Introduction to this report:
The off-season VLCC freight rate surged higher than expected, once again verifying that the oil transportation capacity utilization rate has reached a threshold and should be given strategic attention. It is expected that supply and demand will continue to improve in the next few years, and the oil transportation boom will continue to rise and exceed expectations.
Summary:
Oil transportation may welcome good layout opportunities to maintain and increase holdings. In the off-season, VLCC freight rates surged higher than expected, once again verifying that the oil transportation capacity utilization rate is close to the threshold, and the profitability of oil transportation companies has increased significantly. It is expected that supply and demand in the oil transportation industry will continue to improve in the next few years, and the rise and continuation of the boom will exceed expectations. The situation in the Red Sea will be marginally affected or gradually reduced, and oil transportation will welcome a good layout opportunity. Maintain the 2023-25 net profit forecast of RMB 35/72/86 billion. COSCO Haineng's H shares are attractive in terms of risk-to-return ratio, have double room for performance valuation, and maintain a target price of HK$11.87.
The recent rise in freight rates has exceeded expectations, once again verifying that the capacity utilization rate has reached the threshold. Crude oil freight rates have risen rapidly since early January 2024. Recently, VLCC TCE has risen to a high of 70,000 US dollars. The traditional off-season showed higher price elasticity than expected. 1) The Red Sea detour effect is gradually appearing. The escalation of the situation in the Red Sea has reduced the traffic volume of oil tankers in the Suez Canal by more than 40%, and the circumnavigation of the Cape of Good Hope has increased (distance increased by 30%), high freight rates for small boats, and transmission to large ships. 2) Demand for inventory replenishment has increased due to continued expectations of geopolitical conflicts. Shipments from the Middle East and the Gulf of America in the past two months were better than during the previous low season. 3) Stricter implementation of sanctions against Russia has led to loss of efficiency of the shadow fleet. Since the beginning of the year, Russian crude oil exports have shrunk by about 10%. Multiple factors combined to drive traditional off-season freight rates to show greater flexibility than expected, which will not only help off-season performance, but more importantly, once again verify that the oil transportation capacity utilization rate is close to the threshold.
Stricter sanctions on the shadow fleet may speed up the clearance of old ships. In December 2022, sanctions against Russian crude oil were implemented quickly and effectively. The restructuring of global crude oil and oil transportation trade deepened, the average flight distance was 7% longer than in 2019, and the “shadow fleet” serving Rosneft continued to increase. Tankers are aging seriously, and the proportion of old VLCC vessels over the age of 20 will account for more than 20% within two years, and the presence of shadow fleets causes old ships to be dismantled slowly. Since the fourth quarter of 2023, Europe and the US have strengthened the identification and sanctions of overpriced Rosneft trade and shadow fleets, and inactivity has increased. We believe that sanctions will be tightened and will continue, which is expected to speed up the clearance of old ships. In the next few years, the effective supply of tankers may be reduced beyond expectations.
The utilization rate of oil transportation capacity has reached a threshold, and supply and demand will continue to improve in the next few years. The utilization rate of oil transportation capacity is already close to the threshold, which means that future marginal improvements in supply and demand will bring a rise in the oil transportation industry that exceeds expectations, and should be given strategic attention. We believe that oil supply and demand will continue to improve in the next few years, and the boom will continue to rise and exceed expectations. COSCO Marine's tanker fleet is among the largest in the world, and the fleet structure is similar to that of the industry, which will fully benefit from the upward trend. It is estimated that for every 10,000 US dollars/day of VLCC TCE, the company's net profit will increase by 1 billion yuan, and profit flexibility is sufficient.
Risk warning. Economic fluctuations, geographical situation, implementation of new environmental protection policies falling short of expectations, safety incidents.