China Southern Oil released its 2023 annual report, and the data performance was basically in line with expectations. China Merchants CNPC released its 2023 annual report. In 2023, it achieved operating income of 6.20 billion yuan, and realized net profit of 1.56 billion yuan, +8.6% year over year, of which net profit after deducting non-return to mother was 1.54 billion yuan, +8.7% year over year. Non-recurring profit and loss mainly stemmed from the disposal of an old ship, achieving asset disposal revenue of about 15.58 million yuan.

China Southern Oil relies on more flexible capacity allocation, and its foreign trade business performance clearly outperforms the industry. In 2023, the international refined oil market was high and low. The average TCE for the MR TC7 route (Singapore-Australian East Coast) was US$262,000 per day, down 23.74% year-on-year from US$34,400 per day in 2022.

However, CNPC's foreign trade business achieved revenue of 3.51 billion yuan, an increase of 1.9% over the previous year, and gross margin of 33.9%, an increase of 2.9 pct over the previous year, reflecting the company's strong fleet management and deployment capabilities, as well as a relatively accurate judgment on the market.

The chemical and ethylene transportation boom is under relative pressure, waiting for demand in the domestic chemical industry chain to pick up. By business, the oil transportation business achieved revenue of 5.22 billion yuan, +3.4% year on year, gross margin of 36.3%, +2.4 pct year on year; chemical transportation business achieved revenue of 4.4 billion yuan, +3.8% year on year, gross margin of 17.3%, year on year -3.5 pct; ethylene transportation business: achieved revenue of 180 million yuan, +8.4% year on year, gross margin of 28.3%, year-on-year. Overall, domestic business performance is relatively weak. On the one hand, it is because CNPC actively draws domestic trade capacity when foreign trade tariffs are high. On the other hand, the prosperity of the chemical and gas transportation business is still mainly limited by the prosperity of the domestic petrochemical industry chain. It is expected that with the recovery of China and the global economy, profits from the chemical and ethylene transportation business are expected to be released.

We are optimistic that supply and demand will improve in 2024, and the freight center will rise year on year. On the demand side, the trend of global energy refining eastward has not stopped, and Rosneft sanctions have been driving the industry's turnover demand for a long time; on the supply side, current global orders are still low. With the implementation of new IMO regulations, existing ships are facing pressure to slow down and upgrade.

In 2024, global demand for refined oil transportation capacity is expected to grow at a rate of about 7.3% per tonne nautical mile, and the effective capacity supply growth rate is about 1.8%, and the gap between supply and demand is about 5.5%.

Risk warning: The global macroeconomy falls short of expectations, safety incidents, the release of supply of finished tankers exceeding expectations, etc.

Investment advice:

Factors such as the post-epidemic recovery of the global economy, the entry into force of the Russian ban on refined oil products, the continued eastward migration of global energy refining, and the aging of ships are expected to increase markedly, and freight rates are expected to remain high. As a leading company in the transportation of refined oil products in the Far East, China Merchants China Petroleum is expected to fully benefit. The net profit forecast for 2024-2025 was lowered from 2,21/2 billion yuan to 2.2/2.26 billion yuan, and a profit forecast of 2.32 billion yuan for 2026 was introduced, corresponding to 7.4/6.9/6.6 times the PE valuation, maintaining the “buy” rating.