Description of the event

China Heavy Industries announced results for the third quarter of 2024, with revenue of 35.27 billion yuan for the first three quarters of 24, +16.35%; net profit to mother of 0.934 billion yuan, -0.11 billion yuan for the same period of the previous year; 0.773 billion yuan after deducting non-net profit, -0.245 billion yuan for the same period last year; of these, 24Q3 revenue was 13.163 billion yuan, -2.09% year on year; net profit to mother 0.4 billion yuan, same period last year -0.303 billion yuan.

Incident comments

The company's business situation continues to improve, and its order acceptance and delivery performance is good. The net cash flow from the company's operating activities in the first three quarters was 5.364 billion yuan, up 95% from the same period last year; the net cash flow from operating activities in the third quarter was 11.335 billion yuan, an increase over the previous year, mainly due to an increase in the number of operating orders received by the company and a corresponding increase in advance contract payments. By the end of Q3 2023, the company's inventory reached 31.166 billion, a slight increase over the previous month; contract debt reached 61.756 billion, an increase of 26.44% over the previous month, reflecting the improvement of the company's current orders and new orders. In the first half of the year, the company continued to focus on superior ship types and received high-quality batch orders. In the first half of the year, it received 68 civilian ship orders, up 83.8%/230.6%/130.2% year on year, respectively; in the first half of the year, 26 civilian ships were completed/2.773 million DWT/0.843 million revised total tons (up 10.5% year on year). According to Clarkson statistics, the company is expected to complete and deliver 60 ships throughout 2024, corresponding to the expected delivery of 34 ship orders in the second half of the year. Considering the peak delivery season in the fourth quarter, deliveries are expected to accelerate, and the company's profits are expected to be released throughout the year. The company's main ship models are in line with the trend of tanker recovery, and batch orders help the company optimize production efficiency and achieve rapid delivery. The profitability of the company's shipbuilding business is expected to continue to increase throughout the year.

The company acquired Hong Kong Shipbuilding Heavy Industries and Wushu Aviation Finance, and integrated high-quality assets to further increase production capacity. The upward trend in the global shipbuilding industry is clear. According to Clarkson, as of September 2024, the new ship price index has reached 189.96 points, and the new ship price fraction is 99.3% since 1996; Chinese shipping companies are generally full of orders, production schedules have reached 2028, supply chain pressure is high, and production capacity continues to be tight. According to data from the China Shipbuilding Industry Association, in the first three quarters of 2024, China's shipbuilding completed volume reached 36.34 million DWT, +18.2%; new orders reached 87.11 million DWT, +51.9% YoY; by the end of September, the number of handheld orders reached 193.3 million DWT, +44.3% YoY. The growth rate of new orders received by container ships and gas carriers was significant, with year-on-year increases of 111% and 101%, respectively, while shipbuilding completion increased by 43% and 48%, respectively. From January to September, China's shipbuilding completion volume, new orders, and handheld orders accounted for 55.1%, 74.7%, and 61.4% of the world market share respectively. The share of the three major indicators of China's shipbuilding industry continued to rise, and its leading position in the world was gradually consolidated. In order to ease the tight production capacity situation, China Heavy Industries acquired Hong Kong Shipbuilding Heavy Industries and Wushu Aviation Finance to further increase production capacity. Under the upward trend in ship prices, the increase in the company's core production capacity will effectively ease the tight situation in shipbuilding production capacity. In the long run, it will help the company release orders and push the company's profitability to continue to increase.

China Heavy Industries is one of the world's leading shipbuilding leaders, and the company will also clearly benefit from the upward trend in the shipping cycle. We expect that in 2024-2025, the company will achieve net profit of 1.685 billion yuan and 3.985 billion yuan, respectively, corresponding PE of 70 times and 30 times, respectively, and maintain a “buy” rating.

Risk warning

1. Risk of falling ship prices due to factors such as falling demand for shipping; 2. Risk of a sharp rise in steel prices and exchange rate fluctuations.