Reopening of the Strait of Hormuz Could Drive Tanker Freight Rate Increases

Overview

This report analyzes investment opportunities for China Merchants Energy Shipping in the tanker shipping market. The company is the world’s largest owner of VLCC (Very Large Crude Carrier) fleets, operating 51 VLCC vessels with a total capacity of 15.76 million DWT as of end-2025. Management believes there remains upside potential in the global tanker shipping market, particularly under a scenario where the Strait of Hormuz reopens. UBS maintains a neutral rating on the company with a target price of RMB 17.20, expecting a 12-month total return of 11.1%.

Core views

The company’s core competitive advantages are reflected in three aspects: First, Chinese VLCC owners generally maintain healthier balance sheets than their international peers. Second, the company employs a flexible operational strategy, adhering to the principles of 'avoiding low-priced long-term charters' and 'not rushing to sell vessels,' which enhances resilience during periods of weak freight rates. Third, the majority of its VLCC fleet operates outside high-risk regions such as the Persian Gulf (focusing instead on safer routes like the U.S., Brazil, and West Africa), and will only consider Persian Gulf routes once risk levels decline. The freight rate outlook hinges critically on developments concerning the Strait of Hormuz. If the strait remains closed throughout 2026, global VLCC capacity would shift into surplus, pressuring freight rates further downward. If the strait reopens gradually, recovering Middle Eastern crude exports would support freight rate increases. In a full-reopening scenario—especially if Middle Eastern crude production rebounds rapidly or even exceeds pre-conflict levels—shipping demand could outstrip port berthing and loading capacity, triggering intense vessel booking competition and potentially driving Persian Gulf freight rates significantly higher. Q2 TCE earnings are expected to rise substantially quarter-over-quarter, and freight rates are likely to stay elevated in the medium term. Sinokor, the world’s largest VLCC owner, appears willing to push rates higher, providing overall market support. New vessel deliveries are insufficient to offset the global VLCC capacity shortfall due to factors including time required for newbuild verification, strict U.S. port requirements on vessel age and environmental compliance, and delays in global newbuild deliveries—all of which support freight rates over the medium to long term.

Analysis framework

UBS employs a Sum-of-the-Parts (SOTP) valuation methodology. The analytical framework centers on scenarios related to the reopening of the Strait of Hormuz—the key variable determining freight rate prospects. The research team evaluates market evolution paths under three distinct scenarios: continued closure leading to capacity surplus, gradual reopening supporting rate recovery, and full reopening potentially triggering sharp rate increases. The analysis also emphasizes the company’s operational flexibility and financial strength relative to peers, alongside structural constraints in global VLCC supply-demand dynamics.

Methodology notes

• Valuation MethodSOTP Valuation

  UBS uses a Sum-of-the-Parts (SOTP) approach to value China Merchants Energy Shipping

  The SOTP method values each business segment separately and sums them, suitable for companies with diversified operations. This report applies SOTP to derive the RMB 17.20 target price by evaluating the company’s VLCC operations, other fleet segments, and consolidating the results.

• Industry/ Sector Analysis FrameworkSupply-demand framework

  Tanker shipping supply is influenced by newbuild deliveries, existing fleet capacity, and scrapping pace, while demand is driven by crude oil trade flows and shipping distances

  The report highlights structural tightness in global VLCC supply: insufficient newbuild deliveries combined with older vessels being phased out of premium markets due to environmental and safety standards. This supply constraint, juxtaposed with demand recovery—particularly from a Hormuz reopening-driven surge in Middle Eastern crude shipments—creates upward pressure on freight rates.

• Event-Driven & Behavioral FinanceEvent-driven analysis

  The status of the Strait of Hormuz is a pivotal geopolitical event shaping short-term freight trends and company performance

  The report explicitly identifies the strait’s reopening as the key catalyst, with three distinct scenarios (closure, gradual recovery, full reopening) leading to vastly different freight rate outcomes. Management’s strategic decisions (e.g., entering Persian Gulf routes) are also conditioned on this event, reflecting an event-driven investment logic.

• Industry/ Sector Analysis Framework

  Time Charter Equivalent (TCE) earnings are a critical metric for assessing tanker company profitability

  TCE reflects the equivalent daily charter rate under prevailing freight conditions. A significant QoQ increase in Q2 TCE indicates markedly improved per-vessel revenue generation in the near term—a standard industry metric for analyzing fleet operating cash flow and earnings.

Key data

• Total VLCC Fleet Size51 vessels, 15.76 million DWTAs of end-2025; world’s largest VLCC fleet owner
• Target PriceRMB 17.20Based on SOTP valuation; implies 6.9% upside from May 28, 2026 closing price of RMB 16.09
• 12-Month Expected Total Return11.1%Comprising 6.9% price appreciation and 4.2% dividend yield
• P/BV (12/26E)2.4xBased on December 2026E book value
• Net Debt/EBITDA (12/26E)0.9xIndicates moderate financial leverage
• Dividend Yield4.2%Expected 12-month dividend yield

Impact & implications

A full reopening of the Strait of Hormuz would trigger a surge in Middle Eastern crude shipping demand, shifting the current 'low volume + high rates' paradigm to 'high volume + high rates.' This would directly benefit China Merchants Energy Shipping: first, through its substantial VLCC fleet capacity; second, via its ability to flexibly enter the Persian Gulf market based on risk assessments to fully capture rate upside. Conversely, prolonged closure would exacerbate global VLCC oversupply, pushing freight rates lower and pressuring earnings. In the medium term, tight global VLCC supply and Chinese shipowners’ financial strength will underpin freight rate levels. Long-term risks include newbuild deliveries, weak Chinese oil demand impacting cargo volumes, stricter global decarbonization regulations, and uncertainties surrounding 'shadow fleets' (non-compliant vessels circumventing sanctions).

Risks

• Prolonged closure of the Strait of Hormuz leading to global capacity oversupply and sharp freight rate declines
• Insufficient Chinese oil demand significantly impacting cargo volumes and earnings
• Tighter global environmental regulations increasing compliance costs that may not be fully passed on to customers
• Unexpected expansion of shadow fleets undermining pricing power of compliant carriers
• Intensified international competition as new entrants capture profits from tight capacity conditions

What to watch

• Navigation status of the Strait of Hormuz and progress in Middle Eastern crude production recovery
• Company’s Q2 and subsequent quarterly TCE levels and freight earnings trends
• Global VLCC newbuild delivery schedules and fleet scrapping data
• Crude export volume changes on key routes (e.g., U.S., West Africa)