Incidents:
On March 28, 2024, COSCO Marine Holdings released its 2023 annual report: the company achieved annual revenue of 175.4 billion yuan, or -55.14%; net profit attributable to the parent company was 23.86 billion yuan, -78.25% YoY; and non-net profit attributable to the parent company was 23.75 billion yuan, or -78.24% YoY.
Investment highlights:
The combination of shortfalls in supply and demand has affected the company's performance since 2023. Affected by shrinking demand and rising supply, the relationship between supply and demand in the global container shipping market has tightened, and market freight rates have fluctuated at a low level. The average value of China's Export Container Freight Composite Index (CCFI) fell 66.4% year on year in 2023, and all other routes declined sharply. Affected by the decline in annual average freight rates in the international shipping market, industry profits in 2023 shrunk sharply compared to 2022.
The Red Sea detour absorbs excess capacity, improving fundamentals and boosting freight rates. With regard to shipping fundamentals, the delivery of a large number of new ships in 2024-2025 is a major contradiction. According to Clarkson data, as of March 2024, on-hand orders for container ships were 23% of the current fleet. Even with environmental regulations and the elimination of old ships, the 2024-2025 fleet growth was 8.9% and 4.9%, respectively; cargo demand increased by only 3.9% and 3.0%, respectively, during the same period. There is a serious oversupply situation.
Since the Houthis began attacking merchant ships in mid-November 2023, the situation in the Red Sea region has continued to escalate. After many attempts, the liner company chose to abandon the Red Sea and detour to the Cape of Good Hope. We estimate that if the capacity of the Far East-Europe route were to be fully circumvented, the TEU nautical mile capacity demand would increase by 11.9% and absorb a large amount of newly delivered capacity. The Shanghai-Nordic/Mediterranean freight rate began to soar in December and declined in January. As of March, the average monthly freight rate was 2081/3074 US dollars/TEU, respectively, up 139%/91% year on year. If the Red Sea incident is prolonged, it will continue to benefit the performance of shipping companies.
The company stabilizes 50% dividends. Follow the Red Sea long-term dividend package with reference to the “COSCO SHIPPING Holdings Co., Ltd. shareholder dividend return plan for the next three years (2022 to 2024)” issued by the company. The board of directors recommended that a cash dividend of RMB 0.23 (tax included) for the end of 2023 be distributed to all shareholders per share. The cash dividend due at the end of 2023 is approximately RMB 3.67 billion; in addition to the cash dividend of approximately RMB 8.196 billion already distributed to all shareholders in mid-2023, the company distributed a total cash dividend of approximately RMB 11.866 billion in 2023, which is approximately 50% of the net profit attributable to shareholders of listed companies achieved by the company in 2023. The 2022 dividend accounts for about 50% of the net profit attributable to common shareholders of listed companies in the consolidated statements. If the Red Sea incident is prolonged, the company's high profits may turn into considerable cash dividends.
Profit forecast and investment rating COSCO Maritime Control is the world's leading comprehensive container transportation service provider. Despite slight fluctuations in the market environment, we are still optimistic about the growth of intrinsic value as the company's various service capabilities continue to improve in the medium to long term. Based on the latest supply and demand situation in the industry and the impact of the Red Sea incident, we adjusted the company's profit forecast. It is estimated that COSCO Maritime Control's 2024-2026 revenue will be 2195.23, 1871.82 and 208.049 billion yuan, respectively, and net profit to mother will be 28.616, 192.8 and 22.778 billion yuan, respectively, corresponding to PE 6, 9, and 7 times. Maintain an “Overweight” rating.
Risks suggest the rapid end of the Red Sea detour; the industry price war exceeded expectations; the company's operating performance/dividends did not meet expectations; the risk of exchange rate fluctuations; geopolitical risks; and security incidents.