Key points of investment:

Incident: China Southern Petroleum announced its results for the first quarter of 2024. Net profit for the first quarter of 2024 was 671 million yuan, up 65.32% year on year, and net profit after deducting non-return to mother was 552 million yuan, up 40.47% year on year. The company disposed of two MR tankers “Chang Hang Fa Xian” and “CSC Brave” in the first quarter, contributing to non-recurring profits and losses. The deduction of non-profit is in line with expectations, and is basically close to the 570 million dollars we predicted in our previous Q1 forecast; net profit to mother exceeded expectations due to the disposal of illiquid assets.

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 TCE for the 2024 TC7 route in January, February, and March was 31971, 43,570, and 39,192 US dollars/day, respectively, up 17.7%, 23.5% and 68.1% year-on-year, respectively. Reasons for the strong freight rate performance in the first quarter: ① Continued turbulence in the Red Sea region, causing some tankers to bypass the corner of good hope, boosting market demand for tons of nautical miles; ② Atlantic and Pacific capacity scheduling efficiency declined due to blocked navigation in the Red Sea, and unbalanced capacity deployment highlighted the problem of strong freight rates; ③ in early 2024, China issued the first batch of refined oil export quotas of 19 million tons (the same as the first batch of quotas in 2023). 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 first quarter of 2024 reflects freight rates in late December to early March. The adjusted freight rates for Q4 2023 and Q1 2024 were $22763 and 36,600 US dollars/day, respectively. According to the inverse deduction of the company's performance in the first quarter, with reference to Hifleet satellite data, the TCE level of the Q1 company's foreign trade MR fleet is about 37,000-39,000 US dollars/day. The company's MR fleet outperformed the TC7 freight rate.

The market price center continues to rise, and the boom continues. The average value of TC7-TCE in the first quarter of 2024 was 37,433 US dollars/day, and the average in 2023 was 25,842 US dollars/day. The historical average for the past ten years (2012-2021) was about 13,000 US dollars/day. The 2023 freight rate increased 97% compared to the historical center, and 190% in the first quarter of 2024.

According to Clarkson's forecast, the ton-nautical-mile trade demand for finished tankers will increase by 6.4% in 2024, and the supply of capacity will increase by 1.8%. The freight center is expected to continue to rise in the context of the high gap between supply and demand. 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.

Due to frequent geological events, the efficiency of maritime transportation has decreased, and freight rates have upward options. The transformation of European oil imports and Russian export trade routes after the Russian-Ukrainian conflict in 2022 significantly increased the demand for transportation in tons of nautical miles in the market; the outbreak of conflict in Dabbar in 2023 and the Red Sea turbulence in early 2024, some ships avoided the Red Sea and chose to detour the Cape of Good Hope, and the transportation distance was lengthened again. Currently, there are frequent geological events, all directly or indirectly leading to a decrease in transportation efficiency.

The oil transportation market has options for rising freight rates due to future turbulence due to geopolitical events.

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 14.09% of the in-hand order capacity. According to Clarkson statistics, in terms of DWT, the proportion of finished tankers aged 15 and over is 42%, 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.

The deduction of non-performance was in line with expectations, the profit forecast was raised, and the “buy” rating was maintained. Considering the determination of the market sentiment for refined oil tankers, maintain the average TCE forecasts for MR refined oil products in the 2024-2026 market at 35,000, 35,000, and 35,500 US dollars/day, respectively. At the same time, due to the company's net profit attributable to the disposal of illiquid assets in the first quarter exceeding expectations, the company's net profit to mother in 2024 was raised from the original 2.11 billion yuan to 2.25 billion yuan; the net profit forecast for 2025-2026 was maintained at 2.10 to 2.14 billion yuan. Maintain a “buy” rating.

Risk warning: Safety incidents, mitigation of geopolitical disturbances, demand for refined oil products imported from Europe and the US falls short of expectations.