The leading marine power system company with outstanding diesel engine business performance is backed by the Shipbuilding Group. It is a domestic marine power system leader. Its main business covers seven major power systems, including gas power, steam power, chemical power, all-electric power, diesel engine power, hot air engine power, and nuclear power equipment, and related auxiliary equipment. In 2023, the company's diesel power business accounted for the highest share, reaching 38.17%, an increase of 4.8 pcts over the same period last year. Since the shipbuilding industry cycle is still in the upward phase of recovery, orders cannot be reflected on the profit side as soon as 1) high-value orders are gradually put into production and revenue is confirmed; 2) scale effects are released; 3) commodity prices are reduced, and the company's diesel engine performance can be expected to be flexible.

The long-term boom in the shipbuilding sector is improving, and the leading advantage of greening acceleration is more prominent, considering that most active shipyards in the world schedule production until around 2027. It is expected that about 30% of ships will gradually enter the renewal and replacement stage. Demand for green ship construction is expected to continue to rise due to the combination of environmental factors. In the medium to long term, the global ship greening process is expected to maintain its boom as demand for large-scale upgrades and replacements has arrived. The upward trend in the shipbuilding industry is clear, and ship prices are expected to continue to rise due to supply bottlenecks.

As orders for high-priced, high-quality new ships enter the centralized delivery period, the rapid release of performance over the next 2-3 years will provide strong support to the sector. At the same time, the rapid increase in the share of China's shipbuilding industry and the increasing difficulty of building new ships are expected to further increase the performance flexibility of leading companies during the upward period.

Backed by China Shipbuilding Group, the largest shareholder of the company with a stable share of the marine low-speed engine market, was China Shipbuilding Heavy Industries Group. As of the end of the first quarter of 2024, the direct shareholding ratio was 25.74%, and indirect shareholding through China Heavy Industries, Fengfan Group, China Shipbuilding Investment and Military Research Institute; China Shipbuilding Group and its co-actors together held more than 50% of the company's shares. The company is backed by China Shipbuilding Group, and its new civilian ship orders account for a high proportion of the country's shipbuilding orders. The military research institutes under the group all master core technology in the field of warships, so the company has outstanding advantages in channels, technology, etc., and the subsidiary CRIC Diesel has a steady top share in the marine low-speed engine market.

Profitability is expected to gradually improve, and strengthening core competitiveness in R&D is affected by the bottom of the cycle. Since 2016, the gross margin of the company's diesel engine business has continued to decline from 25% to 14% in 2022. The decline in business gross margin is directly related to the bottom of the cycle and lower order prices; however, the company's expense ratio has remained flat during the period.

Therefore, as the share of cyclical upward and high value-added orders continues to increase, the gross margin/net margin of the diesel power business is expected to gradually recover. The domestic shipbuilding industry continues to promote ships and engines related to dual-fuel technology. Through continuous investment in R&D, the company has repeatedly reached new highs in production and sales of dual-fuel engines, which is expected to give full play to its competitive advantage in technology and make dual-fuel engines an important source of revenue. Furthermore, in 2016, China Shipbuilding Group wholly controlled WinGD, which is expected to help the company reduce the annual patent fees paid by the diesel power business to license manufacturers and further release profit margins.

Give it a “buy” rating. We expect the company to achieve net profit of 1.45 billion yuan and 2.29 billion yuan respectively in 2024-2025, corresponding to PE of 30 and 19 times, respectively, covered for the first time, and given a “buy” rating.

Risk warning

1. Risk of fluctuating demand in the shipping industry;

2. Risk of price fluctuations of major raw materials;

3. Performance forecasting assumptions are unfounded or fall short of expectations.