Key points of investment:

Incident: China Southern Petroleum announced its 2024 interim results. Net profit due to mother for the first half of 2024 was 1.22 billion yuan, up 44.76% year on year, after deducting non-return net profit of 1.028 billion yuan, up 23.97% year on year. In the second quarter of 2024, the company's net profit to mother was 0.549 billion yuan, up 25.66% year on year, down 18.19% month on month; net profit deducted from non-return mother for the single quarter was 0.476 billion yuan, up 9.09% year on year, down 13.86% month on month. The decrease in capacity led to a month-on-month decline in non-profit deducted to a certain extent. The company disposed of an MR tanker “CSCRISINGSUN” in the second quarter at a sale price of 22.65 million US dollars, contributing 0.073 billion yuan in non-recurring profit and loss during the quarter.

Since the company delivered 3 new ships of capacity in 2023, the sale of the old MR actually replaced capacity, while contributing to the company's ship value added revenue during the boom phase of the industry. The company's net profit to mother was in line with expectations and was basically close to 0.57 billion for the Q2 single quarter forecast as predicted in our previous 2-quarter outlook.

Performance was in line with expectations, revenue recognition was delayed by about 2 weeks, and Red Sea disturbances continued to contribute to excess revenue. The TCE for the 2024 TC7 route in April, May, and June was 34,136, 38,676, and 39,572 US dollars/day, respectively, up 3.0%, 22.1%, and 87.6% year-on-year, respectively. Reasons for the strong freight rate performance in the 2nd quarter: ① Continued turbulence in the Red Sea region caused some tankers to bypass the corner of good hope, increasing the transportation distance boosting market demand for tons and nautical miles; ② High LR freight rates led to an increase in MR demand in the Middle East region, which indirectly tightened the capacity of the Southeast Asian market; ③ Overseas demand performance was good in the 2nd quarter. According to Kpler data, China's refined oil exports increased 18.6% year-on-year in the 2nd quarter.

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 revenue lagged behind the freight rate by about 2 weeks. The profit for the second quarter of 2024 reflects the freight rate level from late March to early June. The adjusted 2024 Q2 freight rate was 37,428 US dollars/day, which is close to the first-quarter earnings period, and increased 27.4% over the 2023 Q2 earnings period. According to the company's second-quarter deduction of non-performance, with reference to Hifleet satellite data, the TCE level of the Q2 company's foreign trade MR fleet is about 34,000-36,000 US dollars/day, which is close to the market average, and the company's performance is in line with expectations.

The market price center continues to rise, and the boom continues. The average value of TC7-TCE in the first half of 2024 was 37,723 US dollars/day, and the average value was 25,840 US dollars/day in 2023. The historical average for the past ten years (2012-2021) was about 0.013 million/day. The freight rate in 2023 increased 97% compared to the historical center, and 187% in the first half of 2024. According to Clarkson's forecast, the ton-nautical-mile trade demand for finished tankers will increase by 5.6% in 2024, the supply of capacity will increase by 1.8%, and the freight center will continue to rise against the backdrop of a high gap between supply and demand. The company delivered 3 new MR tankers in 2023. Although 3 ship assets were sold this year, the capacity structure was optimized (rejuvenation and increased energy-saving capacity), compounded by rising market freight rates, and the company's profit release accelerated this year.

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. As of the beginning of August, the volume of in-hand orders for finished tankers accounted for 19.55%. According to Clarkson statistics, in terms of DWT, the proportion of finished tankers aged 15 and over is 45.19%, and those aged 20 and over account for 15.83%. Against the backdrop of stricter environmental protection, the proportion of elderly ships is increasing potential exit demand.

The profit forecast was lowered and the “buy” rating was maintained. From July to August 2024, the Red Sea premium sentiment in the finished tanker market declined significantly. Freight prices may have been under pressure in the 3-4 quarter. The 2024 freight rate center was lowered from 35,000 US dollars/day to 34,000 US dollars/day, and the profit forecast for the full year 2024 was slightly lowered to 2.14 billion yuan from the previous 2.25 billion yuan. Considering that the medium- to long-term tanker boom continues, the 2025-2026 freight rate forecast value will remain unchanged at 35,000 or 35,500 US dollars/day, and the 2025-2026 net profit forecast of 2.1 and 2.14 billion yuan will be maintained. The current position is close to the replacement cost safety margin at the beginning of the year and is sufficient to maintain a “buy” rating.

Risk warning: security incidents, mitigation of geopolitical disturbances, global macroeconomic downturn, etc.