China Heavy Industries announced its 2023 performance forecast. Net profit due to mother is expected to be -800 million yuan to -740 million yuan in 2023, a sharp reduction in losses compared with the same period in '22. Since the company calculated asset impairment of about 860 million yuan in Q4, excluding this part of the impact, the company's net profit returned to mother is expected to reach between 90 million yuan and 230 million yuan in a single quarter, which is a significant improvement over Q3. Furthermore, we expect that all of the ship types involved in asset depreciation are of high quality, and the 620 million yuan calculated by Dafune Heavy Industries will have little impact on the total order volume. Considering that shipping is a long-term sector, short-term performance that falls short of expectations does not affect the release of long-term performance. Continue to maintain the “Highly Recommended” rating.
The company announced its 2023 performance forecast. It is expected to achieve net profit attributable to shareholders of listed companies of -800 million yuan to -740 million yuan in 2023, a significant reduction in losses compared with the same period in '22 (net profit attributable to mother for the same period in '22 was 2.21 billion yuan). Net profit after deducting non-recurring profit and loss is expected to be -1.09 billion yuan to -1.05 billion yuan in 2023, compared to -2.54 billion yuan for the same period in '22.
The company plans to make asset impairment reserves totaling RMB 860 million for the whole year. Since Q1-Q3 has accumulated asset impairment of only 2.61 million yuan, the total amount of 860 million yuan is mainly in Q4. However, the company's estimated net profit to be realized in Q4 is -770 million yuan to -630 million yuan. Therefore, if the impact of asset impairment is deducted, the company's net profit to the mother will be corrected and is expected to reach between 90 million yuan and 230 million yuan, which is a significant improvement over Q3.
Judging from the asset impairment itself, the large amount of depreciation is mainly concentrated on civil ship assembly and construction contracts, including new ship types such as large-scale liquefied natural gas (LNG) ships, new floating production, storage and offloading vessels (FPSO), and some container ships. Due to the high technical content, complex construction process, and unforeseeable cost increases, the company carried out impairment tests at the end of the year and prepared for inventory price drops due to prudential considerations.
Since the reduced ship types are mainly concentrated on LNG carriers and FPSO ships, according to Clarkson's statistics, that is, Dalian Shipbuilding Industry held 2 FPSO and 13 LNG carrier orders at the end of 2023, we consider that due to the high value of LNG carriers and FPSO ships (for example, the 3 LNG carrier orders that Dalian Shipbuilding Heavy Industries signed with COSCO Marine Energy on August 31, '23, with a total order value of over 5 billion yuan), so Dalian Shipbuilding Heavy Industries has an estimated value of over 5 billion yuan The impact on the total order value was small compared to the 620 million yuan accrued in 2023.
Maintain a “Highly Recommended” investment rating. Taking into account the impact of current asset impairment and the high short-term profit pressure on subsequent first-built ships, we lowered China Heavy Industries' subsequent profit forecasts. Net profit returned to mother is expected to reach -7.5/30.1/5.3 billion yuan in 23/24/25, respectively. Considering that shipping is a long-term sector, the relevant listed companies have different processes to release their performance. We believe that short-term performance falls short of expectations and does not affect the judgment of long-term performance releases and new orders. In line with the recent proposal by the State Assets Administration Commission to comprehensively launch market value management assessments for listed companies, central enterprises with Chinese characters are expected to benefit. We continue to highly recommend China Heavy Industries!
Risk warning: The bulk carrier shipping market continues to be sluggish, and recovery falls short of expectations; China Heavy Industries' internal production efficiency falls short of expectations; raw materials and labor costs continue to rise; risk of exchange rate fluctuations; and predictions about the industry cycle are inconsistent with reality.