According to the Wisdom Wealth App, Huachuang Securities issued a research report recently, covering COSCO for the first time and giving it a "recommended" rating. It is expected that the company's net income attributable to the parent company will be 6.41, 7.71, and 8.35 billion yuan for 2024 to 2026, with corresponding EPS of 1.34, 1.62, and 1.75 yuan, and a target price of HKD 13.12.

Huachuang Securities' main views are as follows:

How do you view investment opportunities in the oil shipping cycle?

1. The strong supply logic lays the foundation for the big cycle: 1) In the next 2-3 years, the incremental capacity is inadequate. As of June 2024, the proportion of the overall tanker orderbook is only 10% (crude oil tankers account for 7.7%, VLCC account for 5.8%), still at a relatively low level in nearly 28 years; Clarkson predicts that the growth rate of crude oil tanker capacity in 2024 and 2025 will be -0.1% and 1.0%, respectively, which is far lower than the average of 3.1% from 2010 to 2023. 2) Existing effective capacity is facing potential shrinkage, as there is a serious problem of aging in the tanker fleet (it is expected that the proportion of oil tankers over 20 years old will further rise to 23% by the end of 2026, and the proportion of those over 15 years old will approach 50%). Increasingly stringent environmental policies (such as CII, EU ETS, FuelEU) will limit the industry's effective capacity over a long period of time, resulting in decreased actual turnover rate, increased compliance costs, and so on. 3) The incremental supply for the long term has not yet been opened up. Starting from 2023, the new orders for tankers have increased, but the proportion of orders in the order book is still at a relatively low level in history; considerations such as delivery time and return on investment continue to suppress the willingness to place orders for VLCCs; there is no need to over-worry about the increase in tanker new orders, as the tanker fleet has a relatively rigid demand for upgrading and replacement.

2. Demand side: replenishment of storage and eastward movement of refining capacity make up the mid-term variable, and geopolitical factors provide additional support. 1) In the long run, mainstream institutions such as OPEC predict that global oil demand will continue to grow before 2045, and it is expected that demand for crude oil shipping will also maintain relative resilience. 2) The main demand increment in the mid-term comes from potential replenishment needs and ton-mile demand created by eastward movement of refining capacity. 3) In the short term, the Russia-Ukraine conflict has changed the long-established global crude oil trade pattern. Coupled with the OPEC+ policy of maintaining production cuts and increased production in the Atlantic region, the ton-mileage of global crude oil shipping in 2023 will increase by 3.35% YoY; the Red Sea conflict has intensified, and oil tankers that previously passed through the Suez Canal are bypassing the Cape of Good Hope, consuming effective capacity.

Prospects for the future: Clarkson predicts that the growth rates of crude oil tanker capacity in 2024 and 2025 will be -0.1% and 1%, respectively, and the growth rates of crude oil shipping tonnage will be 2.8% and 3.1%, indicating that the industry's supply-demand relationship is good and its business climate is expected to continue to improve.

COSCO: a global tanker giant, is expected to fully benefit from the upward cycle of freight rates.

As of the end of April 2024, the company owned or controlled 154 tankers, totaling 22.43 million deadweight tons (70% of which were VLCCs); and 43 LNG carriers, totaling 7.2 million cubic meters. The company's oil shipping fleet capacity ranks first in the world, its crude oil tanker fleet capacity ranks third in the world, and its VLCC fleet capacity ranks second in the world.

Highlights: 1) It has the largest capacity, with VLCC as the mainstay and medium and small ships as supplementary, and significant freight rate elasticity. The bank estimated that for every $10,000/day fluctuation of VLCC TCE, there is a corresponding elasticity of net profit of the entire fleet of CNY 1.02 billion; 2) The performance of domestic and LNG business has been stable, and it can be attacked as well as defended. 1) The competitive landscape of the domestic oil shipping market is relatively stable, and the company's market share is more than 55%, with 90% of its business locked through COA contracts. 2) LNG ships are tied to long-term leases with specific projects, bringing stable income. As more projects are accelerated, profitability is expected to maintain a growth trend. 3) Pay attention to investor returns and increase the dividend payout ratio. The dividends per share for the company in 2022 and 2023 are expected to be RMB 0.15 and 0.35 respectively, with corresponding dividend payout ratios of 49.1% and 49.8%. The dividend payout for 2023 corresponds to a current H-share dividend yield (as of June 28, 2024) of 3.8%.

Risk warning: demand is lower than expected, and scrapping of old ships is less than expected.