Morgan Stanley: Bullish on Short-Term Valuation Repair and Freight Rate Upside for COSCO SHIPPING Energy Transportation

Overview

This report presents Morgan Stanley's tactical investment view on COSCO SHIPPING Energy Transportation (600026.SS). The firm believes that although the share price has recently retreated, this has made short-term valuations highly attractive. Based on judgments regarding the normalization of Middle East shipping, the release of backlogged crude oil, and regional capacity shortages, the firm expects the company's share price to achieve absolute gains within the next 60 days. It maintains an 'Overweight' rating with a target price of Rmb31.60.

Core views

The core logic lies in the resonance between short-term valuation repair and potential fundamental catalysts. First, from a trading perspective, the recent pullback in COSCO SHIPPING Energy Transportation's share price has significantly enhanced the cost-effectiveness of its short-term valuation, which the firm believes offers a good entry point at current levels. Second, there are clear upward drivers on the fundamental side. The potential normalization of shipping activities in the Middle East will be a key catalyst. This process is supported by multiple factors: first, the urgent need to release previously backlogged crude oil transportation demand; second, the continued existence of downstream restocking demand; and third, a potential shortage of available vessel capacity in the region, which would push up spot freight rates. The firm assesses the probability of these scenarios occurring at approximately 70% to 80%, categorizing it as a 'very likely' situation. Regarding valuation methodology, the firm employs a probability-weighted Price-to-Book (P/B) model. In the base case (60% weight), the target P/B multiple is 2.5x; in the bull case (25% weight), the target P/B multiple is 5.6x, reflecting expectations of VLCC (Very Large Crude Carrier) supply tightness, intensified sanctions on the 'dark fleet,' and continued production increases by OPEC+; in the bear case (15% weight), the target P/B multiple is 1.2x. Additionally, considering the A/H share premium, the base case assumes a premium of 30%.

Analysis framework

The firm adopted a typical 'tactical trading approach' combined with 'probability-weighted valuation.' First, Tactical Perspective: Unlike long-term fundamental deep revaluation, this report focuses on a short-term window of the next 60 days, aiming to capture trading opportunities arising from valuation mispricing due to market sentiment fluctuations and short-term supply-demand imbalances. Second, Scenario Analysis and Probability Assignment: Instead of providing a single deterministic forecast, the firm constructed bull, base, and bear scenarios, subjectively assigning occurrence probabilities (25%/60%/15%). This method allows investors to understand the valuation range under different macro assumptions, especially the high weighting towards supply-side factors (VLCC tightness, sanctions) in the bull scenario, reflecting the firm's emphasis on supply rigidity. Third, Valuation Anchoring: Using historical Price-to-Book (P/B) ratios as the core valuation metric, referencing historical means and standard deviation distributions since 2009 to ensure that valuation multiples have historical comparability and statistical significance.

Methodology notes

• Valuation MethodPB valuation

  Probability-Weighted Price-to-Book Valuation

  The firm sets bull, base, and bear scenarios with their respective occurrence probabilities, corresponding to different Price-to-Book (P/B) multiples, and finally calculates the target price through weighted averaging. This method can more flexibly reflect valuation ranges in uncertain environments rather than relying on a single static forecast.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Shipping Industry Supply-Demand Balance Analysis

  The report focuses on analyzing the demand side of crude oil transportation (normalization of Middle East shipping, restocking demand) and the supply side (regional capacity shortage, VLCC supply tightness, dark fleet sanctions), pointing out that supply-demand mismatch is the core driver pushing up freight rates and share prices.

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Short-Term Event-Driven and Valuation Repair

  The firm focuses on the impact of the potential event 'normalization of Middle East shipping' on the market, believing that current share prices have already reflected pessimistic expectations. Once events develop towards normalization, a positive expectation gap will form, driving rapid share price repair in the short term.

Asset mapping & comparison

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

• COSCO SHIPPING Energy Transportation (600026.SS)

  Direct beneficiary, owning a large VLCC fleet and directly participating in global crude oil transportation

  Strengths

  Valuation is at a low level with high elasticity; benefits from VLCC supply tightness and lengthened transport distances or restricted capacity due to geopolitics

  Risks

  Decline in crude oil demand due to global economic weakness; compression of A-H share premium

Key data

• Target PriceRmb31.60Derived based on probability-weighted P/B valuation
• Current Share PriceRmb17.50Closing price as of June 12, 2026
• Probability of Upside Scenario70%-80%Firm's assessment of the likelihood of favorable scenarios such as normalization of Middle East shipping
• Base Case P/B Multiple2.5xCorresponding to the base scenario with 60% weight
• Bull Case P/B Multiple5.6xCorresponding to the bull scenario with 25% weight, 9.1 standard deviations above the historical mean
• Bear Case P/B Multiple1.2xCorresponding to the bear scenario with 15% weight, close to the historical mean since 2009

Impact & implications

The report believes that for COSCO SHIPPING Energy Transportation, short-term trading opportunities outweigh long-term trend changes. If tensions in the Middle East ease or shipping returns to normal, the company will directly benefit from soaring freight rates and improved turnover efficiency. For investors, the current position offers a high margin of safety and upward elasticity, making it suitable for short-to-medium term tactical allocation.

Risks

• Decline in crude oil demand due to global economic weakness
• Crude oil production lower than expected
• Compression of A-H share premium

What to watch

• Increased demand from the reopening of the Strait of Hormuz or lifting of sanctions on Iranian oil exports
• Whether transport distances further lengthen
• Scrapping speed of older vessels