Incident: on August 7, 2019, China Shipping Defense issued a notice to adjust the major asset restructuring plan, selling part of Guangzhou Shipping's international equity to Chinese ships, no longer injecting power assets.

Second, the reasons for the adjustment of this major asset restructuring plan.

After the release of the original plan, new changes have taken place in the situation, and the South and North Shipping Group is planning a strategic reorganization.

There is competition among the company, China Shipbuilding Group and China Shipbuilding, as well as overcapacity in the civil shipping market.

Smoothly promote the market-oriented debt-to-equity swap project

To achieve agreement on the interests of shareholders of all parties.

Third, the main contents of the adjustment of this major asset restructuring plan.

Transaction method: from the major asset exchange in the original plan to the major asset sale. A 27.4214% stake in Guangzhou Shipping International was sold to Chinese ships at a transaction price of 2.891 billion yuan. Chinese ships pay the transaction consideration by issuing A-shares to the company in private. After the completion of the transaction, China Shipping Defense is expected to hold 5.28% of the shares in Chinese ships.

The counterpart of the transaction: from the China Shipping Group in the plan to a Chinese ship

Transaction content: the original plan is to buy out part of the equity of Guangzhou Shipping International and Wenchong of Huangpu, which is adjusted to sell 27.4214% of the equity of Guangzhou Shipbuilding International to Chinese ships; in the original plan, there is an equity injection of power assets such as China Shipbuilding Power, which does not involve the injection of power assets after adjustment.

The follow-up arrangement of the debt-to-equity swap: the company abandons the market-oriented debt-to-equity swap investors of Guangzhou Shipping International and Huangpu Wenchong to transfer the preemptive right of 23.5786% of the equity held by Guangzhou Shipping International and 30.9836% of Wenchong's equity of Huangpu, and the Chinese ship will buy it by way of additional issuance.

Fourth, the impact of the adjustment of this major asset restructuring plan on listed companies.

Changes in the scope of the consolidated statement: after the completion of the transaction, China Shipping Defense will hold 49.00% equity (lose control and no longer be included in the scope of the consolidated statement), Huangpu Wenchong 69.0164% equity (still retain control); Chinese ships will hold a total of 51.00% equity and gain control, while Wenchong Wenchong will hold 30.9836%.

Changes in the main business: after the completion of this transaction, the scope of China ship defense business will still cover four parts: defense equipment, ship repair, marine engineering and non-ship business, but with the sale of international control of Guangzhou ship, China ship Defense will no longer be engaged in the production of oil tankers, passenger ro-ro ships and other ship types, and the follow-up main products include military ships, special auxiliary ships, official ships and other ship types. Offshore platforms and other marine products, as well as steel structures, complete sets of mechanical and electrical equipment and other non-marine products.

The sale of international control of Guangzhou Shipping will greatly increase the investment income of about 3.299 billion yuan over the past 19 years, reduce the asset-liability ratio and improve the company's financial situation. In accordance with the relevant accounting requirements of the Enterprise Accounting Standard 33-Consolidated Financial statements on the loss of control over the invested party due to the disposal of part of the equity investment, investment income = consideration obtained by disposal of equity + fair value of remaining equity-identifiable net assets continuously calculated by the original subsidiary from the date of purchase * original shareholding ratio = 3.299 billion yuan The asset-liability ratio is expected to fall from 67.08 per cent to about 52.53 per cent.

Retaining the control of Wenchong in Huangpu will help to improve the profitability of listed companies. Guangzhou Shipping International is in a state of loss due to the poor prosperity of the civil shipping industry in recent years; Wenchong of Huangpu is mainly engaged in the production and manufacture of military ships and special engineering ships with strong profitability, with a net profit of 965 million yuan from January to April 2019. Therefore, the new restructuring plan no longer includes Guangzhou Shipping International into the scope of the consolidated statement and retains the control of Wenchong, which is more beneficial to the profitability of listed companies, and a substantial increase in investment income in 19 years is more beneficial to the company's shareholders. The new plan is more beneficial to the original plan.

Investment suggestions: we believe that China Shipping Defense was used as the power asset platform of China Shipping Group in the previous plan; after the adjustment of the plan, the positioning of the company's platform is not yet clear. With the South and North Shipping Group planning strategic restructuring, the group's asset pool will expand, asset volume and coverage business will be larger and wider. China Shipping Defense, as one of the important listed companies, may play a more important role, and the status of the platform should not be underestimated. We are optimistic about the future development of the company.

Compared with the previous power platform, this major asset plan adjustment is more beneficial to listed companies in terms of profitability and platform positioning, and the future platform positioning is still worth looking forward to. We expect that this asset restructuring plan will directly increase the investment income by 3.299 billion yuan, and the net profit from 2019 to 2021 is expected to be 34.99,1.25 and 243 million yuan respectively, the EPS is 2.48,0.09,0.17 yuan respectively, and the PE corresponding to the previous stock price is 6X, 175X and 90X respectively. Cover for the first time, with a buy-A rating.

Sixth, the investment strategy of the ship plate: we have exclusively recommended Chinese ships since the bottom of last year, and made it clear that we are optimistic about the performance of the ship plate in the first quarter of this year. The logic comes from the fact that the PB valuation of several major ship assembly plants is historically low, and private ships are gradually warming up at the bottom of a long period, and the ship plate has performed well this year.

At present, we believe that the adjustment of the major asset restructuring plan of China Shipbuilding Defense has exceeded market expectations, and the positioning of the platform in the future is still uncertain. Moreover, at present, it is in the strategic restructuring stage of the North and South Shipping Group, superimposing the promotion of the asset reorganization of its listed companies, we should pay attention to the opportunities of asset revaluation brought about by the strategic reorganization of the South and North Shipping Group. For example, China Shipbuilding Defense, China Shipbuilding, China heavy Industry, etc., can refer to our series of in-depth reports.

Seventh, the investment strategy of the military industry plate: at present, we continue to be optimistic about the phased market of the military industry Q3. The main logic is: 1) in terms of balanced allocation, the configuration of partial value industries is high, which is now slightly loosened, and military stocks are one of the optional industries; 2) from the perspective of industry growth, the certainty of steady growth is high, and it is expected to grow by around 20% in 19 years. The growth may still be 15-20% in the year after next, and the prospect is relatively clear. 3) in terms of valuation, although the overall valuation of the military sector is still more than 40 times, there is a large internal differentiation (there are also some companies with a price-to-earnings ratio of more than 20 or 30 times), taking into account the upcoming New year valuation switch, the valuation can be seen; 4) event catalytic factors.

Configuration suggestions, focus on state-owned enterprise parts, mainframe factory, information and civilian participation in the army and other directions.

Parts and components of state-owned enterprises: continue to pay attention to the targets for matching valuation and performance growth, such as [AVIC] and [Aerospace Appliances].

Main engine factory: we used to put forward that we were not optimistic except for ships in the first half of the year. Now it is suggested to focus on [China Direct], [AVIC Shenfei], as well as the opportunities for revaluation of ship class marks brought about by the strategic restructuring of the South and North Shipping Group, such as [China Shipping Defense], [China Shipbuilding], [China heavy Industry] and so on.

Informationization: pay attention to [Aerospace Development]

Civilian participation in the army: select targets with low valuation and fundamental support, adjust dynamically according to the situation, and currently pay attention to [Torch Electronics], [Changying letter quality], [Chujiang New Materials], and so on.

Eighth, risk hints: the uncertainty of the restructuring plan, the risk of transaction approval, the fluctuation of subsidiary performance, and so on.