China Merchants Energy Shipping (CMES) has been boosted by the US sanctions on Cosco Shipping Tankers (Dalian), one of the main subsidiaries of its largest domestic rival in the tanker sector.
Over the past month, Chinese equity analysts have lifted their 2019 earnings forecasts for the Shanghai-listed carrier or upgraded its stock rating.
Their main argument is that CMES is well positioned to benefit from stronger-than-expected tanker earnings in the fourth quarter, with its young fleet of 53 VLCCs the largest in the world.
“The supply-demand fundamentals have improved and CMES has enjoyed the short-term, favourable fluctuations in spot markets,” according to analysts at Hua Chuang Securities.
They lifted CMES’ net profits forecast this year to CNY 1.67bn ($239m), up from CNY 1.49bn previously.
Having briefly spiked at more than $300,000 per day on 11 October, spot VLCC earnings have stabilised at $60,000 per day lately.
Sanctions list
Many tanker players have suggested the rally is due in part to the US’ decision to put Cosco Dalian on the sanctions list on 25 September for allegedly transporting Iranian oil.
The move effectively removed the company’s 26 VLCCs from trading, before the US Department of the Treasury issued a waiver in late October to allow its counterparties to wind down their dealings by 20 December.
In addition, many charterers were hesitant about fixing spot tonnage from Cosco Shipping Energy Transportation, the parent of Cosco Dalian, which controls 43 VLCCs.
“CMES has the world’s largest VLCC fleet, and the market conditions are improving,” Northeast Securities said. “We have adjusted its rating to ‘buy’.
"The company can earn an additional CNY 1.3bn whenever VLCC earnings increase by $10,000 per day.”
With a large chunk of the Cosco fleet effectively blacklisted by the US, Chinese charterers — some of the world’s largest crude buyers — are expected to rely on CMES even more for carrying their cargoes.
VesselsValue recorded 259 laden voyages of CMES' VLCCs in the first nine months of 2019, of which 139 were destined for China.
Star performer
Reflecting bullish earnings prospects, CMES' share price jumped from CNY 4.77 at the end of September to CNY 7.46 on 15 October, before easing back to CNY 5.5 in recent days.
The company achieved net profits of CNY 723m ($103.3m) in the first three quarters of 2019, compared with net profits of CNY 440m in the same period last year.
Revenues improved to CNY 9.81bn, up from CNY 7.32bn.
Assuming average VLCC earnings of $80,000 per day in the fourth quarter, Huatai Securities has hiked its forecast of CMES’ full-year net profits to CNY 2.58bn, up from CNY 1.67bn previously.
Aside from US sanctions, spot rates have also been boosted by the removal of some owners’ tonnage for scrubber installation ahead of the IMO 2020 deadline, according to the Chinese brokerage.
“The bullish events have come when seasonal demand is strong,” Huatai said. “The additional demand would result in spot earnings far exceeding expectation.”
