Event: the third quarter report of 2018 was released on October 29, 2018, with operating income of 29.871 billion yuan in the first three quarters, an increase of 15.35% over the same period last year, and a net profit of 1.415 billion yuan, an increase of 28.03% over the same period last year, corresponding to earnings per share of 0.06 yuan.

Comments: the performance of the three quarterly reports is growing rapidly, and we are optimistic about the long-term development of naval equipment leaders.

(1) during the reporting period, the company's revenue was 29.871 billion yuan, an increase of 15.35% over the same period last year. The main reason is: during the ① reporting period, the international shipping and shipbuilding market is now recovering, and the company has made great efforts to improve quality and efficiency, strengthen risk prevention and control, and counter the trend to improve operating efficiency under the situation that the overall economic benefits of the shipbuilding industry have declined compared with the same period last year. ② focuses on the decision-making and deployment of the "three go, one drop and one supplement" work, promotes the reorganization and integration of resources, and makes every effort to do a good job in corporate governance at a loss. the loss area and losses of subordinate subsidiaries have declined significantly compared with the same period last year; ③ military production tasks have been completed as planned, civil ships have maintained growth in accepting orders, and a number of high-tech and high value-added products have been completed and delivered. (2) despite the weak recovery of new ship prices during the reporting period, the decline in shipbuilding completion compared with the same period last year, the increase in comprehensive cost rigidity such as the price of marine steel, and the existence of revenue write-off in the previous year, gross profit margin decreased by 1.19 percentage points.

However, the company's parent net profit increased by 28.03% compared with the same period last year, exceeding the revenue growth rate. The main reason is: during the ① reporting period, the scale of the company's interest-bearing liabilities decreased significantly, and the average loan interest rate decreased from 3.89% to 3.09%. The expense exchange income of subsidiaries of the company increased greatly due to the conversion of US dollar deposits. Together, the company's financial expenses are reduced by 122 million yuan compared with the same period last year. During the ② reporting period, subsidiaries of the company disposed of some idle fixed assets, resulting in an impairment loss of 370 million yuan less than last year; during the ③ reporting period, wholly-owned holding subsidiaries reduced losses or turned losses into profits, the losses borne by minority shareholders correspondingly decreased, and minority shareholders' profits and losses decreased by 88 million yuan. (3) from the balance sheet point of view, due to the company's prepaid accounts according to the production and operation schedule, concentrated large purchases increased year-on-year, resulting in a substantial increase in prepaid accounts by 42.54%, indicating that the company has full orders From the perspective of the cash flow statement, during the reporting period, due to the year-on-year increase in sales rebates and advance receipts for some key projects of the subsidiaries, the net cash flow generated by promoting business activities was 5.777 billion yuan, an increase of 4.894 billion yuan over the same period last year, and the company had good liquidity. Looking forward to the whole year, the overall operation of the company continues to improve, and is optimistic about the long-term development of naval equipment.

The core supplier of naval equipment directly benefits from the modernization of our navy. The company is not only the main supplier of naval ship equipment in China, but also the largest listed military company, which undertakes a number of major R & D and production tasks of military equipment. Military products cover aircraft carriers, nuclear-powered submarines (subcontractors), conventional power submarines, large and medium-sized surface combat ships, large amphibious attack ships, military auxiliary ships and so on. In February 2018, the company completed the acquisition of 100% stake in Dayang heavy Industry and Wushu heavy Industry in the form of debt-to-equity swaps. In the first half of the year, Dawang heavy Industries carried out the departure sea test of the first domestic aircraft carrier built by final assembly. The construction of the first Malaysian coastal mission ship undertaken by Wushu heavy Industry and the smooth delivery of two large anti-submarine patrol boats jointly built with Kunla Shipyard in Bengal are expected to further improve the profitability of the military business. With the continuous tension of the surrounding maritime security situation and the steady progress of "Belt and Road Initiative", China has put forward higher requirements for naval offshore defense and ocean-going operations, and it is expected that the market space of China's marine equipment will reach a trillion in the future. as a core supplier of naval equipment, the company is expected to directly benefit from the modernization of the navy.

Major domestic civil ship equipment suppliers, deepen supply-side reform to cope with industry cycle fluctuations. The company is the most important domestic marine transport equipment, marine development equipment, marine scientific research equipment development and supplier. The shipbuilding and marine engineering industries have obvious cyclical characteristics, which are deeply influenced by the global economic situation, shipping market situation and international crude oil prices. The international shipping market rose slightly in the first half of 2018, but the contradiction between insufficient demand and overcapacity still exists. The company seized the opportunity to actively deepen supply-side reform, take the initiative to open up the market and complete product delivery in a timely manner. In the first half of 2018, the subsidiary Wuchang Shipbuilding heavy Industry Group Co., Ltd. successfully delivered Shenlan 1, the first self-developed large-scale full-submersible deep-sea fishery culture equipment in China, and started to build the world's largest deep-sea intelligent fishing ground "Hainan Lingshui Deep Sea Fisheries Culture platform". The use of this equipment will achieve a major breakthrough in industrialization, automation, scale and cluster culture in the open sea area. The subsidiary Qingdao Shuangrui BalClor ballast water management system has been highly recognized by NYK, the largest shipping company in Japan, and has signed a large order for the supply of ballast water equipment, including VLCC, large bulk carriers, super-large container ships, chemical carriers and other rich ship types.

There is a large space for the integration of group asset securitization, and the subsequent injection of assets is expected. According to the official data of China Shipbuilding heavy Industry Group, the group asset securitization rate target is 70% during the 13th five-year Plan period, which is about 50% at present, and there is more room for integration in the future. In the marine defense equipment sector, the group currently has two companies (Tianjin Xingang Shipbuilding and Chongqing Chuandong Shipbuilding), and the Group has promised to propose to inject the assets of these two companies into the company within one year after the trigger conditions are met. At present, the reform of mixed ownership and the restructuring of scientific research institutes are accelerating, and the subsequent injection of assets into the company is expected, which may further thicken the company's performance.

Profit forecast and rating: be optimistic about the long-term development of the company's marine equipment business, and give the company a "recommended" rating considering that the company is expected to continue to benefit from naval modernization. Our forecast for the company's EPS for 2018-19-20 is 0.05 EPS 0.06, 0.05 yuan respectively, corresponding to the 2018-19-20 year PE is 79-75-75 times.

Risk hint: naval procurement fluctuates; civil ship orders fall short of expectations