Incident: On June 28, 2024, the company announced the 2024 employee stock ownership plan (draft). The participants included the company's directors (excluding independent directors), supervisors, senior management personnel and core key personnel. The total number of participants was no more than 55 people, the transfer price was 7.38 yuan/share, and the size was no more than 4.2 million shares, accounting for about 1.50% of the total share capital. The first unlocking period performance assessment target: Based on operating income/net profit/freight volume in 2023, one item of the 2024 operating income/net profit/freight volume growth rate is not less than 25%. Performance assessment goals for the second unlocking period:

Based on operating revenue/net profit/freight volume in 2023, any one of the revenue, net profit, and freight volume growth rates in 2025 is not less than 35% (target value is 50%).

Domestic trade: Under macro-control, capacity is growing in an orderly manner, and leading enterprises may continue to benefit. 1) Since 2018, the country has implemented macro-control over the supply of coastal liquefaction capacity. Hazardous chemical water transport companies are required to obtain capacity increases through capacity approval and capacity replacement, and the industry's capacity is growing in an orderly manner. 2) Industry traffic has maintained steady growth as domestic refineries expand production and increase in water transport penetration rate. According to data from the Dangerous Chemicals Logistics Branch of the China IoT, waterway transportation of hazardous chemicals in 2023 was about 0.4 billion tons, and the compound growth rate in 2018-2023 was 5.9%. The mismatch in the time cycle makes the industry have a tight balance between supply and demand, and freight rates have room for growth. 3) The industry pattern is scattered. As regulations gradually become stricter and leading companies continue to invest in production capacity, the market share of leading companies is increasing markedly. The market share of Xingtong increased from 4.6% in 2018 to 14.2% in 2023.

Foreign trade: Limited supply growth and geopolitical conflicts have boosted the short-term economy, and chemicals have gone overseas to create broad room for growth. The industry's capacity growth is limited due to the low level of on-hand orders for global chemical tankers and overcrowding of platforms. According to Clarkson data, the compound growth rate of global chemical tanker capacity was only 3.3% in 2019-2023. In 2023-2024, industry freight rates maintained an upward trend due to geographical conflicts, and industry sentiment continued to rise. In the medium to long term, demand for chemical shipping continues to increase as refineries move eastward and chemicals go overseas. According to CEFIC and China Petroleum and Chemical Industry Federation data, China's chemical market share increased from 12% in 2002 to 56% in 2022, and the export scale of the chemical industry increased from 182.1 billion US dollars in 2015 to 316.5 billion US dollars in 2023. The compound growth rate is about 7.2%. Domestic chemical shipping companies are expected to grow rapidly as chemicals go overseas.

Domestic and foreign trade capacity continues to expand, and performance is expected to achieve steady growth. The company maintained its capacity expansion strategy and expanded its fleet size through capacity approval, mergers and acquisitions, and self-construction: 1) In terms of domestic trade, in 2023, the company took advantage of scale effects and leading enterprise advantages and invested in 7 ships. The capacity scale increased from 0.2398 million DWT to 0.2878 million DWT, an increase of 20.0% year-on-year, and the market share increased from 4.6% in 2018 to 14.2% in 2023. Domestic trade capacity continued to increase, and its leading position was stable. 2) In terms of foreign trade, in 2023, the company operated 6 foreign trade chemical vessels, with a capacity of 0.0972 million DWT. Five ships are planned to be built in 2024-2026, with a total capacity of 0.1166 million DWT, which is expected to double.

As capacity continues to grow, the company's performance is expected to improve steadily.

Investment advice: We expect the company's net profit to be 0.334/0.41/0.51 billion yuan respectively in 2024-2026, corresponding PE is 10x/8x/7x. We selected as comparable companies of Milkway, Hongchuan Wisdom, and Shenghang Co., Ltd. The average PE valuation in 2024 was about 14x. The company is a leading domestic trade chemical shipping company. The business model is clear. The capacity continues to grow under self-construction and mergers and acquisitions. The foreign trade business benefits from the upward trend in geopolitical conflicts, and is expected to double in volume and price. For the first time Coverage, giving the company a “buy” rating.

Risk warning: Demand falls short of expectations due to macroeconomic fluctuations; changes in industry regulatory policies affect the pace of company expansion; risk of hazardous chemical transportation accidents; risk of profit forecasts falling short of expectations