Description of the event

On September 26, 2024, Qingdao Port issued an announcement stating that the company received the “Notice on Accepting Applications for Qingdao Port International Co., Ltd. to Issue Shares to Purchase Assets and Raise Supporting Funds” from the Shanghai Stock Exchange. The project became the first merger, acquisition and restructuring project accepted by the Shanghai Stock Exchange after the China Securities Regulatory Commission issued “Opinions on Deepening the Reform of the M&A and Restructuring Market for Listed Companies”.

Incident comments

Port integration in Shandong Province continues to advance. Since the establishment of the Shandong Port Group in 2019, it has successively integrated the four major port groups in the province: Qingdao Port, Rizhao Port, Yantai Port, and Bohai Bay Port. In order to resolve the issue of peer competition between listed companies and companies affiliated with the group, the company previously issued an announcement stating that it plans to issue shares and cash to purchase oil terminal assets of Rizhao Port Group and Yantai Port Group, a subsidiary of Shandong Port Group. The announcement on September 26 means that port integration within the province continues to advance. As the first merger, acquisition and restructuring project after the publication of the “6 M&A Rules”, the restructuring process is being accelerated.

The effects of the restructuring will be highlighted, and the stability of the liquid bulk business is expected to be supported. In the first half of this year, the performance of the liquid bulk sector was under pressure. Apart from being affected by weak downstream demand at the macro level, the commissioning of nearby crude oil terminals also had a certain impact on its hinterland supply. At the end of last year, three 0.1 million-ton terminals at Dongying Port were put into operation one after another, causing some refineries to reduce transportation demand from transit ports such as Qingdao, Dalian, and Ningbo to Dongying. Similarly, Yulong Petrochemical was put into operation at the end of this month. Due to the small tonnage of the Yulong Port Terminal, most crude oil imports will be handled through Yantai Port. This integration mainly focuses on oil terminals and pipeline assets at Rizhao Port and Yantai Port. Therefore, with the injection of related assets, the company will achieve integrated integration of high-quality oil terminals in Shandong Province to make up for loss of cargo volume caused by surrounding terminals and the commissioning of Yulong Petrochemical, and support the stability of liquid bulk cargo.

In addition to business-level considerations, the asset quality will also benefit Qingdao Port. Compared with the original plan announced in 2023, the current plan excludes assets with an ROE of less than 5%, and the asset profit level has increased markedly. Overall, the ROE level of the assets acquired in 2023 reached 11.68%, which is close to that of the company and higher than other ports. Financially, the deal will boost the company's EPS. According to the company's exam preparation data, regardless of the impact of raising supporting capital, the company's EPS increased from 0.76 yuan/share to 0.80 yuan/share in 2023, an increase of 5.20%, and EPS increased from 0.20 yuan/share to 0.21 yuan/share in the first quarter of 2024, an increase of 3.78%. Since the maximum amount of supporting capital raised this time is 2 billion yuan, the probability that EPS will be diluted is low even after considering raising capital. In summary, this restructuring focuses on the liquid bulk sector and increases EPS.

Investment advice: The restructuring process is speeding up, and the liquid bulk sector is defending against the wind. In our in-depth report “Qingdao Port: Jiaozhou Bay, Right Time to Lead”, we emphasized that the growth of the container sector and the stability of the liquid bulk sector are the two major logics supporting the growth of Qingdao Port's performance. In the first half of this year, the container sector achieved double growth in throughput and performance, which continued to confirm the sector's growth, while the liquid bulk sector was affected by weak downstream demand and the commissioning of surrounding crude oil terminals, putting pressure on performance. The trend of port consolidation in Shandong Province is on the rise. This announcement may mean that the asset restructuring process will speed up and the liquid bulk sector will fight back against the wind. Under the integrated collaborative development pattern of Shandong Province “with Qingdao Port as the lead, Rizhao Port and Yantai Port as the two wings, Bohai Bay Port as the extension, various sector groups as support, and many inland ports as the foundation”, Qingdao Port will continue to benefit. We expect the net profit attributable to the company in 2024-2026 to be 5.13, 5.23, and 5.59 billion, corresponding PE of 10.9, 10.7, and 10.1 times. Assuming a 40% dividend ratio, the corresponding dividend rates for 24-26 will be 3.7%, 3.7%, and 4.0%, respectively, maintaining a “buy” rating.

Risk warning

1. Macroeconomic fluctuations;

2. Port integration falls short of expectations.