Incident: China Dynamics released its 2024 three-quarter report. In the first three quarters, the company achieved total revenue of 36.62 billion yuan, an increase of 12.83% over the previous year, and net profit to mother of 0.743 billion yuan, an increase of 80.46% over the previous year. In the third quarter of 2024, the company achieved total revenue of 11.759 billion yuan, a year-on-year increase of 5.59%, and net profit to mother of 0.268 billion yuan, an increase of 114.39% over the previous year.

The trend of sharp rise in volume and price did not change, and orders for high-margin products increased

According to China Shipping News data, from January to August 2024, China's shipbuilding completion/new orders/handheld orders were 35.4/81/208.2 million dwt respectively, up 15.69%/77.24%/49.57% year-on-year, accounting for 57.7%/76.1%/63.2% of the global share, and all three indicators achieved relatively rapid growth. Reflected at the company level, the company's total revenue increased by 12.83% year-on-year in the first three quarters of 2024, mainly due to increased order delivery and contract settlement by diesel engine subsidiaries. At the same time, the company's profitability increased. The gross profit margin for the first three quarters was 12.81%, up 1.19 pcts year on year, the net sales margin was 3.53%, up 1.80 pcts year on year, the gross profit margin for the third quarter was 14.87%, up 3.12 pcts year on year, and the net profit margin was 4.35%, up 2.94 pcts year on year. We believe that the increase in profitability is mainly due to the following two reasons: 1) According to data from China Shipping News, in August 2024, Clarkson's new ship price index was 189.20, up 9.01% year on year, and the price growth trend did not change. The company's main product, low-speed diesel engines, is the core part of ships, and its price has risen; 2) The company's marine machinery sales scale has expanded, orders for products with high gross margins have increased, and the revenue structure has gradually been optimized.

Acquire 16.51% of CSSC Diesel Engine's shares and strengthen the deep integration of the diesel engine business According to the “Notice on Planning Asset Restructuring and Suspension of Trading” issued by the company on October 25, China Dynamics plans to purchase 16.51% of its shares in CSIC Diesel by issuing convertible corporate bonds and paying cash, and to raise supporting capital by issuing convertible corporate bonds. After the transaction was completed, China Power held 68.3662% of CSSC Diesel Engine's shares, and China Shipbuilding Industry Group no longer holds CSSC Diesel Engine's shares. We believe that the company's acquisition of CSSC Diesel Engine shares will further strengthen the deep integration of the diesel engine business, promote efficient decision-making in the diesel engine business, make up for shortcomings in the industrial chain in R&D and post-sales, and promote the high-quality development of the diesel engine business.

Investment advice:

Currently, the shipping industry is in the upward phase of this cycle. Orders are expected to maintain a sharp upward trend in volume and price along with ship prices, and the industrial chain will continue to benefit. As the core force of research and production of marine power systems in China, the company's market share and profitability are expected to increase further in the future under the influence of multiple factors such as mismatch between supply and demand and implementation of environmental protection and emission reduction policies. We expect the company's revenue from 2024 to 2026 to be 54.02, 64.02, and 74.88 billion yuan, respectively, up 19.8%, 18.5%, and 17.0% year-on-year; net profit from 2024 to 2026 will be 1.28, 2.1, and 3.07 billion yuan respectively, up 64.2%, 64.0%, and 46.2% year-on-year, with a target price of 26.10 yuan for 6 months, corresponding to 45xPe in 2024, giving a “increase in holdings -A” rating.

Risk warning: Risk that macroeconomics falls short of expectations; raw material prices and exchange rate fluctuations; environmental policies fall short of expectations; risk that profit forecasts fall short of expectations.