Incident: China Shipbuilding Defense announced its report for the third quarter of 2023. In the third quarter of 2023, the company achieved operating income of 3.79 billion yuan, up 25.2% year on year. The first three quarters achieved a total operating income of 9.77 billion yuan, an increase of 33.9% year-on-year over the same period last year; net profit attributable to the parent company was 100 million yuan in the third quarter, and a total net profit of 0.2 billion yuan was realized in the first three quarters.
China Shipbuilding Defense is one of the major shipbuilding enterprises under China Shipbuilding Group Co., Ltd., and its predecessor was Guangzhou Shipbuilding International Co., Ltd. The company was listed in Shanghai and Hong Kong in 1993, and is the first shipbuilding company listed on A+H shares in China. In order to promote industry mergers and integration, achieve strategic production capacity layout, and enhance overall competitiveness, in 2014 and 2015, China Shipbuilding Defense successively acquired CSIC Huangpu Wenchong Shipbuilding Co., Ltd. and CSIC Huangpu Wenchong Shipbuilding Co., Ltd. to complete the integration of China Shipbuilding Group's high-quality shipbuilding assets in South China, achieve the listing of core domestic military assets, and become a large-scale comprehensive marine and defense equipment enterprise group integrating the four major marine equipment of marine defense equipment, marine transportation equipment, marine development equipment and marine scientific research equipment.
Ships are aging seriously, and demand for replacement of rigid ships will further support shipbuilding demand. The aging problem of oil tankers and dry bulk carriers is worsening. By 2026, more than 25.2% of ships will be over 20 years old. Currently, a total of more than 8% of dry bulk carriers are over 20 years old. In the future, these old ships will be eliminated, and there is plenty of room for rigid ships to be replaced. Environmental policies in the shipping market are becoming stricter, and ship modifications that do not meet environmental standards will also have an important impact on the shipbuilding market.
Shipyard orders in hand tend to be saturated, and ship delivery cycles are getting longer. As shipyard orders tend to become saturated, new orders placed by shipowners need to wait for spare production capacity under the shipyard's limited production capacity, so the delivery time is longer than before. Judging from global and Chinese shipyard production assurance factors (in-process orders/average three-year delivery), the current production guarantee factor for global shipyards is 2.89 years, up 0.34 years from '22, while the production guarantee factor for Chinese shipyards is 3.46 years, up 0.73 years from '22, which means that Chinese shipyards now have a higher capacity utilization rate.
Under limited production capacity, ship prices have changed to demand pricing rather than supply pricing. The cost of raw materials in shipbuilding accounts for about 60%. Among them, steel plate is used as the main raw material. Looking back at the price of new shipbuilding in China, ship prices are largely affected by the price of marine steel plates. However, with the decline in steel prices, the price of new ships is still high and has not been affected by the decline. We believe this is due to the tightening of production capacity of global shipyards, which is less than demand, so current ship prices are mainly dominated by demand rather than the supply of raw steel plates.
Profit forecasts and investment advice. It is estimated that the company's operating income for 2023-2025 will be 14.98 billion yuan, 18.48 billion yuan and 21.5 billion yuan respectively, net profit of 990 million yuan, 1.94 billion yuan, 2.39 billion yuan, and EPS of 0.70 yuan, 1.37 yuan and 1.69 yuan respectively. We believe that the company will continue to build core competitiveness and develop new growth points. Profitability is expected to be further improved, with 20 times PE in 2024, corresponding to a target price of 27.4 yuan. First coverage, giving a “buy” rating.
Risk warning: risk of exchange rate fluctuations, risk of shipbuilding demand falling short of expectations, risk of fluctuations in raw material prices and labor costs.