Introduction to this report:

Performance growth in the first half of 2024 exceeded expectations, benefiting from the rise in the shipping boom and revenue from non-main businesses such as ship sales. The company's market focus is increasing, and it will return to Hong Kong Stock Connect in September. The undervaluation resulted in potentially high dividends and maintained an increase in holdings.

Key points of investment:

Maintain an increase in holdings. The company's “countercyclical shipbuilding and procyclical operation” has benefited from the upward boom in the shipping industry in recent years. Performance has maintained rapid growth, and profit sustainability will exceed expectations. The company's capital expenditure is slowing down, and the dividend rate is expected to gradually increase. The company's low PE will create a potentially high dividend target.

Maintain the 2024-26 net profit forecast of HK$2.2/2.4/2.6 billion. The company's PE valuation is 4 times. If the dividend rate increases to 50%, the dividend rate will increase to 12%. Maintain the target price of HK$2.06.

The results for the first half of 2024 exceeded expectations, benefiting from rising shipping conditions and ship sales. The company's net profit for the first half of 2024 was HK$1.34 billion, up 23% year over year, exceeding market expectations. As of mid-2024, the company's fleet size was 148 ships (including orders), of which 125 were in operation, a slight increase of 1 over the previous year. 1) Long-term leasing (leasing+long-term leasing): 95 ships, a year-on-year reduction of 3 ships. Benefiting from the optimization of the fleet structure, long-term rental profits are estimated to be flat year over year. 2) Short-term leasing (own+joint venture): 30 ships, an increase of 4 over the previous year. Short-term rental profits are estimated to have increased 17% year over year, with 14 refined oil tankers surging 36% year on year, fully enjoying the boom in refined oil transportation. It is estimated that nearly 30% of the main business profits in the first half of the year came from short-term leasing, and will continue to show profit flexibility in the future with the shipping boom. 3) Non-main business income such as the sale of ships is HK$0.24 billion.

The company's market attention has increased, and it will return to Hong Kong Stock Connect. In March 2024, the company was excluded from Hang Seng Index and Hong Kong Stock Connect due to failure to meet liquidity requirements. The company's market attention increased in the past six months, driving improvements in liquidity. 1) The shipping boom improved in the first half of the year, and the market expects that the company's procyclical operation will help increase performance; 2) Ship asset prices have risen in the past two years, and the company's countercyclical shipbuilding strategy has established a low cost advantage and asset appreciation; 3) High dividends are favored by the market. All standards were met in the first half of the year, and the company will be re-included in the Hang Seng Index and Hong Kong Stock Connect, effective September 9.

Capital expenditure may be reduced, and undervaluation will lead to potentially high dividends. Since the company went public, the dividend rate has declined year by year, and the capital expenditure cycle is behind it. The dividend rate increased to 39% for the first time in 2023. The company is committed to “countercyclical shipbuilding and procyclical operation”. It has 23 orders in place by mid-2024, reducing 6 ships compared to the end of 2022, and future capital expenditure will be reduced. The company has long attached importance to shareholder returns, and it is expected that the dividend rate will gradually increase. The company's PE valuation is only 4 times. If the dividend rate increases to 50%, the dividend rate will increase to 12%.

Risk warning. Default risk, economic fluctuation, interest rate and exchange rate risk, geographical situation, etc.