Introduction to this report:

The company is the first shipyard leasing company in Greater China and has a “ship-savvy” gene. Countercyclical shipbuilding establishes a cost advantage, and enjoys asset appreciation and profit flexibility from self-operated businesses in a procyclical manner. In the future, orders may be placed cautiously, and the dividend rate is expected to increase.

Summary:

First coverage, increased rating. The company is the first shipyard ship leasing company in Greater China. It relies on the China Shipbuilding Group to build long-term core competitiveness with a “ship understanding” gene. Countercyclical shipbuilding establishes a cost advantage, and enjoys asset appreciation and self-operating profit flexibility in the procyclical cycle. Considering that platforms will tighten and ship prices will rise in the next few years, or that companies will be careful to place orders, it will benefit from the rise in oil transportation, and the dividend rate is expected to increase. The estimated net profit to mother for 2023-25 is HK$20/22/2.4 billion. The dividend rate is expected to be 9% in 2024. If the dividend rate is raised from 36% to 50%, the dividend rate will rise to 13%.

Countercyclical shipbuilding lays the foundation for the company's long-term cost advantage and profit. The company was listed on the Hong Kong stock market in 2019, seizing the bottom of the shipping cycle and low ship prices to build a large number of ships, establishing a long-term cost advantage.

At the same time, the company has long attached importance to optimizing and balancing the asset structure of the fleet, and stable long-term rental profits. The company has a fleet of 129 ships, with an average age of only 3.8 years. Environmental supervision risks are limited. Among them, high-value-added vessels such as LNG/LPG account for more than 40%. The rest of the bulk carriers/liquid carriers/special ships/container ships are mainly small ships and have strong circulation. With 31 ships in hand, the fleet size growth rate will slow down in the future.

Procyclical operations, asset appreciation, and profits continued or exceeded expectations. In 2021-22, the shipping industry boomed and ushered in a wave of orders. Since then, the oil transportation industry has boomed, and leasing levels and asset prices have risen markedly. The benefits of the company's long-term rental business are lagging behind, while the replacement value of assets has increased significantly. At the same time, in the procyclical phase, companies actively carry out short-term and immediate operations through self-employment and joint ventures, demonstrating the rare profitability of the leasing industry. According to the 2023 mid-year report, the company has 26 self-operated/joint ventures, contributing about 30% of net profit, including 8 MR and 6 LR1 refined-product tankers. The oil transportation industry's boom is expected to rise and continue in the next few years, and the company's profits may continue to exceed expectations.

Orders may be placed cautiously in the next few years, and the dividend rate is expected to increase. The company's order pace has been slowing down since 2022. Apart from shrinking demand for financial leasing and increased competition in the industry, it is also due to the tightening of platforms and high ship prices in the next few years. Since the company went public, the dividend rate has declined year by year, and the capital expenditure cycle is behind it.

As on-hand orders are gradually delivered, and orders may continue to be placed carefully over the next few years, we expect the company's dividend rate to increase. The company's 2024 PE is only 4.2 times, and the dividend rate is expected to be 9%. If the dividend ratio is raised from 36% to 50%, the dividend rate will increase to 13%.

Risk warning. Default risk, economic fluctuation, interest rate and exchange rate risk, geographical situation, etc.