Strong exports+Red Sea bypass, rising freight rates; industrial restructuring, demand growth in tons and nautical miles has boosted profit hubs since this year, due to strong export demand and Red Sea detours, container freight rates have risen sharply, and the market is booming; looking ahead to the second half of the year, we expect that the Red Sea detour may continue and route adjustments will increase, and port congestion will gradually occur since May; on the demand side, the third quarter will usher in the traditional peak season in Europe and the US. Cargo volume will rise month-on-month, and freight rates are expected to rise further month-on-month. Looking at the medium to long term, new ship deliveries are expected to increase in 23-26, but due to industrial restructuring, there have been structural changes in capacity deployment, new capacity in emerging markets has increased significantly, and the increase in demand per ton nautical mile is expected to boost the profit center of the industry. Considering rising freight rates, we raised our 24/25/26 net profit forecast to $58.6 billion/16.4/24.5 billion (previous value: 24.6 billion/16.1billion/23.3 billion yuan); based on 1.2x/1.4x 24E PB (average PB in the company's three-year history plus 1.5/1.0 standard deviation; valuation premium mainly due to current industry boom; 24E BPS 15.22), we raised the target price of H/A shares to 19.8 HK$21.3 (previous value: HK$11.5/13.6 billion), and reiterated” Buy”.

The Red Sea Bypass is expected to drive 12.8% increase in demand for tons and nautical miles in 24 years 1) Since 23, along with new ship deliveries, there has been a significant increase in ship capacity; however, the Red Sea Bypass has increased transit time from Asia to Europe by about 1/3, thus boosting the demand for tons and nautical miles. According to Clarksons forecast, due to the Red Sea detour, global shipping demand (tons and nautical miles) is expected to increase by 12.8% year-on-year versus 9.8% in ship supply in 24. Currently, market demand growth is higher than supply growth, and there is a shortage of capacity, which is driving up freight rates sharply. 2) In the chartering market, due to the cancellation of direct connections in Europe and the Mediterranean, some ports have switched to transit connections. Demand for small and medium-sized ships is active, and rental prices have risen sharply. 3) In terms of port congestion, Asia/European ports have experienced congestion since May due to increased cargo volume at transit ports.

Industrial restructuring and trade restructuring. In the past 23 years, new capacity in emerging markets has increased significantly. Despite the delivery of a large number of new ships, benefiting from industrial restructuring and trade restructuring, a large amount of additional capacity has been invested in emerging markets, and the pressure on new supply in the European and American markets is relatively small. By route, the 1Q24 US line/Asia region/Middle East/South America cargo volume increased by 28.1%/9.9%/36.4%/35.4% compared to 1Q19, higher than supply growth of 11.9%/2.7%/36.2%/33.3%, thus driving up the freight center; European cargo volume increased 2.6% vs. supply increased 8.4%, but due to the Red Sea detour, supply was digested.

Strong cash flow, attractive valuations and dividend rates, reaffirming that “buying” the company expects net profit of 58.6 billion yuan in 24 years, based on a 50% year-on-year increase in the average European/trans-Pacific route freight rate. As of 1Q24, the company had cash of 174.4 billion yuan (net cash of 128.6 billion yuan after deducting interest-bearing liabilities); we expect that by the end of '24, the company's cash will further increase to 202.1 billion yuan versus the current market value of H/A shares, respectively, at HK$210.7 billion/239.7 billion, with cash accounting for 104%/84% of the market value, and the valuation is undervalued. Our target price of HK$19.8/$21.3 corresponds to a 24-year dividend rate of 10%/9% (assuming a dividend rate of 50%).

Risk warning: 1) global economic recession; 2) geopolitical risk; 3) freight rates are lower than expected; 4) effective supply is higher than expected; 5) the competitive pattern worsens.