1H24 results beat our expectations

Xingtong Shipping announced its 1H24 results: Revenue rose 24% YoY to Rmb772mn and net profit attributable to shareholders grew 32% YoY to Rmb180mn, implying EPS of Rmb0.64. In 2Q24, revenue rose 35% YoY and +0% QoQ to Rmb387mn, and net profit attributable to shareholders grew 71% YoY and 33% QoQ to Rmb103mn, beating our expectations.

We attribute the strong results to higher-than-expected growth in time charter income driven by overseas business expansion. In 1H24, domestic revenue was Rmb480mn (accounting for 62% of total revenue) with gross margin at 40.7% (up 4.7ppt from 36.1% in 2023); overseas revenue was Rmb292mn (accounting for 38%) with gross profit margin at 29.8% (up 4.9ppt from 24.9% in 2023).

Trends to watch Expansion of shipping capacity as expected: Share of domestic shipping market rising steadily; shipping orders related to foreign trade ample.

Based on data from shipformula.com, the firm estimates that its share measured by total volume of liquid chemicals transported for domestic trade rose to 15.49% from 13.95% at end-2023. In the domestic trade market, we believe the firm may continue to step up efforts to assess new shipping capacity and acquire capacity from other institutions to expand its fleet at an appropriate pace, stabilize its leading position, and gradually increase its market share.

The firm announced that the shipping capacity of its vessels for various bulk and hazardous liquefied cargos rose 7% from end-2023 to 410,000 DWT (35 vessels for foreign trade of chemicals, with two being newly added). The firm has nine chemical vessels under construction with a combined shipping capacity of 153,800 DWT (37,200 DWT for domestic trade and 116,600 DWT for foreign trade). As new vessels come online, we expect the firm's overseas business to drive revenue growth.

2Q24 gross margin improves notably YoY and QoQ; watch domestic trade demand and changes in foreign trade business. In 2Q24, the firm's gross margin rose 8.8ppt YoY and 8.7ppt QoQ to 40.9%, and its net margin rose 5.6ppt YoY and 6.5ppt QoQ to 26.6%. Domestic trade demand is still recovering. The firm's business related to domestic trade has rebounded YoY thanks to a low base for comparison. Looking ahead, we expect gross margin of this business to be boosted thanks to improving operating efficiency. We believe gross margin of foreign trade-related business may gradually improve as new ships come online, the firm expands its business scale, and its operating experience becomes increasingly rich.

Financials and valuation

As the firm's overseas business expansion is better than we expected, we raise our earnings forecast 13% to Rmb341mn for 2024 and 18% to Rmb431mn for 2025. The stock is trading at 11.9x and 9.4x 2024e and 2025e P/E. We maintain an OUTPERFORM rating and our TP of Rmb19.5, implying 16.0x 2024e and 12.7x 2025e P/E, offering 34.5% upside.

Risks

Output growth of upstream chemicals slows; capacity expansion disappoints; geopolitical risks weigh on foreign trade.