Introduction to this report:
China Heavy Industries is the largest shipbuilding group listed company in the North and South Shipbuilding Group. The listed companies and holding groups all have assets exceeding 100 billion dollars. There is still potential for merger asset integration between the two ships. As heavy equipment for major powers, warships will benefit from naval construction in the future.
Key points of investment:
Covering China Heavy Industries for the first time, with a target price of 6.81 yuan, an increase in holdings. The company's products include large warships such as aircraft carriers, destroyers, and submarines. It also has manufacturing capabilities for high-tech civilian ships, LNG carriers, etc., and is a comprehensive large-scale shipbuilding base. As the national defense strategy moves from the inland to the deep sea, the path of a major power to a powerful nation must go through aircraft carriers. The company is the largest listing platform for North-South Ships, and the merger of the two ships will improve asset quality and operational efficiency. We expect the company to increase its holdings by EPS of 0.05/0.06/0.07 and CAGR of 18.32% in 2019-2021, giving a target price of 6.81 yuan.
The naval construction cycle is improving, and craftsmen from major countries are building heavy aircraft carriers. 1) In the future, naval construction will continue to be the focus of military investment. The Blue Water Navy is building an aircraft carrier cluster, and there is a lot of room for the quantity and quality of ships; 2) Warships are shifting from mechanization to informatization, and the added value of equipment upgrades is gradually increasing; 3) The company is actively expanding overseas warship business, and there is potential for exports.
The civil shipping cycle fluctuates, and companies take the initiative to deleverage to improve risk resilience and profitability. 1) In 2017, the company actively implemented a debt-for-equity swap plan. The balance ratio in 2016-2018 was 68.74%, 57.35%, and 54.78% respectively, reducing financial leverage year by year; 2) Offshore engineering business reduced production capacity, focusing on developing high-value-added ships such as research vessels, icebreakers, LNG ships, luxury cruise ships, etc., and divested non-core businesses.
Small platforms and large groups are expected to integrate group assets. 1) Listed companies of China Heavy Industries had revenue of 44.484 billion yuan and net assets of 84.436 billion yuan in 2018. The 2016-2018 turnover of China Shipbuilding Heavy Industries Group was 280 billion, 2782 billion, 305 billion, and net assets of 123.7 billion, 132.1 billion and 143.1 billion dollars. In terms of net assets in 2018, the asset securitization rate was 59%, and there is still great potential for asset integration; 2) The merger of the two ships is gradually getting closer, and institutional reforms may help improve operational efficiency.
Risk warning: The launch of new products fell short of expectations; the growth rate of military spending was lower than expected.