1Q24 results are in line with our expectations
The company announced 1Q24 results: revenue of 48.27 billion yuan, +1.9% year on month, +18.0% month on month; net profit to mother of 6.76 billion yuan, corresponding to profit per share of 0.42 yuan, -5.2% year on year, and +277.5% month on month, in line with our expectations.
1Q24 container traffic increased year-on-year and declined slightly month-on-month. Affected by the Red Sea detour, spot freight rates rose sharply, leading to a significant month-on-month improvement in the company's profit. 1Q24's container freight volume was +10.5% year-on-year and 1.2% month-on-month. Among them, cargo volume on the Asia-Europe route fell 8.1% month-on-month, mainly affected by the fleet orbiting the Red Sea. In the 1Q24 quarter, SCFI's average freight rates for European, Western, and Eastern American routes changed +162%/+128%/+131%, respectively, compared to 4Q23, and +167%/+233%/+137%, respectively, compared to 1Q23. We believe that the increase in spot freight rates led to a sharp increase in the company's month-on-month profit, but due to the high long-term cooperation freight rates for some routes in 1Q23, there was a slight year-on-year decline in profit.
Development trends
Freight rates have risen recently. Continued detours in the Red Sea will help absorb supply pressure, and demand will remain strong to reduce freight rates or maintain current high levels. As of April 26, SCFI's US/West/Europe freight rates were +13.4%/+16.7% month-on-month, and +147.9%/+161.1% year-on-week. Meanwhile, several shipping companies recently announced price increases. The Red Sea detour continues. Container ship traffic on the Suez Canal dropped 73% year on year in the past 7 days. According to our previous estimates, if a liner company were to bypass the Red Sea or absorb 6% of the current capacity throughout the year. According to Clarksons, the 1H24/3Q24/4Q24 delivery capacity accounted for 5.8%/2.6%/2.5% of the capacity at the beginning of the year. Before capacity delivery was completed in the first half of the year, there was still a capacity gap around the Red Sea, compounded by the improvement in regional demand. We believe that in the short term, there will still be a mismatch between supply and demand, freight rates may remain high at the current high level, and the probability of successful price increases during the peak season is increasing. Looking at the whole year, the 2024/2025 supply growth rate was +9%/+4.9%, and the box-mile demand growth rate was +9.2%/-2.4%. We believe there is a basic balance between supply and demand in 2024, and there is still some pressure on supply in 2025.
Profit forecasting and valuation
Off-season freight rates have risen, the company's profit and dividend certainty have increased, the company's dividend ratio is expected to improve compared to previous expectations, and the company has plenty of cash on its books, showing investment value. Due to the recent rise in freight rates, we raised our 2024 profit by 49% to 22.1 billion yuan, and our 2025 profit by 15.7% to 15.3 billion yuan. The current A share price corresponds to 8.2 times/11.8 times the 2024/2025 price-earnings ratio, and the H share price corresponds to 6.1 times/8.4 times the 2024/2025 price-earnings ratio, assuming a 4.7%/8.2% dividend rate for A/H shares under a 50% dividend rate. Maintaining an outperforming industry rating, due to industry supply and demand after 2025 or still under pressure, we raised our target price of A shares by 10.2% to 13 yuan/share, corresponding to 9.4 times/13.6 times the 2024/2025 price-earnings ratio, with 14.7% upside compared to the current stock price, and raised the target price of H shares 15.0% to 11.5 HKD/share, corresponding 7.4 times/10.7 times the 2024/2025 price-earnings ratio. There is 20.7% upside compared to the current stock price.
risks
Global economic growth is declining, and geopolitics are changing.