The last round of ship cycle from the rise to the decline, the enlightenment for us

Iii. Review of the last cycle and investment analysis

Through the content of the above three chapters, we have completed the sorting, review and summary of the ship's upward cycle from 2002 to 2008. Our findings include:

(1) From the 1960s to the 2010s, the global ship market actually experienced three cycles, including two new demand-driven ship market booms, and a "sub-boom" driven by replacement demand. The prosperity of the ship market driven by new demand often produces a large amount of speculation at the peak, resulting in subsequent new orders and ship prices falling, while the change of the ship market climate driven by alternative demand is relatively smooth.

(2) The boom of the shipping market from 2002 to 2008 did not maintain a high boom from beginning to end, and the new orders and ship prices would show a structural rise and fall. The reason for the fluctuation of ship prices and orders lies in the different economic rhythms of different subdivided ship types: the boom of oil tankers mainly comes from the replacement and renewal of double hull vessels to single hull vessels; The prosperity of container ships mainly comes from the improvement of containerization rate and the rapid development of global commodity trade. The boom of bulk carriers mainly comes from the sharp rise in the freight rate of bulk raw materials in 06 and 07, and the trade pattern and fleet travel have undergone great changes. Although they all have their own factors, the key to the three major ship types can shine lies in some common factors: the weakening of the global dollar + China's economic rise + global shipping volume growth continues to lead fleet growth + economic globalization gradually deepening.

(3) The ship market from 2002 to 2005 was mostly rational and prosperous, while the high-profile performance of the ship market in 2006 and 2007 had quite irrational factors. The irrational body of the market is now misjudging the subsequent shipping rate of return, and underestimating the time required for the bottom adjustment of the shipping industry, and the irrationality of shipping enterprises is reflected in the excessive expansion of production capacity in the early stage, resulting in subsequent overcapacity. The final result is that after the subprime crisis, the delay rate and withdrawal rate of shipyard orders have increased significantly.

(4) Considering that the current global shipping enterprises are relatively cautious about capacity expansion, and no country has the basic conditions to undertake East Asian shipbuilding capacity, so the early part of this cycle may be similar to the oil tanker update around 2003, will usher in a wave of small peak form of replacement demand, but in the latter part of the cycle, capacity bottlenecks will gradually become prominent. In the context of the lack of capacity expansion channels, once there are sudden factors such as the change of trade pattern in 2006 and 2007, the hub plug port, it will likely lead to a retaliatory rise in freight and ship prices again, and the leading enterprises will no longer face the competitive impact of blind expansion of production capacity, and will be expected to enjoy a higher ship price premium. Revenue expansion may be slower than in the last cycle, but margin improvement will be more dramatic.

(5) From the perspective of stock price, before 2006, PE of China Shipbuilding (Hudong Heavy Machinery) was continuously pulled down under the background of continuous EPS growth, and the stock price did not change much. In 2007, due to the high prosperity of the ship market + the asset restructuring of China shipbuilding + the bull market of the stock market, the stock price of China shipbuilding ushered in explosive growth. We believe that the tail end of the upward cycle of ships may show high investment sentiment due to long-term suppression of low valuations and rapidly improving fundamentals, ushering in Davis double click.