2023 results fall short of our expectations
The company announced its 2023 results: achieved revenue of US$2,297 million, a year-on-year decrease of 30.0%, and net profit of US$109 million, corresponding to basic profit of 2.1 US cents per share, a year-on-year decrease of 84.4%; in response to 2H23, achieved revenue of US$1.15 billion, a year-on-year change of -26.3%/+0.0%, achieving net profit of US$24 million to mother, a year-on-year change of -89.8%/-71.8%. The company's performance was slightly lower than our expectations. Freight rates in the main 2H23 small bulk market declined year on year, and the BSI/BHSI index fell 30.7%/36.2% year on year, respectively. However, due to its flexible operation capabilities, the company still achieved better freight rates than the industry index. In 2023, the TCE freight rates of the company Xiaoling Express and Chaoling Express were 12,250 US dollars/day and 13,830 US dollars/day respectively, higher than the industry index of 3,260 US dollars/day and 3,150 US dollars/day, respectively.
The balance sheet remains solid, and dividends are attractive. The company continued to maintain steady financial and cash levels. In 2023, the company's total loans fell further to US$300 million. Net liabilities accounted for only 2% of the net book value of its fleet, and available working capital of approximately US$550 million. Additionally, the company announced a total dividend of 12.2 HK cents for the whole year (corresponding to a 75% dividend ratio, including an interim dividend of 6.5 HK cents, a special dividend of 4.1 HK cents, and an annual dividend of 1.6 HK cents). If the dividend rate remains at the level of 75% in 2023, it corresponds to the 2024 dividend rate of 12.6%, which is attractive.
Development trends
Due to the decline in traffic volume in the Red Sea and the Panama Canal, 1Q24 bulk carrier freight rates increased year-on-year. According to Clarksons data, about 6% of the world's dry bulk goods are transported via the Suez Canal. As of January 27, 2024, the seven-day average of bulk carriers passing through the Suez Canal and the Panama Canal decreased by 21%/74% year on year. We believe that the two major canal traffic restrictions will cause longer route detours, thereby boosting the tonnnautical mile demand for bulk cargo transportation. From January to January 2024, the BSI and BHSI freight indices increased by 49.4%/30.3%, respectively.
Ongoing orders for bulk carriers are still low. Supply and demand are basically balanced in 2024, and the average freight rate for the whole year may have improved year over year. According to Clarksons data, as of February 2024, on-hand orders for bulk carriers accounted for 8.5% of capacity, which is still low in the past ten years. In 2024, supply and demand in the bulk shipping market increased 2.7% and 2.1%, respectively. However, we believe that considering the slowdown in shipping speed and the increase in ship scrapping volume under stricter environmental regulations, the average freight rate is expected to improve year-on-year from 2023.
Profit forecasting and valuation
The profit forecast remains basically unchanged. Net profit of 2025 of US$253 million was introduced for the first time. The current stock price corresponds to 6.0 times the 2024 price-earnings ratio and 6.1 times the 2025 price-earnings ratio. Maintaining the outperforming industry rating and target price of HK$2.85 per share, corresponding to 7.2 times the 2024 price-earnings ratio and 7.5 times the 2025 price-earnings ratio, with 24.5% upside compared to the current stock price.
risks
The global economic growth rate has declined, China's economic growth rate has fallen short of expectations, and geopolitical risks have changed.