China Heavy Industries: Laying out ship assembly+support, continuing to release the company's profit flexibility China Heavy Industries is a leading domestic ship R&D, design and manufacturing enterprise. It has modern shipyards such as Dalian Shipbuilding, Wuchang Shipbuilding, and Beihai Shipbuilding. Currently, its main business covers marine defense and marine development equipment, marine transportation equipment, deep-sea equipment and ship repair and modification, ship support and mechanical and electrical equipment, strategic emerging industries and five other major sectors. Beginning in 2021, benefiting from the boom in global shipbuilding and rising ship prices, the company continued to seize opportunities in the new ship market. In 2021-2023, the civil shipping business sector signed new orders of 28.6/36.5/33 billion yuan for marine transportation equipment, respectively. At the end of each year, orders in progress reached 35.5/57.8/75.1 billion yuan, respectively, and continued to reach new highs. As the company starts delivering high-priced ships one after another in 2024, and the increase in superposition capacity utilization brings about scale effects, we continue to be optimistic about the company's future profit flexibility release.

Volume and price have risen sharply in the shipbuilding cycle, and shipping companies have enjoyed the triple dividend of “capacity, price, and cost” on the supply side. The shipbuilding industry has gone through many years of supply side clearance after the 2008 financial crisis, and global shipyards have been reduced by more than half since the 2009 peak; on the demand side, ships newly built since the 2000s will accelerate into an aging phase starting in the 2020s, compounded by green drivers, and the civil shipbuilding cycle will begin.

Shipyard supply is tight and shipbuilding demand is strong. Under the seller's market, orders for new ships are concentrated, and shipping companies are enjoying “capacity dividends”; on the price side, the global new shipbuilding price index continues to be high, and shipbuilders have high bargaining power and enjoy the price dividend of “delta supply

Investment advice:

We expect the company to achieve revenue of 55.3/63.7/73.5 billion yuan in 2024-2026, up 18.4%/15.2%/15.3% year-on-year; in 2024-2026, net profit to mother of 1.4/3.25/5.75 billion yuan, respectively, with a year-on-year increase of 278.7%/132.8%/76.8%, corresponding to PE92.0/39.5/22.4.

Under the current civil shipbuilding cycle, we selected domestic and overseas listed shipbuilders China Shipbuilding, China Shipbuilding Defense, Yangzijiang, Hyundai Heavy Industries, and Samsung Heavy Industries as comparable companies. As of 2024/7/30, the PB (LYR) of comparable companies China Ship/China Shipbuilding (A share) /Yangzijiang/Hyundai Heavy Industries/Samsung Heavy Industries was 3.8/2.7/3.5/3.0, respectively, and the PB of China Heavy Industries was 1.5, which is significantly lower than that of comparable companies. We conservatively gave China Heavy Industries 1.8 times PB, corresponding to the target price of 6.58 yuan. We covered it for the first time, and gave it a “buy-A” rating.

Risk warning: macroeconomic risks falling short of expectations, fluctuations in raw material prices and exchange rates, falling short of expectations in environmental policies, falling short of expectations, profit forecasts falling short of expected risks.