The company is the leading low-speed diesel engine in China. Currently, the demand-side cycle of the ship-and-sea cycle continues to rise. The power system is the core equipment, the competitive pattern is stable, and production capacity is in short supply, which is expected to benefit the core. Maintain the “Highly Recommended” rating.
Demand side: The prosperity of the shipping industry is increasing with certainty. In the short term, since 2022, new shipbuilding prices have continued to rise and marine steel plate prices have continued to fall, resulting in a sharp margin of profit; in the long run, under the influence of low-carbon emission reduction policies for international ships+demand for replacement of old ships, the shipping industry is expected to usher in a long-term definite boom. However, as the core equipment for ship operation, marine power systems account for about 10-15% of the total cost of shipbuilding, and are expected to fully benefit. Among them, low-speed diesel engines account for more than 90% of the power market for ocean ships. Clarkson counted the DWT of each order and the estimated delivery period. From this, we measured the subsequent annual delivery volume of the Chinese shipbuilding industry. The year-on-year growth rates of completed shipbuilding heavy tonnage (DWT) in 24, 25, and 26 were 15%, 7%, and 11%, respectively, and continued to grow, indicating that demand for marine engines continues to rise.
At the same time, with the tightening of new environmental regulations, demand for dual-fuel engines such as LNG/methanol/hydrogen/ammonia will also explode, and the volume and price of dual-fuel engines will rise sharply. As a leader in domestic marine power systems, the company is expected to benefit the core from rising prosperity in the shipping industry combined with a rapid increase in international share.
Demand-side structural changes: The penetration rate of dual-fuel engines continues to increase, the value is 20% higher than traditional diesel engines, and the profit margin is 3-5% higher. 1) Increased penetration rate: Driven by factors such as aging ships, new environmental regulations, and EU carbon taxes, green power ships are rapidly replacing old ships and catalyzing an increase in the penetration rate of dual-fuel engines. According to the Power Industry Alliance Innovation Center, as of July 2024, 39% of all in-hand orders for ships larger than 100GT had used alternative fuels. We expect the share of alternative fuel engines to continue to increase as carbon neutrality policies in the shipping sector continue to advance. 2) Increased value and profit margin: According to the international shipping network, dual-fuel engines that can use marine fuel and natural gas fuel alternately are more than 20% more expensive than traditional diesel engines. Therefore, as the share of dual-fuel engine orders continues to increase, it will increase the revenue and profits of manufacturing companies and drive their profitability upward.
Capacity side: The trend of short supply is expected to continue. In 2023, China Power's domestic low-speed diesel engine market share increased to 78%, and the international market share increased to 39%. According to the company's response on the investor platform, the company's low-speed diesel engine business is currently at full capacity, and production capacity is currently tight. As one of the leading diesel engine manufacturers in the Chinese market and the international market, the company still cannot meet market demand at full capacity. Furthermore, according to price changes brought about by the relationship between supply and demand, the company stated on an interactive platform in September 2023 that there has been an upward trend in prices for commercial marine diesel engines in the past two years. In particular, the price of low-speed diesel engines for ocean shipping has increased by more than 20%. Therefore, we judge that the low-speed diesel engine market is in short supply, and it is relatively difficult for manufacturers to expand production. It is expected that this trend will continue for a certain period of time.
Competition pattern: The manufacturing side is on three legs, and China's share is expanding. Currently, ship design and manufacturing mainly uses a licensed production model, and the design side is separated from the manufacturing side. From the design side, it mainly consists of the three brands MAN, WinGD, and J-Eng, which are responsible for low-speed engine technology research and product design.
According to China Shipping News, in 2022, global marine low-speed engine manufacturing was mainly concentrated in the three countries of South Korea, China, and Japan, with a market share of over 99%. Among them, Korean low-speed engine manufacturing accounted for 48% of the global market share, China 30%, Japan 22%, and the European market was less than 1%. According to China Power's 2023 annual report, the company's international market share of marine low-speed diesel engines has increased to 39% in 2023, with a completed volume of 403 units, breaking through 10 million horsepower for the first time in terms of power, which highlights the increase in China's share in manufacturing.
Company level: Low-speed diesel engine leaders, in line with the major trend of emission reduction, with the possibility of extending to the design side.
In the field of low-speed diesel engines, the company has manufacturing, commissioning, service capabilities and experience in MAN and WinGD's full range of two-stroke marine diesel engines. The products cover almost all mainstream ship types, from bulk carriers, tankers to container ships, and have the largest share in the domestic market. According to the company's 2023 annual report, the domestic market share of the company's low-speed marine diesel engines increased to 78%, and the international market share increased to 39%. 1) In line with the major trend of emission reduction: According to the 2023 annual report, the company's dual-fuel mainframe production and sales reached a new high, and it undertook 133 LNG dual-fuel engines such as 9X92DF and 6G80ME-GI, and 34 methanol dual-fuel engines, including the 10X92DF-M and 12G95-LGIM. The number of newly signed units increased by 79.73% and 41.67% year-on-year, respectively, and achieved a zero breakthrough with ethane dual-fuel engines. 2) Possibility of extending to the design side: WinGD was acquired 100% of the shares by CSIC Investment in 2016, and WinGD's shareholders' voting rights and management rights were entrusted to China Shipbuilding Dynamics Research Institute in 2019. According to the Investor Interactive Platform on May 9, 2024, the company mentioned in the investor's response that WINGD is mainly engaged in R&D and design of low-speed diesel engines, which is an important part of the company's industrial chain. The company has always paid attention to its business conditions, and once the conditions are met, the possibility of future injection into listed companies is not ruled out. If injected into the company later, it will fill the gaps on the company's design side and achieve healthy interaction between design and manufacturing.
Profit forecast: The company's net profit for 2024/2025/2026 is estimated to be 1.419/2.452/3.238 billion yuan, corresponding to a valuation of 35, 20, 15 times, and maintaining a “highly recommended” rating.
Risk warning: Raw material prices fluctuate, the upward cycle in the shipping industry falls short of expectations, and the risk of convertible debt-for-equity swaps.