Due to the prolongation of the Red Sea crisis and the moderate growth in cargo volume, the global maritime market entered a prosperous cycle in the first three quarters of 2024, with maritime-related companies achieving significant growth in performance. Taking COSCO Shipping Holdings Co., Ltd. (01919) as an example, the company's net profit for the first three quarters of 2024 was 43.34 billion yuan, a year-on-year increase of 66.67%.

Capitalizing on the high prosperity of the maritime market, the well-known ship refueling service provider PTL Limited (hereinafter referred to as Chang'an Energy) has accelerated its pace towards listing in the United States. Smart Finance APP learned that after submitting the initial public version of the prospectus (F-1) to the SEC on July 30 this year, Chang'an Energy has updated the prospectus twice on August 19 and September 20, with a tight schedule for the IPO.

According to the latest version of the prospectus, Chang'an Energy has applied to list on NASDAQ under the code "PTLE". It will issue 1.25 million common shares in this IPO, with a price per share ranging from $4 to $6, raising up to $7.5 million in funds. If calculated at an issue price of $6 per share, Chang'an Energy's market value upon listing will reach $75 million.

In terms of performance, Chang'an Energy has shown a dazzling performance. Data shows that Chang'an Energy's revenue in 2023 was $102 million, a year-on-year increase of 36.5%, and the net profit for the period was $936,100, a year-on-year increase of 139.4%.

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With dazzling performance during the industry's prosperous period, can Chang'an Energy win a high valuation? And after listing, can it win the favor of market funds? The answer can be found through the company's prospectus.

Profitability reveals the essence of the distributor

Hong Kong is an important gateway connecting China's mainland with the global market and is one of the world's largest international trade shipping centers. With excellent harbor conditions and advanced port facilities, Hong Kong has become an important goods transit station, promoting trade between China and other countries around the world. The headquarters of Chang'an Energy is located in Hong Kong.

As a mature refueling service provider, Chang'an Energy mainly provides marine fuel logistics services for ships (especially container ships, bulk carriers, general cargo ships, and chemical tankers). At present, Chang'an Energy has established a cooperation network including upstream suppliers and downstream customers, providing a one-stop solution for ship refueling.

In terms of fuel delivery locations, Chang'an Energy's revenue mainly comes from Hong Kong. According to the prospectus, in 2023, the revenue from fuel delivered in Hong Kong accounted for 93.2% of Chang'an Energy's revenue. It can be seen that Hong Kong is the core market of Chang'an Energy. However, Chang'an Energy has started to expand into new markets such as the United Arab Emirates and Singapore, aiming to create a new growth curve through new regions. The revenue growth rates from these two markets in 2023 were 442.3% and 214%, respectively, but the revenue proportion is still low, with a total of less than 5%.

There are multiple factors behind Chang'an Energy's dazzling performance in 2023. First, at the industry level, although the demand for container shipping market contracted in 2023, the delivery of new ships increased supply, which to some extent boosted the demand for refueling services. At the same time, the continuous and steady export of Chinese goods also benefited Chang'an Energy. More importantly, since mid-November 2023, the continuous tension in the Red Sea has led some ships passing through the Suez Canal to take a detour through the Cape of Good Hope. This has increased the sailing distance by about 30%, the sailing time by 7 to 15 days (depending on the speed of the ships), and according to Clarksons data, about 10% of the world's maritime transaction volume is transported through the Suez Canal, which has significantly increased the demand for refueling services.Chang'an Energy has clearly seized the industry opportunities, as it provided marine fuel services to more customers in mid-2023, increasing sales volume from 98,013 tons in 2022 to approximately 163,738 tons, marking a year-on-year growth of 67.06%. Consequently, Chang'an Energy's total revenue for 2023 grew by 36.5% to $102 million, with revenue from Hong Kong increasing by 33.4% to $95.1866 million. It is worth noting that the total revenue growth rate was lower than the sales volume growth because the oil prices in 2023 were lower than those in 2022.

Due to the economies of scale generated by the significant increase in sales and the decrease in oil price costs, Chang'an Energy's gross margin for 2023 rose to 1.9%, an increase of 0.4 percentage points from 1.5% in 2022. Driven by both the substantial increase in revenue and the improvement in gross margin, Chang'an Energy's net profit for 2023 surged by 139.4% to $9.3612 million, with a corresponding net profit margin of 0.92%, a noticeable increase from 0.52% in 2022.

From Chang'an Energy's profitability level, it is not difficult to discern that the essence of its business model is actually that of a distributor of marine fuel, with fuel costs accounting for nearly 100% of the company's costs. This means that Chang'an Energy has hardly ventured into other high-value-added products and services.

Despite the impressive performance of Chang'an Energy in 2023, it is not sufficient to judge the true value of Chang'an Energy solely based on this, as shipping is a typical cyclical industry with profits that are significantly volatile. Therefore, studying industry trends is more important, and the current shipping market has begun to enter a downturn.

In the first half of 2024, thanks to the strong demand in the container shipping market and the continuation of tense situations in the Red Sea, the container shipping index (Europe line) futures main contract kept rising, and the shipping market continued to prosper. Top shipping companies such as COSCO Shipping achieved significant profit growth. However, starting from July, market demand began to decline. Data from the Shanghai Shipping Exchange shows that on October 7, the Shanghai Export Containerized Freight Index (Europe route) reported 2,662.75 points, a decrease of 15.9% from the previous period. In addition, the Shanghai Export Containerized Freight Index (SCFI) has been declining for six consecutive weeks, with the latest drop to 2,135.08 points, an expanded decline of 9.77%.

The significant drop in freight rates is mainly due to the continuous weakness in overseas demand, especially on the Asia-to-Europe route; secondly, as new ships are delivered successively, shipping capacity gradually recovers. At the same time, the slowdown in global economic growth has also affected trade demand. Although the recovery of shipping capacity will to some extent stimulate the demand for refueling services, if global market demand continues to be weak, it will also suppress the demand for refueling services. It is worth noting that the United States has cut interest rates by 50 basis points on September 18, and almost every time the United States cuts interest rates, it is accompanied by an economic recession. If the U.S. economy fails to achieve a soft landing subsequently, it will undoubtedly exacerbate global demand.

In addition to concerns on the demand side, Chang'an Energy also faces multiple operational challenges. Firstly, the ship refueling service is a fragmented and highly competitive market. According to data from Frost & Sullivan, there are about 100 companies in the Asia-Pacific region providing refueling services, including refueling service intermediaries and refueling service departments of oil giants or traders. In mid-2023, if calculated based on the volume of fuel oil and diesel supplied to Hong Kong operators, Chang'an Energy had about 2.7% and 0.8% market share in Hong Kong, respectively, with a relatively small market share. Chang'an Energy aims to expand its scale by developing new areas, but whether it can turn new areas into a new growth curve remains to be seen.

Secondly, Chang'an Energy has a relatively high concentration of customers and suppliers. In mid-2023, the revenue from Chang'an Energy's largest customer accounted for 20.3%, and the revenue from the top five customers accounted for 44.3%. There are no long-term agreements with customers, and the duration of business relationships varies from two to three years. If major customers are lost, it will affect the operation of Chang'an Energy's business. On the supplier side, in mid-2023, the share of purchases from Chang'an Energy's largest supplier was 42.2%, and the total share of purchases from the top five suppliers was 82.2%. Although centralized procurement from suppliers can improve profitability to some extent, it also increases supply chain risks.

In addition, Chang'an Energy has relatively high debt. Refueling service providers need a large amount of operating funds to purchase fuel, and the recovery of accounts receivable takes some time. Coupled with relatively low profitability, this leads to the need for high debt to maintain and expand market scale for refueling service providers. In 2023, Chang'an Energy's total assets were $11.0362 million, and total liabilities were $9.6861 million, with a debt-to-asset ratio of 87.77%.It is worth noting that the biggest factor affecting the profitability of fuel service providers is cost. After all, fuel costs account for nearly 100% of revenue costs. If fuel prices rise due to geopolitical reasons, but downstream demand remains sluggish, the room for upstream prices to pass through to downstream will be compressed. At that time, with Chang'an Energy's profit level, it is not impossible to turn into a loss.

Overall, although Chang'an Energy achieved impressive results in 2023, it is under pressure due to being in a cyclical industry and concerns about future demand. At the same time, Chang'an Energy is also facing many potential business challenges, such as fierce market competition, high concentration of customers and suppliers, and high debt. It is not easy to win high valuation in the market. Perhaps waiting for the industry to enter a high prosperity cycle is the opportunity for valuation improvement.