Key points of investment:

Event: The company released financial results for the third quarter of 2024. According to the company's announcement, revenue for the first three quarters of 2024 was 35.27 billion yuan, +16.35% year-on-year, and net profit to mother was 0.934 billion yuan. The year-on-year net profit changed from negative to positive, after deducting non-attributable net profit of 0.773 billion yuan, and the year-on-year change from negative to positive. Among them, Q3 revenue was 13.168 billion yuan, -2.00% YoY, +10.33% month-on-month, net profit 0.401 billion yuan, year-on-year to positive, +0.99% month-on-month, minus 0.329 billion yuan, year-on-year to positive, and -7.29% month-on-month. Revenue and gross margin growth were limited, and performance was slightly lower than expected, mainly due to a significant increase in R&D expenses.

High-price orders on the revenue side were gradually delivered, and steel prices on the cost side were lower than in the same period last year. According to Clarkson's data, the company delivered 17 ships/0.39 million dwt in Q3. The contract period is April 2021 to January 2023. It is expected to deliver 16 civilian ships/0.44 millionCGT in 2024. The signing period is April 2021 to April 2023. Revenue side: The price increase in this round began in Q1 in 2021. The delivery ratio of high-priced orders signed after 2021H2 was 52%, 74%, 75%, and 96% for 2024H1, 2024H2, 2025H1, and 2025H2, respectively, and the proportion of high-priced orders gradually increased.

Cost side: Steel purchased 1.5 years before order delivery is reversed. The average steel price for 2024 and 2025 delivery orders is expected to drop 20% and 6% year over year, and revenue costs are improving in both directions. The company's Q3 gross profit margin is 12.52%, compared to Q2+0.76pct.

Production capacity was acquired in a procyclical cycle, and shipyard deliveries and revenue entered the upward channel. The company announced in July that it plans to purchase all of the previously leased Hong Kong Shipbuilding Heavy Industries, which is expected to increase production capacity by 2.4 million dwt. According to Clarkson data estimates, the 2024 civil ship delivery volume (CGT) of the company's Dalian Shipyard, Shanhaiguan Shipyard, China Shipbuilding Tianjin, Qingdao Beihai Shipyard, and Wuchang Shipyard is expected to be -43%, +70%, +396%, +48%, and +50% year-on-year, while civil shipbuilding revenue is expected to be -41%, +79%, +371%, +57%, and +104% year-on-year. China Heavy Industries' civil ship delivery volume (CGT) is expected to be +42%, -12%, and +38% over the next three years (2024-2026), and the delivery amount will be +51%, +4%, and +59% year-on-year.

The shipbuilding and shipping boom resonates, and the industry is still in an upward phase. Price: According to Clarkson data, as of October 25, 2024, the new shipbuilding price index reached 189.68 points, up 6.34% from early 2024 and 23.05% from early 2022.

Volume: According to Clarkson, the company's orders are currently scheduled until 2028. According to estimates by Clarkson and Shenwan, up to now, the company's handheld order amount is about 21.7 billion US dollars, up about 35% from the beginning of 2024, and the margin for handheld orders has improved markedly.

The profit forecast was lowered and the buying rating was maintained. Considering the impact of high temperatures in the third quarter, order delivery delays, and adjusted the company's delivery assumptions based on the latest production schedule, and lowered the 2024-2026 profit forecast. The company's 2024E-2026E net profit forecast is 1.7, 4.7, and 9.4 billion yuan (the original forecast was 2.2/4.8/9.4 billion), corresponding to PE 69, 25, and 12 times, respectively.

The current PO valuation (market capitalization order ratio) is 0.82, which is sufficient space for more than 1.5 times 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.