Incident: China Dynamics released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 45.103 billion yuan, +17.82% year-on-year, and net profit to mother of 779 million yuan, +132.18% year-on-year. 2024Q1 achieved revenue of 11.402 billion yuan, +24.42% year-on-year, and net profit to mother of 88 million yuan, +167.82% year-on-year.

The only listed marine power platform under the China Shipbuilding Group. The core target company in the industry chain is the core force in research and production of China's ship power systems, and the only listed marine power platform under China Shipbuilding Group. The company's power business covers seven major power sectors, and is in a leading position in domestic marine power system R&D, design, manufacturing and support.

After the global shipbuilding industry experienced capacity transfers from Japan, South Korea, and China, the industry concentration in this shipbuilding cycle showed an upward trend. Currently, downstream shipyards are full of orders. As its main power supplier, the company's market share is expected to increase further after increasing production capacity in the future.

Net profit to mother increased by 132.18% year-on-year in 2023, new orders increased, and the company achieved revenue of 45.103 billion yuan in 2023, +17.82% year-on-year, and net profit to mother of 779 million yuan, +132.18% year-on-year. 2023Q4 achieved revenue of 12.649 billion yuan, +2.76% year-on-year, and net profit to mother of 368 million yuan, +790.31% year-on-year. In 2023, the company's orders for the diesel engine sector increased dramatically, and the price of low-speed engines rose sharply, achieving a sharp rise in volume and price. The number of new orders signed by various sectors of the company increased:

1) Shipbuilding and marine industry: signed new contracts of 27.598 billion yuan, +47.32% year-on-year, with a total industrial output value of 18.244 billion yuan, +36.49% year-on-year. The domestic market share of the company's low-speed marine diesel engines rose to 78%, and the international market share rose to 39%. The production capacity of medium- and high-speed diesel engines continues to maintain market share in the mainframe market for civil ships such as engineering ships, while priority is given to defense equipment.

2) Application industry: The company continues to strengthen the land market development efforts, promote the steady development of the application industry, and has successfully completed the planned targets. In 2023, the company signed a new contract of 26.737 billion yuan, +13.10% year-on-year, and completed a total industrial output value of 21.649 billion yuan, or +16.12% year-on-year.

3) Emerging industries: 1656, 99609 new wind power growth boxes and yaw propeller gearboxes for green energy equipment were signed, +61%, +64% compared to the same period; green marine equipment undertook 133 LNG dual-fuel hosts and 34 methanol dual-fuel engines, and the number of new units signed was +79.73% and +41.67% compared to the same period; new energy storage signed a new contract of 1,772 billion yuan, +622% year over year.

In 2023, the company improved quality and efficiency, and increased profitability

In 2023, the company's gross profit margin was 13.28%, +0.44pcts year on year, net profit margin 2.35%, +1.38pcts year on year, with a period cost ratio of 11.11%, +0.05pcts year on year, with sales expenses ratio 1.62%, -0.15pcts year on year; management expense ratio 5.00%, -0.19pcts year on year; financial expense ratio -0.18%, +0.07pcts year on year; R&D expense ratio 4.68%, year on year +0.32pcts year on year.

In 2023, the gross margin of the company's main products increased, and asset impairment losses and credit impairment losses declined sharply year-on-year. The company improves quality and efficiency, and increases profitability. Due to the impact of environmental and emission reduction policies, the share of high-dual-fuel ship orders will increase in the future. The company has carried out targeted research and development for the market and continued breakthroughs in technological innovation. At present, it has completed the manufacture of the world's first fuel version of iCER dual-fuel engine CMD-WingD5x72DF-2.1, and has obtained batch orders for methanol fuel engines.

2024Q1 diesel engine orders increased, year-on-year performance +167.82%

2024Q1 achieved revenue of 11.402 billion yuan, +24.42% year-on-year, and net profit of 88 million yuan, +167.82% year-on-year. Mainly due to the global shipping industry in an upward cycle, orders in the diesel engine sector increased sharply. 2024Q1's gross profit margin was 10.65%, +0.02pcts year on year, net profit margin 1.60%, and +1.09pcts year on year, mainly due to the increase in the price of marine low-speed engines, which led to an increase in profitability.

The shipping industry cycle is upward, and the trend of volume and price increases unchanged

The shipping industry is in the upward phase of this cyclical boom. Volume increase: According to China Shipping News data, in January-January 2024, China's shipbuilding completion/new orders/handheld orders were 920/1110/158.9 million dwt, up 70.4%/311.1%/38.5% year on year, accounting for 60.5%/63.1%/57.7% of the global share, and all three indicators achieved relatively rapid growth. Price increase: According to China Shipping News data, in February 2024, Clarkson's new ship price index was 181.39, up 10.58% year on year, achieving 36 consecutive months of positive growth. Strong demand: 1) demand for renewal due to the aging of the fleet; 2) environmental protection and emission reduction policies accelerate fleet renewal; 3) global geopolitical instability has lengthened routes and increased demand for capacity. Insufficient supply: Global shipbuilding production capacity withdrew during the downturn of the previous cycle, and was unable to match the rapid rise in demand when the new cycle arrived.

The market pattern, which is in short supply, is difficult to change in the short term. We believe that future orders are expected to maintain a sharp upward trend in volume and price along with ship prices, and the industry chain will continue to benefit.

Investment advice:

Currently, the shipping industry is in the upward phase of this cycle. Orders are expected to maintain a sharp upward trend in volume and price along with ship prices, and the industrial chain will continue to benefit. As the core force of research and production of marine power systems in China, the company's market share and profitability are expected to increase further in the future under the influence of multiple factors such as mismatch between supply and demand and implementation of environmental protection and emission reduction policies. We expect the company's revenue from 2024 to 2026 to be 540.2, 640.2, and 74.88 billion yuan, respectively, up 19.8%, 18.5%, and 17.0%; net profit from 2024 to 2026 will be 12.8, 21.0, and 3.07 billion yuan respectively, up 64.2%, 64.0%, and 46.2% year-on-year, with a target price of 23.60 yuan for 6 months, corresponding to 40xPE in 2024, for the first time coverage, giving a “increase in holdings -A” rating.

Risk warning: raw material price fluctuations; exchange rate fluctuations; macroeconomic fluctuations and other risks.