COSCO SHIPPING Energy Transportation (01138) Report Interpretation

Overview

This conference-feedback update examines COSCO SHIPPING Energy Transportation’s exposure to a strong VLCC freight market. Morgan Stanley attributes the upcycle to constrained effective vessel capacity and changing crude-trade flows, and expects improving earnings through 2026 as higher rates and utilization feed through.

Core views

Management characterizes the current VLCC rally as a sharp tightening in effective capacity occurring alongside increasing shipment demand. It identifies three pillars supporting elevated spot rates: rising Chinese crude imports, ship-to-ship transfers in the Middle East that absorb available capacity, and rerouting associated with Bab al-Mandab Strait disruption. China’s crude restocking has been underway since July; charterers have become more urgent in securing tonnage, while healthy refining margins and strategic inventory requirements have enabled refiners to bear higher crude and freight costs. The report highlights the Strait of Hormuz disruptions as a potential longer-lasting support for tanker shipping. Management views recent three-year VLCC time-charter rates of US$100k per day as a stronger signal for mid-term pricing. CSE has repositioned most of its capacity toward Middle East–Far East routes, with many vessels on the TD34 Gulf of Oman-to-China route, allowing it to capture higher spot rates. Morgan Stanley expects 3Q26 earnings to improve quarter on quarter on better rates and utilization; management expects most of the September rate spike to be reflected in 4Q26. Supply conditions remain relevant to the durability of the market. CSE has six VLCCs on order and six bareboat charter-in VLCCs due for delivery in 2027–28, although management remains cautious about expanding chartered-in capacity despite high spot rates. Restrictions by charterers on aged vessels also remain in place, limiting the practical supply response. For valuation, Morgan Stanley uses probability-weighted price-to-book scenarios of 15% bull, 80% base and 5% bear. For the Hong Kong shares, its 2027e P/B assumptions are 3.8x in the bull case, 1.9x in the base case and 1.0x in the bear case. The stated positive skew reflects longer-haul crude sourcing, tight VLCC supply, more sanctions on the dark fleet and continuing OPEC+ production hikes. For the A shares, the corresponding 2027e P/B assumptions are 5.5x, 2.4x and 1.1x, with A/H premiums of 45%, 30% and 15% in the bull, base and bear cases, respectively.

Analysis framework

The report combines management feedback from the China Best Conference with an assessment of tanker supply-demand conditions, route disruptions, vessel deployment and earnings timing. It then applies probability-weighted P/B valuation scenarios to reflect different tanker-market outcomes and A/H valuation premiums.

Methodology notes

• Industry AnalysisSupply-demand framework

  VLCC effective-capacity and crude-shipment-demand analysis

  The report explains tanker-rate strength through constrained effective vessel supply, Chinese crude restocking, ship-to-ship transfers and longer rerouted voyages that consume capacity.

• Valuation methodsPB valuation

  Probability-weighted 2027e price-to-book valuation

  Morgan Stanley uses bull, base and bear P/B multiples with 15%, 80% and 5% probabilities to frame valuation outcomes for the Hong Kong and A shares.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• COSCO SHIPPING Energy Transportation (01138.HK)

  Primary covered Hong Kong-listed share expected to benefit from elevated VLCC rates and Middle East–Far East route deployment.

  Strengths

  Most capacity has shifted to Middle East–Far East routes, including TD34, to capture higher spot rates.

  Weaknesses

  Management remains cautious on charter-in expansion despite high spot rates.

  Comparison

  Valued at 2027e P/B assumptions of 3.8x bull, 1.9x base and 1.0x bear.

  Risks

  Lower crude-shipment demand, lower OPEC output, or a return of shadow fleets could weaken the tanker market.

• COSCO SHIPPING Energy Transportation (600026.SH)

  Primary covered A-share listing with valuation linked to the same tanker-market outlook.

  Strengths

  Exposure to the same improving tanker rates and utilization backdrop.

  Comparison

  2027e P/B assumptions are 5.5x bull, 2.4x base and 1.1x bear, with A/H premiums of 45%, 30% and 15%.

  Risks

  Lower-than-expected crude oil output and compression of the A-H premium.

Key data

• Hong Kong share rating and target priceOverweight; HK$26.00HK$19.29 closing price on Sep 17, 2026 and 35% stated upside.
• 3Q26 and 4Q26 earnings timing3Q26 QoQ improvement; most September rate spike reflected in 4Q26Attributed to improved rates and utilization and management’s expected earnings pass-through.
• VLCC fleet additions6 VLCCs on order and 6 bareboat charter-in VLCCsScheduled for 2027–28 delivery.
• Hong Kong shares 2027e P/B scenarios3.8x bull; 1.9x base; 1.0x bearBase case is 3.4 standard deviations above the historical mean since 2009; bull case is 9.0 standard deviations above; bear case is 0.8 standard deviations above.
• A shares 2027e P/B scenarios5.5x bull; 2.4x base; 1.1x bearBull is 9x standard deviations above the historical mean since 2009, base is 2x above, and bear is largely equivalent to the historical mean.
• A/H premium scenarios45% bull; 30% base; 15% bearApplied to the A-share valuation framework.
• Forecast EPSRmb1.68 in 2026e; Rmb1.79 in 2027e; Rmb1.65 in 2028eMorgan Stanley ModelWare estimates.

Impact & implications

Morgan Stanley’s thesis is that CSE is positioned to benefit from sustained high VLCC spot rates because its fleet has been deployed toward Middle East–Far East trade lanes. The expected rate and utilization improvement supports better near-term earnings, while the valuation framework assumes a market supported by tight supply and longer-haul crude flows.

Risks

• Infrastructure damage causing an extended east-west pipeline suspension could reduce crude-shipment demand.
• A weaker global economy could reduce crude demand.
• Lower-than-expected OPEC crude output could weaken tanker demand.
• The return of shadow fleets could increase effective tanker supply.
• For the A shares, compression of the A-H premium is a stated valuation risk.

What to watch

• The duration of Strait of Hormuz and Bab al-Mandab-related disruption and its impact on voyage distances and effective capacity.
• Chinese crude restocking, refining margins and charterers’ urgency in securing tonnage.
• Whether the September VLCC rate spike is reflected in 4Q26 earnings as management expects.
• Crude-output trends, aging-vessel scrapping and the potential return of shadow fleets.
• Progress of CSE’s six VLCC orders and six bareboat charter-in VLCCs scheduled for 2027–28 delivery.