Cosco Shipping: A Daily Profit of 240 Million!

The remarkable surge in profitability reported by China COSCO Shipping Corporation (中远海控) has undoubtedly captured market attention.Official forecasts indicate that the company's net profit attributable to shareholders reached approximately 38.12 billion yuan for the first three quarters, showing a staggering year-on-year growth of 72.72%. In particular, the third quarter alone saw profits soar to 21.25 billion yuan, representing an extraordinary increase of 285% compared to the same period last year.To put it another way, during the third quarter, COSCO earned an impressive average of 240 million yuan per day, illustrating the sheer scale of its profitability. The significant increase in performance can be attributed to several factors, as explained by the company representatives:On one hand, the ongoing tensions in the Red Sea region have led to a tightening global supply chain, resulting in an effective shortage of supply; on the other hand, the European and American mainline shipping markets have entered a robust seasonal period, driving up demand and improving the overall shipping market. Consequently, COSCO’s container shipping segment experienced both volume and price increases.One key aspect to focus on is freight rates.This year's shipping prices far exceed those of the previous year; despite experiencing a dip in the first two months, the container freight index has recently rebounded above the 2000-point mark. Notably, on October 11, the futures contract for European shipping saw two consecutive trading limits, closing at 2494.3 points.This indicates a clear sign of stabilization in container freight rates, suggesting that performance in the fourth quarter may be even more impressive!However, some may argue that COSCO is considered a cyclical stock, implying that its share price does not directly correlate with its performance metrics. While there's truth to this, the situation is not entirely straightforward.In 2023, COSCO's operating revenue was approximately 175.4 billion yuan. Although this reflects a decline of 55.14% year-on-year, it still exceeds the revenue figures from 2019 and 2020. In terms of net profit, it stands at 3.5 times that of 2019 and 2.4 times that of 2020.What does this indicate?The company witnessed a sharp increase in revenue during 2021 and 2022 due to the impacts of the Red Sea situation and the pandemic, yet even after the pandemic receded, COSCO’s revenue did not regress. In 2019, COSCO's gross margin was 11.09%, and in 2023, it improved to 15.72% for the entire year and 22.88% for the first half of the year.This suggests that COSCO’s gross margin is now significantly higher than in the past.In other words, the logic underlying COSCO has evolved.It is well known that COSCO primarily engages in container shipping and terminal operations, with the former focusing on route quantity and scale costs, while the latter is primarily about lease revenues.On a global scale, container shipping involves heavy capital investment, leading to a high market concentration primarily held by a few major players, including COSCO.According to semi-annual report data, COSCO operates a fleet of 527 self-owned vessels, with a total capacity exceeding 3.24 million TEUs. Additionally, the company is in the process of building 20 new vessels, cumulatively adding nearly 570,000 TEUs of capacity.This means that COSCO's capacity will continue to rise. As long as demand remains robust, their profitability is expected to keep strengthening.The pivotal question arises: Will market demand plummet?Despite fluctuations in the global economy, maritime trade tends to behave more like a growth stock rather than a cyclical one. Particularly in China, the world's factory, alongside the Belt and Road Initiative, the demand for shipping remains relatively stable with a slight upward trend.This brings us back to COSCO's risk resilience, which fundamentally hinges on its financial strength.In 2022 and 2023, COSCO's dividend payout ratio was approximately 50%, amounting to a total dividend distribution of 66.7 billion yuan; in the first half of this year, COSCO paid out an interim dividend of 8.3 billion yuan. It is evident that COSCO possesses ample capability to distribute dividends.As of the end of June 2024, COSCO reported cash and cash equivalents of 173.6 billion yuan, with short-term loans and interest-bearing liabilities due within one year amounting to only 16.2 billion yuan, which is negligible. Furthermore, the net operating cash flow for the first half of the year was 22.638 billion yuan, reflecting a year-on-year increase of 70.7%, while capital expenditures stood at 11.827 billion yuan, indicating a substantial influx of funds.In summary, COSCO manages to maintain a dividend payout ratio of around 50% while also accommodating significant capital expenditures for shipbuilding, which is a noteworthy achievement.Thus, my perspective on China COSCO Shipping Corporation is as follows:If one perceives the global macroeconomic climate and maritime trade as cyclical, then COSCO is indeed a cyclical company. However, since 2019, based on the company's sustainable profitability and dividend trends, COSCO effectively resembles a growth-oriented blue-chip stock.What do you think?