Key points of investment:

Event: China Heavy Industries released its 2024 semi-annual report. 2024H1 achieved revenue of 22.102 billion yuan, +31.1% year-on-year, net profit to mother of 0.532 billion yuan, +177.1% year-on-year, after deducting non-return net profit of 0.444 billion yuan, or +259.70% year-on-year. Corresponds to 2024Q2 revenue of 11.935 billion yuan, +18.84% YoY, +17.39% month-on-month, net profit 0.397 billion yuan, YoY +215.97%, month-on-month +193.63%, net non-return net profit of 0.355 billion yuan, +215.79% YoY and +299.11% month-on-month. The interim results were close to the median of the pre-increase announcement (0.5 billion-0.58 billion), in line with expectations.

The price of new shipbuilding continues to rise, and after considering inflation, there is still room for about 30% compared to the previous round of highs. According to Clarkson, as of August 23, 2024, the new shipbuilding price index reached 188.83 points, up 5.87% from the beginning of 2024 and 50.42% from the beginning of 2021. Currently, the recovery rate of the new shipbuilding price index has reached 99%, but the price recovery rate after the inflation period is only 71%.

The margins of orders have improved significantly, and new orders are green, batch, and high-end. Heavy Industries was relatively cautious in taking orders in the early stages, and will begin to centrally accept high-priced orders in the second half of 2023. According to the interim report, 68 civilian ship orders were received in the first half of the year, up 83.8%/230.6%/130.2% year-on-year, with new orders showing batch, green, and high-end characteristics. By the end of June 2024, the company had a handheld order of 216 ships/28.783 million DWT and 108.6 billion yuan for marine transport equipment (excluding offshore) (+62% year over year). According to Clarkson, the amount of heavy industry handheld orders rapidly increased from 11.6 billion US dollars in May 23 to 24.2 billion US dollars in July 24, an increase of 108%.

High-price orders were gradually delivered, and the corresponding steel price cost was lower than in the same period. According to the interim report, the company delivered 26 ships/2.773 million dwt in the first half of the year. According to Clarkson, China Heavy Industries delivered a total of 13 civilian ships/0.3293 millionCGT in 2024Q2. The signing period is January 2021 to January 2023. It is expected to deliver 19 civilian ships/0.6844 millionCGT in 2024Q3. The signing period is March 2021 to November 2022. Revenue side: The price increase in this round began in Q1 2021. The delivery ratio of high-priced orders signed in 2023H2 and 2023H1, 2023H2, 2024H1, and 2024H2 was 19%, 38%, 52%, and 74% respectively, and the share of high-priced orders gradually increased. Cost side: Backwards from steel purchased 1.5 years before order delivery. The average steel price for 2024 delivery orders was reduced by 20% compared to 2023 delivery orders, orders with high steel prices and low shipping prices were basically delivered, and revenue costs improved in both directions.

The pace of order delivery is gradually being accelerated, and profit flexibility is gradually being released. According to Clarkson, China Heavy Industries's 2024-2026 civil ship delivery volume (CGT) increased by 37%, -5%, and 30% year on year, while civil ship delivery amounts increased 47%, 27%, and 54% year on year.

The company's Dalian Shipyard, Shanhaiguan Shipyard, CSSC Tianjin, Qingdao Beihai Shipyard, and Wuchang Shipyard are expected to deliver 43%, +69%, +394%, +34%, +66% year-on-year, and civilian shipbuilding revenue is expected to be -41%, +85%, +368%, +43%, and +96% year-on-year.

The shipbuilding and shipping boom resonates, and the industry is still in an upward phase. Shipyard production capacity is tight, and factors such as aging fleets and environmental pressure still exist. The demand side of the shipbuilding industry resonates with the shipping boom, and shipowners' willingness to place orders has increased. On the supply side, shipyard production capacity has been fully cleared since the last cycle, and production capacity is difficult to expand rapidly in the short term. The supply pressure trend in the industry has not changed, and the cycle is still in an upward phase. Continuously verify our view that the previous shipbuilding upward cycle “stands at the starting point of the new shipbuilding cycle 2021-2038”.

Maintain profit forecasts and maintain buying ratings. The company's 2024E-2026E net profit forecast is 2.2, 4.8, and 9.4 billion yuan, and the corresponding PE is 54/25/13 times, respectively. The current PO valuation (market capitalization order ratio) is 0.75, which is more than 1.5 times more room than the boom cycle. Maintain a “buy” rating.

Risk warning: New orders for civilian ships fell short of expectations; implementation of carbon emission reduction policies in the shipping industry fell short of expectations; shipping sentiment declined; steel prices rose sharply, RMB appreciated sharply, and competition in the industry intensified due to the entry of Southeast Asian countries.