1. One-sentence logic

The only “A+H” platform under China Shipbuilding Group, a core global shipbuilding enterprise; benefiting from the upward cycle of the shipbuilding industry and the improvement of the competitive landscape, the company's profits continued to recover.

2. Logic that exceeds expectations

(1) Market expectations: 1) Currently, ship prices are at 96% of the historical peak, and there is insufficient momentum for subsequent ship price increases; 2) Military ships account for a relatively high share of the company's product structure, and the gross margin of military ships is lower than that of civilian ships. Therefore, the company's profitability repair is limited, and performance flexibility is insufficient.

(2) We believe that:

The company's main business is shipbuilding, offshore engineering, steel structures, etc. Among them, shipbuilding is the core business. The main products are divided into civilian ships and military ships. Civilian ships include bulk carriers, branch container ships, dredging engineering vessels, and official ships. Military ships include military ships, maritime police equipment, etc. The company has two major shipyards, Huangpu Wenchong and Guangzhou Shipbuilding International. Through holding Huangpu Wenchong, it owns companies such as Wenchong Shipyard, Huangchuan Heavy Industries, and Wenchuan Heavy Industries to participate in Guangzhou Shipbuilding International.

According to the “Letter of Commitment to Avoid Competition with CSSC Offshore Defense and Equipment Co., Ltd.” issued by China Shipbuilding Group Co., Ltd. on June 30, 2021, China Shipbuilding Group will steadily promote relevant assets and business integration in line with the injection of listed companies within five years from the date this letter of commitment is issued to resolve competition issues in the industry. To resolve the issue of competition in the industry, the promised completion deadline is June 30, 2026. The company is the only “A+H” platform under the China Shipbuilding Group. In conjunction with the earlier proposal of the State Assets Administration Commission to include market value management in the performance assessment of central enterprise leaders, we believe that the company is expected to fully benefit in resolving industry competition, asset integration, and market value management.

1) In response to the question that ship price increases are insufficient: We believe that there is still plenty of room for ship prices to rise, and peak ship prices in this cycle are expected to exceed the peak of the previous round. As of April 2024, the Clarkson New Ship Cost Index closed at 183.6 points, up 10% year on year, and is at the 96% level of the historical peak; the cost index for box ships, tankers, and dry dispersion ships increased 10.65%, 8.07%, and 5.02% year-on-year respectively, and is in the 88%, 85%, and 71% levels of the historical peak. Although there has been a significant increase in ship prices, considering the apparent factors of increasing the average load tonnage of ships “getting bigger”, dual-fuel upgrades, and hidden factors such as rising labor costs and inflation, there is still plenty of room for ship prices to rise.

2) In response to questions about the limited restoration of the company's profitability and insufficient performance flexibility: We believe that an inflection point in the company's profitability has emerged, future profitability will continue to improve, and performance elasticity will be high. ① Improved profitability: Due to the large difference in DWT between the military and civilian ship types produced by the company, the production capacity of military and civilian shipyards is not shared. With the gradual delivery of high value+high added value+high gross margin ship models, the company's profitability will continue to improve. If ship prices continue to rise in the future, there is still room for improvement in civilian ships' production capacity; ② As of 2024-5-16, China Shipbuilding Group's ship assembly platforms China Shipbuilding (A Shares), China Shipbuilding Defense (A/H Shares), and China Heavy Industries (A Shares) PB (TTM) were 3.36, 2.35/1.08, and 1.41, respectively. China Shipbuilding Defense (H Shares) PB's valuation is significantly lower than that of comparable companies.

3. Inspection and catalysis

(1) Inspection indicators: new order volume, shipbuilding completion volume, handheld order volume, new ship cost, new ship price index, shipping index, production capacity utilization inspection index.

(2) Catalysts: The number of new orders in the shipping industry continues to grow; shipping prices rise; oil and dry bulk shipping price indices rise; companies sign new high-value-added ships; group asset integration and state-owned enterprise reform accelerate.

4. The value of research

(1) Unique understanding: The market believes that the profitability of the company's shipyards is limited. We believe that the company's major shipyards already have strong profitability, and future performance is expected to continue to improve. 2024Q1 achieved net profit of 15.37 million yuan, turning a loss into a profit year over year; net profit not attributable to mother was 25.23 million yuan, turning a loss into a profit year over year. Profitability increased dramatically in a single quarter, mainly due to the beginning of the delivery period for high-margin ships.

(2) A different understanding from before: Previously, we thought that future shipowners might not be willing to place orders, and the growth rate of new orders was less than expected. We now believe that subsequent oil tankers and dry bulk carriers are still very willing to place orders. According to Clarkson's forecast data, the difference in supply and demand in 2024 and 2025 is expected to be about -3% and -4.2% respectively. Future capacity exceeds demand, and it is less likely that container ships will continue to place large orders in the later stages; differences in crude oil capacity supply and demand are expected to be about 3.5% and 2.7% respectively; refined oil products are expected to be about 4.5% and -1.3% respectively, and future tankers are still likely to place large orders; there is no significant increase in demand yet, but factors such as declining canal traffic capacity and geopolitical conflicts help the market. drive, The later stages of the international dry bulk shipping market are worth looking forward to.

5. Profit prediction and valuation

Net profit due to mother for 2024-2026 is expected to be $74,12.5 billion, 2.27 billion, up 1429%, 70%, 81% year-on-year, and CAGR = 76%. The corresponding PE was 53, 31, 17 times, and raised to a “buy” rating.

6. Risk warning:

1) Shipbuilding demand falls short of expectations; 2) Raw material prices fluctuate.