1H24 results in line with our expectations

Nanjing Tanker Corporation announced its 1H24 results: Revenue rose 11.8% YoY and 16.0% HoH to Rmb3,528mn, and attributable net profit grew 44.8% YoY and 70.9% HoH to Rmb1.22bn, implying EPS of Rmb0.25. In 1H24, the firm sold three old vessels. Excluding vessel sales, recurring net profit increased 24.0% YoY or 45.2% HoH to Rmb1.03bn in 1H24. In 2Q24, revenue excluding vessel sales was Rmb1.689bn (+9.8% YoY or -8.1% HoH), and attributable and recurring net profits reached Rmb549mn (+25.7% YoY or -18.2% HoH) and Rmb476mn (+9.1% YoY and -13.9% HoH).

Shipping rates fell QoQ but rose YoY in 2Q24; the firm’s earnings moved in sync with shipping rates. Due to the Red Sea bypass, tanker rates for refined oil rebounded YoY in 2Q24 (though 2Q is the typical slack season) due to the Red Sea bypass. Due to a two-week time lag between the signing of refined oil freight rates and the actual transportation, the firm's 2Q24 earnings were mainly affected by freight rates from mid-March to mid-June 2024. During this period, BCTI freight rates in the Pacific region where the firm mainly operates fell 2.5% QoQ and rose 18.5% YoY.

Trends to watch

Expect shipping rates to recover in 4Q the peak season. The bottom and average MR freight rates have risen markedly YTD as the Red Sea bypass occupied effective shipping capacity. The average MR freight rate on all routes as of August 16 has increased US$0.45/day YoY. In the long term, we think sector-wide supply and demand conditions will continue to improve. According to Clarksons, backlog orders for MR vessels now account for 16% of total shipping capacity, and 41% of existing vessels have been in use for over 15 years.

We believe new vessel orders cannot meet future replacement demand. In addition, factors such as the tightening of environmental regulations and fleet aging are also a curb on the effective shipping capacity of MR vessels. We expect sector uptrend to continue. Shipping rates fell QoQ in 2Q24 due to slack season, but we expect recovery in 4Q24 as the heating season begins in the northern hemisphere.

Optimization of fleet structure and balance sheet; share buybacks to improve shareholder returns; dividend expectations to further support valuation. The firm has sold three old vessels YTD to optimize its fleet structure, and repurchased two leased vessels in 1H24 to further reduce interest-bearing liabilities. Moreover, shareholder returns have continued to improve. According to the share buyback plan approved by the board at the beginning of the year, the repurchased shares account for 1.05% of total share capital.

In addition, under the new Corporate Law, we expect the firm's parent company's undistributed profit to turn positive at an accelerated pace. After the undistributed profit turns positive, the firm will be able to pay dividends, thereby supporting its valuation. As of end-2Q24, the firm reported an undistributed loss of Rmb1.98bn, down Rmb213mn from end- 1Q24.

Financials and valuation

We keep our earnings forecasts unchanged. The stock is trading at 6.4x 2024e and 6.4x 2025e P/E. We maintain an OUTPERFORM rating, but cut our TP 16.0% to Rmb4.2 (8.9x 2024e and 8.9x 2025e P/E), offering 39.1% upside, given falling risk appetite for the sector.

Risks

Slowing global economic growth; geopolitical risks.