First, China heavy Industry: the core target of naval equipment and the leader of ship development with a complete industrial chain.
The company has two main lines of business: military products, the company is the largest listed company of marine defense equipment in China, the products include aircraft carriers, nuclear-powered submarines (subcontracts), conventional power submarines, large and medium-sized surface combat ships, large amphibious assault ships, military auxiliary ships, underwater weapons and so on. In terms of civil products, the company is one of the three major domestic civil ship construction groups, including bulk carriers, container ships, oil tankers, gas tankers, offshore ships, marine engineering equipment and other equipment.
Second, the industry ushered in a double inflection point: warship orders for 19 years of higher growth certainty, civil ship director cycle at the bottom of the cycle is now gradually warming up.
Military products: naval equipment orders have a relatively high growth in the short term over the past 19 years, while shipbuilding is still at its peak in the long run.
2019 marks the 70th anniversary of the founding of the Chinese Navy, and it is also the first year after the end of the naval military reform. Naval equipment orders may usher in a compensatory high growth, and the company as a leader in domestic ship construction may fully benefit. In addition, the company has successively obtained warship military trade orders, and the military trade market may become a new performance growth point.
Civilian products: civil ships are gradually warming up at the bottom of the long period, and the rise in ship prices and the fall in steel prices are conducive to the improvement of the profits of leading shipyards. 2018H1 marine transport equipment orders increased by 72.2% compared with the same period last year. The increase in civil ship orders is due to the gradual recovery of the civil ship market since the end of 2016, the continuous progress of the supply-side reform of civil ships, the accelerated clearance of shipbuilding capacity, and the further concentration of new shipbuilding orders to superior shipyards. More crucially, with the gradual rise in new shipbuilding prices, the high price of superimposed ship steel plates has fallen, and the profit inflection point of civil ship leading enterprises may have come, which will be improved quarter by quarter. In addition, the company intends to sell the main body of the marine business equity, marine engineering order risk is released.
Third, investment strategy: the market capitalization of the military industry is the first share, and the allocation value is prominent. At present, the company's stock price and PB valuation are at the bottom since the listing, and are significantly upside down compared with the two fixed price increases (the two IPO prices in 2016 and 2017 are 5.43,5.78 yuan, respectively). Since August 2018, the controlling shareholder has issued three plans to increase its holdings (which has increased by 1.132 billion yuan), which shows that the group is optimistic about the company's development prospects. We believe that the company will usher in a double favorable inflection point of higher growth in naval equipment orders and gradual warming of the bottom of civil ships in 2019. It is estimated that the company's net profit in 2018-2020 will be 10.6,13.5 and 1.7 billion yuan respectively, and the PE corresponding to the previous stock price will be 99x, 78x and 62x respectively. As the first share in the market capitalization of domestic military industry, the allocation value of China heavy Industry is prominent, and we give it a "buy-A" rating.
Fourth, risk hints: the growth rate of military investment slows down and is lower than market expectations; the amount of naval equipment construction falls short of expectations; the risk of demand fluctuation in the civil ship market; exchange rate risk.