中外运航运(00368) 　　Action 　　Conviction BUY, raise TP 36% to HK$1.93, 0.5x 2017e P/B. 　　Reasoning 　　Dry bulk shipping market upcycle 2017/18: Supply growthto slow: 2.7% in 2016, 2.0% in 2017, 1.2% in 2018. Order bookto fleet ratio is only 12%, a 10-year low. New capacity 36mn dwtin 2017, 25mn in 2018, down 36%/31% YoY, while 20mn/15mndwt is to be scrapped. Demand growth is likely to recover from2016’s 2% to 2.5% for 2017 and 3% for 2018. 　　Low breakeven point and large earnings upside. 　　Historically, dry bulk has been the major earnings contributor.Earnings once reached US$347mn in 2008 (BDI 6,390), but themarket has left dry bulk business suffering losses since 2013.Market rebound can bring large earnings upside thanks to SSL’slow breakeven point and strong profitability. The companycould make breakeven with BDI at 950 thanks to a lowvessel purchasing price. Each 1,000 BDI increase couldbring US$40~50mn earnings enhancement. 　　After integration, SSL may become the dry bulk shippingplatform and purchase bulk assets from CMES. CMES and its JV(30%) currently operate eight large VLOC and have 20 VLOCorders, all of which have long-term contracts with Vale and couldcontribute stable earnings of ~US$3mn on each vessel eachyear. CMES’s eight VLOC could bring US$15.5mn NP and all 28could generate earnings of US$54.3mn each year. 　　Earnings forecast and valuation 　　We expect a loss of US$39mn in 2016, turning to US$7mn profitin 2017, and surging 600% to US$49mn in 2018. Our forecastdoes not include the potential integration with CMG. If SSLpurchases CMES’s dry bulk assets, 2017/18 earnings could beUS$23mn/US$90mn. SSL is trading at 0.38x 2017e P/B, cheaperthan sector’s 0.55x. Catalysts: 1) BDI rebound in peakseason; 2) integration of Sinotrans & CSC and CMG. 　　Risks 　　Freight rate expectations.