign trade chemical tankers and oil tankers for the past year. Based on this, we revalued each ship of Shenghang Co., Ltd. and Xingtong Co., Ltd., compared the assessed value with the book value of fixed assets, calculated the value-added amount of the existing fleet, and determined the replacement value of the fleet and the company as a whole. Comparing the replacement value and market value, it was found that the market value of Shenghang shares is about 80% of the replacement value, and the market value of Xingtong shares is about 100% of the replacement value, indicating that the market value of Shenghang shares may be undervalued, and there is room for upward recovery.

Lower profit forecasts and maintain “buy” ratings

The shipping capacity of Shenghang Co., Ltd. continues to increase, but the decline in domestic and foreign trade hazardous chemical shipping prices in 2023 dragged down performance, and freight rates are expected to rise in 2024. As a result, the forecast net profit for 2023-2024 was lowered to 175 million yuan or 272 million yuan (the original forecast was 286 million yuan, 398 million yuan); domestic trade chemical shipping is expected to maintain a high boom in 2025, and a net profit of 345 million yuan was introduced. Maintain a “buy” rating.

Risk warning: Chemical production fluctuates, domestic chemical exports fall short of expectations, safety incidents have occurred in hazardous chemical transportation, and fuel prices have risen sharply. The estimates are subjective for reference only.