Incident: China Southern Petroleum released its 2023 annual report. Net profit for the full year of 2023 was 1,557 billion yuan, up 8.55% year on year, and net profit after deducting non-return to mother was 1,537 billion yuan, up 8.71% year on year. Among them, net profit for the fourth quarter was 354 million yuan, down 26.33% from the previous year. The performance was in line with expectations. The company's performance was basically close to the 333 million in Q4 that we had predicted in our previous four-quarter outlook.

The performance was in line with expectations, revenue confirmation was delayed by about 2 weeks, and the company's MR fleet's performance outperformed the TC7 freight rate.

The TCEs for September, October, November, and December of the 2023 BOX TC7 route were 30689, 27260, 13680, and 23,198 US dollars/day, respectively. The overall trend was high and low. The main reason was that the Ministry of Commerce issued an export quota of 12 million tons for the last batch of refined oil products in early September, compounded by the strong rise in Western cracking price spreads during the same period, which boosted China's export activity in September-October. At the end of the year, freight rate performance was relatively weak as export quotas were tight. Considering that the TC7 freight rate on the Bosnian Stock Exchange was delayed by about 2 weeks from the transaction of the lease to the actual shipment of the goods, the company's revenue was recognized according to the completion percentage, and the revenue lagged behind the freight rate by about 2 weeks. The profit for the fourth quarter reflects the freight rate level from late September to early December. The adjusted Q3 and Q4 freight rates were $2,2768 and 2,763 US dollars/day, respectively. According to the company's fourth quarter deduction of non-performance, and with reference to Hifleet satellite data, the TCE level of Q4's foreign trade MR fleet is about 23,000-25,000 US dollars/day. The company's MR fleet outperformed the TC7 freight rate.

The market freight center is rising, and the upward boom cycle confirms that the tariff center is expected to continue to rise in 2024. The average value of TC7-TCE for the full year of 2023 was 25,840 US dollars/day. The historical average for the past ten years (2012-2021) was about 13,000 US dollars/day, and the 2023 freight rate increased 97% compared to the central level. Since the beginning of 2024, the average freight rate is $38079 per day, which is 33% higher than the same period last year. Disturbances in the Red Sea have disrupted capacity scheduling in the east-west markets for refined tankers, and some refined tankers have circumvented the Cape of Good Hope to boost the overall market's demand for ton-nautical-mile trade. According to Clarkson's forecast, the ton-nautical mile trade demand for finished tankers will increase by 7% in 2024, and the supply of capacity will increase by 1.4%. Against the backdrop of a high gap between supply and demand, the freight center is expected to continue to rise. The company delivered 3 new MR tankers in 2023. Increased market freight rates combined with the company's additional capacity, and the company's profit release is expected to accelerate further in 2024.

Rigidity restrictions on the supply side of capacity increase the possibility of potential withdrawal due to the high proportion of elderly ships with refined oil products. Production capacity for new shipbuilding is tight, and the platforms of the leading shipyard have already been scheduled until 2028. Currently, finished tankers account for 13.45% of the in-hand order capacity. According to Clarkson statistics, in terms of DWT, the proportion of finished tankers aged 15 and over is 43%, and those aged 20 and over account for 14%. Against the backdrop of stricter environmental protection, older ships account for a higher share of potential exit demand.

Top ten shareholders and share capital changes: According to the annual report, China Construction Bank reduced its holdings by 2.24% in 2023 among the top ten shareholders of the company. ICBC and Bank of Communications have not changed their shares in the past year. In February 2024, the company bought back and cancelled 50927,700 shares (1.06% of the total share capital) through centralized bidding transactions.

The performance was in line with expectations, the profit forecast was raised, and the “buy” rating was maintained. Considering the determination of the popularity of refined oil tankers, it is estimated that the average TCE values for MR refined oil products in the 2024-2026 market will be 35,000, 35,000, and 35,500 US dollars/day, respectively. At the same time, the profit of the concurrent fleet business increased. The company's net profit forecast for 2024-2025 was raised from 1.92 billion yuan and 1.93 billion yuan to 21.10 billion yuan, and the net profit forecast for 2026 was added to 2.14 billion yuan. Maintain a “buy” rating.

Risk warning: Safety incidents, transportation distances have not been extended due to the easing of the Russian-Ukrainian conflict, and demand for refined oil products imported from Europe and the US falls short of expectations.