Jan 24, 2018 COMPANY NEWS COSCO Shipping Energy Transportation CO., Ltd [1138.HK; HK$4.45 Not Rated] - Another recovery play. Market Cap: US3,434m; H-share Free Float: 100%; 3-month Average Daily Turnover: US$3.0m Analyst: Mark Po [COSCO Shipping Energy Transportation CO., Ltd ] The Company. COSCO Shipping Energy Transportation Co., Ltd. (COSCO (HK$) (HK$ million) Shipping Energy) operates as a shipping company. The Company offers 6 250 mainly marine transportation of crude oil, coal, and natural gas. COSCO 5 Shipping Energy serves customers worldwide. As of 30 Sep 2017, the 200 4 Company owned and chartered-in 120 tankers of 18.35m DWT. COSCO 150 Shipping Energy, including JVs and associates, operates 14 LNG vessels 3 with capacity of 2.3m cubic meters. In 2016, COSCO Shipping Energy had a 100 2 58.7% of market share of the domestic crude oil transportation market. 50 1 China’s imports of LNG hit a record high in Dec 2017. According to 0 0 Bloomberg, China’s imports of LNG on a monthly basis hit an all-time high of Jan17 Mar17 May17 Jul17 Sep17 Nov17 5.03m metric tonnes, up 34.7% YoY or up 24% MoM in Dec 2017. The Turnover (RHS) Price (LHS) Key Financials strong growth in LNG imports is due to a surge in demand from both 2015 2016 2017E 2018E (in Rmb m) residential and industrial users, which is a result of the government’s policy of promoting the use of gas rather than coal to reduce emissions in winter. The Revenue 10,709.3 9,658.3 10,039.4 10,939.0 Gross Profit 3,203.7 2,701.6 2,580.1 2,904.3 Chinese government’s efforts to increase the use of natural gas are expected Gross Margin % 29.9 28.0 25.7 26.6 Net Profit 1,180.9 1,934.1 1,364.5 1,371.8 to result in continuous growth in demand for LNG, which is positive for gas Net Margin % 11.0 20.0 13.6 12.5 infrastructure (e.g. pipelines and storage) names and transportation names EPS (Basic) 0.30 0.48 0.36 0.38 (e.g. LNG carrier operators such as COSCO Shipping Energy). COSCO ROE (%) 4.4 6.5 5.1 5.2 Shipping Energy has another 20 vessels under construction, all of which will Dividend Yield (%) 2.58 5.14 4.63 4.55 PER (x) 13.04 7.70 10.20 9.60 be delivered for use by the end of 2020. COSCO Shipping Energy PBR (x) 0.49 0.54 0.51 0.49 management highlighted that the Company’s LNG vessels have been linked Capex (m) (3,879.6) (4,277.7) (4,409.3) (3,023.3) to LNG projects and that it believes the charter rates of LNG vessels will be Free cash flow (m) 3,103.8 7,575.9 216.0 943.0 stable. The LNG vessel operation will make more meaningful contribution by Net cash/(net debt) (mn) (44,193.3) (20,176.0) (21,962.5) (22,294.5) 2020, as more vessels will be in operation after delivery. Source: Bloomberg, Company Data. conditionally agrees to issue A shares worth not more than RMB4.2bn. Because of the oversupply issue, very large crude carrier (VLCC) rates have The proceeds will be used as follows: a) approximately RMB4.99bn for been under pressure since the beginning of 2017, which is one of the the construction of 14 additional oil tankers; and b) approximately reasons for the underperformance of COSCO Shipping Energy. VLCC rates RMB0.41bn to complete the acquisition of two Panamanian oil tankers reached a trough in Sep 2017 and rebounded in Q4 2017. The depressed previously committed to. According to the announcement COSCO market has resulted in an increase in the scrapping of old vessels (0.3 DWT Shipping’s stake in COSCO Shipping Energy will increase from in 1H 2017 and about 2m DWT in 2H 2017). About 20% of VLCC fleets 38.56% to 45.00% assuming an issue price of RMB6.81. COSCO globally are over 15 years old, so they will be phased out in the coming 2-3 Shipping Energy aims to complete the share issuance by 2H 2018. years, given the high maintenance costs because of regulations related to COSCO Shipping Energy management highlighted that the Company ballast water and low-sulphur oil. The new-build supplies should continue to will have lower operating costs than its peers, given its expansion in come down, given the depressed market environment. These factors should the depressed market environment. change the supply/demand dynamics to become more balanced, which is positive for COSCO Shipping Energy. Our view. COSCO Shipping Energy is a laggard, in our view due to weak operating performance in Q3 2017. However, VLCC and tanker In Nov 2017, COSCO Shipping Energy announced that it planned to sell up rates improved in Q4 2017. Given industry developments, 2018 is to 806,406,572 A shares to not more 10 specific target subscribers, including expected to be the trough for COSCO Shipping Energy, and the COSOC Shipping (the parent co. of COSCO Shipping Energy), which will Company’s operating performance is expected to improve gradually, raise gross proceeds of RMB5.4bn. The minimum issue price of COSCO as the industry is likely to enter an upcycle in the next 2-3 years, Shipping Energy’s A shares will be at least RMB6.81 per share. The providing an enhanced entry point. Trading at 0.5x PBV, COSCO maximum number of A shares that may be issued represents: a) Shipping Energy is a major laggard compared to its related sister approximately 29.5% of the existing issued A shares and approximately shipping companies, such as CSCOL Shipping Development 20.0% of the existing total issued share capital of the Company; and b) [2866.HK] and COSCO Shipping Holdings [1919.HK]. Given recent approximately 22.8% of the enlarged issued A shares and approximately industry developments, COSCO Shipping Energy looks interesting for 16.7% of the enlarged total issued share capital of the Company upon investors who are looking for a recovery theme. completion of the issuance of A shares. COSCO Shipping Energy and COSCO Shipping entered into a subscription agreement whereby COSCO Catalysts: Q4 2017 results announcement, news flow on business Shipping conditionally agrees to subscribe for, and COSCO Shipping Energy development, and completion of share issuance. Figure 1: CCFI Figure 2: BDIY CCFI 1,000.0 BDIY Index 2,000.0 1,800.0 900.0 1,600.0 800.0 1,400.0 1,200.0 700.0 1,000.0 800.0 600.0 600.0 400.0 500.0 200.0 400.0 0.0 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Sources: Bloomberg, CGIS Research Sources: Bloomberg, CGIS Research Figure 3: Dirty VLCC Middle East to Far East Figure 4: Dirty tanker spot price Dirty VLCC Arabian Gulf to Far East Tanker Rate/USD per day Dirty 260-270 DWT tanker spot price, worldscale rates 120,000.0 120.0 100,000.0 100.0 80,000.0 80.0 60,000.0 60.0 40,000.0 40.0 20,000.0 20.0 0.0 0.0 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Jan/16 Apr/16 Jul/16 Oct/16 Jan/17 Apr/17 Jul/17 Oct/17 Jan/18 Sources: Bloomberg, CGIS Research Sources: Bloomberg, CGIS Research COMPANY / INDUSTRY NEWS Figure 5: Peer comparison Ticker Company PE EV/EBITDA P/B ROE ROA Div yield Share Price Performance Price Market Cap 2017F 2018F 2019F 2017F 2018F 2019F 2016 2017F 2016 2017F 2016 2017F 2016 2017F 1M 3M 6M 12M YTD Lcy US$m x x x x x x x x % % % % % % % % % % % 2866 HK COSCO Shipping Development 1.67 5,124 n.a. n.a. n.a. n.a. n.a. n.a. 1.1 n.a. 1.2 n.a. 2.0 n.a. 0.0 n.a. 7.1 -4.6 -6.2 2.5 4.4 1919 HK COSCO Shipping Holdings-H 4.22 9,632 14.6 14.7 15.2 16.5 15.5 11.7 1.7 1.7 -42.3 12.2 -0.7 2.5 0.0 0.3 5.5 -1.2 -2.3 47.6 4.7 2343 HK Pacific Basin Shipping Ltd 1.72 977 n.a. 15.7 6.9 12.5 8.1 5.7 0.9 0.8 -8.6 0.4 -2.2 0.3 0.0 0.0 1.2 -6.5 2.4 27.4 1.8 368 HK Sinotrans Shipping Ltd 2.34 1,195 37.4 20.0 17.6 6.7 4.9 5.2 0.7 0.7 -12.0 1.6 -8.2 1.3 1.7 0.0 22.5 4.0 17.0 46.3 17.6 316 HK Orient Overseas Intl Ltd 74.00 5,924 37.4 24.2 16.8 13.7 11.7 9.9 1.3 1.3 -4.7 4.4 -1.1 1.9 0.2 0.8 -1.6 0.3 1.2 85.0 -1.9 137 HK Jinhui Holdings Company Ltd 1.14 77 n.a. n.a. n.a.