Description of the event

China Dynamics announced a pre-increase in 2024 semi-annual results. The first half of the year is expected to achieve profit of 0.459-0.516 billion yuan, an increase of 0.172 billion yuan to 0.23 billion yuan compared with the same period of the previous year, an increase of 60%-80%; it is expected to achieve net profit without return to mother of 0.383-0.437 billion yuan, an increase of 0.246 billion yuan to 0.301 billion yuan compared with the same period last year, an increase of 180%-220% year on year ; Net profit without return to mother in Q2 alone was 0.33-0.384 billion (Q1 after deducting non-return net profit of 0.054 billion yuan), an increase of 178%-224% over the previous year.

Incident comments

Performance exceeded expectations, the company's console orders grew rapidly, product structure was optimized, and gross margin and profitability are expected to continue to improve.

The sales scale of the company's diesel engine segment continued to expand in the first half of 2024. The price and gross margin of the main product, marine low-speed engines, increased at the same time, sales volume of high-margin models increased year-on-year, and the annual engine production is expected to exceed previous plans. 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. 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 only 14% in 2022. The decline in business gross margin is directly related to the bottom of the cycle and lower order prices, while the company's expense ratio has basically remained flat during the period. As a result, the company's profitability is expected to continue to improve as the share of cyclical upward and high-value-added orders continues to increase, and the gross margin/net margin of the diesel power business is gradually restored.

The shipbuilding sector is booming, and marine engine prices are following the rise in ship prices, and we are optimistic that the company's profitability will increase. According to Clarkson, the global new ship price index has been rising since '21. As of June '24, it has reached 187.23 points, an increase of 9.5% over the previous year. Compared with an increase of 6.07 points in January, the rise in ship prices is expected to drive marine engine prices to rise simultaneously. At the same time, the main raw material for diesel engines is steel, and the cost is greatly affected by steel prices. Since diesel engines have a certain production cycle, commodity prices have declined somewhat after 2022H1, and the company's raw material costs have declined. At the same time, engine prices have risen, and the company's profitability continues to increase, which is expected to drive the flexible release of profit performance.

The share of dual-fuel mainframes has increased, and environmental trends have accelerated the company's leading advantage. The domestic shipbuilding industry continues to promote ships and engines related to dual-fuel technology. Through continuous investment in R&D, the company gives full play to its competitive advantage in technology. Production and sales of dual-fuel engines have repeatedly reached new highs, and dual-fuel engines have become an important source of revenue for the company. The increasing difficulty of building new ships will strengthen the leading effect. The company has strong core competitiveness in the field of research and development. It continues to develop dual-fuel low-speed engines with new clean fuels such as methanol and ammonia. Methanol fuel engines have already received batch orders, and profit margins are expected to increase. 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.

Maintain a “buy” rating. As a global leader in marine power systems, China Power is expected to fully benefit from the development of the industry and achieve greater performance flexibility with its own barriers in marine engine technology. We expect that in 2024-2025, the company will achieve net profit of 1.589 billion yuan and 2.443 billion yuan respectively, corresponding to PE of 30 times and 20 times, respectively, and maintain a “buy” rating.

Risk warning

1. Risk of fluctuating demand in the shipping industry;

2. Risk of price fluctuations of major raw materials.