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

First, the enlightenment of the last ship cycle from the rise to the decline

The U.S. subprime crisis emerged in early 2006 and swept through the United States in August 2007, and the ship market was affected about a year apart. In fact, when the market downward turning point is approaching, the market did not significantly revise down expectations to reach a rational state, but gradually revised down expectations in the process of witnessing the ship market step by step toward the Xiao, and the final revision amplitude is even lower than the objective state, reaching the degree of excessive pessimism. We can look at the correction of market expectations after the 1980s oil crisis, from relatively optimistic expectations in 1978 to overly pessimistic expectations in 1984, and the true trend of the market is somewhere in between. The same is true for the ship market after 2008, although the ship industry has really gone to the trough, but the market's expectations have moved from optimism to excessive pessimism. Considering that the shipbuilding industry has gone through a decade-long period of overcapacity, the CCI (China Shipbuilding Industry Association released China Shipbuilding capacity utilization monitoring index) in 2021 has finally returned to the position of the boom and contraction line, and another upward cycle of the shipbuilding industry has arrived, and the market is expected to remain relatively pessimistic under its inertia. This shows that there is an expectation gap in the current shipping industry.

From the perspective of ship production capacity, the number of shipyards in operation in the world in 2007 was 678, and by 2021 it has fallen to 274, and the actual capacity of shipping companies has contracted significantly, especially the number of active shipyards in China has declined most obviously. The decline in the number of shipyards also means the consolidation of the domestic shipbuilding industry, the CR5 of China's shipbuilding industry has increased from about 70% in 2010 to more than 80% today. The two leading domestic shipbuilding companies, China Shipbuilding and China Heavy Industry, have also achieved substantial restructuring, and their common holding group company, China Shipbuilding Group, has gradually integrated the business within the two shipbuilding groups.

Finally, we need to understand that the rise of China's shipbuilding industry in the early 21st century, it is the last round of ship upward cycle for the domestic shipbuilding industry to bring growth opportunities. In 2000, China's shipbuilding completion accounted for less than 6% of the world, by 2010, China's shipbuilding completion accounted for 42% of the world. The reason why China's shipbuilding industry can rise rapidly is attributed to China's very low labor costs, huge economic potential and rapid development of import and export trade. Limited by environmental control and land approval, it was difficult for Europe, Japan and South Korea to expand dock capacity in the last cycle, and they could only improve dock utilization. So that by 2006, a large number of orders from Japanese shipping companies spilled over to China, and by 2008, the average delivery time of Japanese shipping companies had been dragged to 2012, while the average delivery time of China and South Korea was relatively short. More attractive. On the other hand, China's per capita shipbuilding completions rose from 15.4 DWT in 2001 to 62.6 DWT in 2008, significantly improving human efficiency and reducing average shipbuilding costs, which also attracted global shipowners to order ships in China. Compared with this round of ship upward cycle that we have come, the global ship market from 2002 to 2008 has the attributes of shifting the center of gravity of shipbuilding + new demand, and at the same time, the market is too enthusiastic at the peak position. 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 changes in the 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 previous cycle, but the margin improvement will be more dramatic.

Second, the leading company's stock price in the last cycle, historical review and future outlook

In this chapter, we combine the historical development of the leading company China Shipbuilding from 1998 to 2008 to make a stock price recovery. China Shipbuilding, formerly known as Hudong Heavy Machinery, has long undertaken most of the ship machinery supporting tasks of the original Hudong Shipyard and the original Shanghai shipyard. In 1999, the year after the establishment of listing, Hudong Heavy Machinery is already the largest domestic production scale, the strongest technical development capacity of Marine medium and low speed diesel engine production base, with an annual capacity of 410,000 kilowatts, and the domestic market share of more than 60%. In November 2002, Hudong Heavy Machinery successfully developed the world's first 6-cylinder K80MC-C diesel engine, so far, Hudong Heavy Machinery Marine diesel engine annual capacity has reached 1 million horsepower, accounting for 70% of the domestic peer manufacturing total. In May 2004, Shanghai Shipyard, the shareholder of Hudong Heavy Machinery Company, was restructured into a wholly state-owned company, and its name was changed to Shangshang Chengxi Shipbuilding Co., LTD. All the shares of Hudong Heavy Machinery Company formerly held by Shanghai Shipyard were transferred to Shangshang Chengxi Shipbuilding Co., LTD. In November 2005, with the approval of SASAC, Hudong Heavy Machinery implemented the reform of split shares, and the net profit of Hudong Heavy Machinery exceeded 100 million yuan for the first time that year. 2006 is Hudong heavy machinery development road important node. In that year, the company expanded the production capacity of the Sino-Japanese joint venture CSSC Mitsui, and in the same month, Hudong Heavy Machinery and Hudong Zhonghua (including its subsidiaries) jointly put into operation the phase I project of Shanghai Hulin Metal Processing Co., LTD., indicating the continuous expansion of the company's production capacity. In November of that year, a total of 139 million shares of state-owned legal persons held by Hudong Zhonghua, the controlling shareholder, and Chengxi, the second largest shareholder, were transferred to China State Shipbuilding Corporation, the actual controller of the company, accounting for 53.27% of the total share capital of the company, and became the controlling shareholders of the company, and Hudong Heavy Machinery began to be directly placed under the system of CSSC.

In January 2007, Hudong Heavy Machinery Co., Ltd. issued 400 million A-shares to A specific target group, including large state-owned enterprises such as controlling shareholders CSSC Group, CITIC Group, Baosteel Group, CSSC Finance, Shanghai Electric, China Life and Social Security Fund. To acquire the 66.66% equity interest in Waigaoqiao held by CSSC, 100% equity interest in Chengxi, 54% equity interest in Yuanhang Wenchong, and the remaining 33.34% equity interest in Waigaoqiao held by Baosteel Group and Shanghai Electric Company, The company from a single Marine engine leading enterprise to a large civil ship manufacturing, high-power low-speed diesel engine manufacturing, ship repair as one of the three major businesses, with a complete industrial chain of large-scale ship manufacturing listed companies, initially formed the core of CSSC civil products main business overall listing platform. In July of the same year, CSSC increased its holding by 260 million shares due to the subscription of Hudong Heavy Machinery's non-public offering shares, and accumulated 61.06% of Hudong Heavy Machinery's shares. In the same month, after the integration of CSSC core civilian quality assets, Hudong Heavy Machinery officially changed its name to "China State Shipbuilding Industry Co., LTD." In August of the same year, the company's securities abbreviation was changed from "Hudong Heavy Machinery" to "China Shipbuilding", and the securities code remained unchanged. In December of the same year, based on the original diesel engine business and related assets, the company established a new "Hudong Heavy Machinery Co., LTD." as a wholly-owned subsidiary of the company, to continue to play its original advantages in the domestic and foreign diesel engine industry.

In 2008, the company's wholly-owned subsidiary Waigaoqiao Shipbuilding acquired 65% of Changxing Shipbuilding from CSSC and became the controlling shareholder. After the completion of this transaction, the combined capacity of Waigaoqiao and Changxing Shipbuilding will reach about 7 million deadweight tons. Waigaoqiao will become the world's second largest shipbuilding company after Hyundai Heavy Industries of South Korea and the largest domestic shipbuilding company. In August of the same year, China Shipbuilding planned to issue convertible bonds of no more than 7.4 billion yuan to invest in eight projects, including Waigaoqiao Ocean Engineering and high-tech ship engineering supporting projects.

Next, we look at the historical recovery of China Shipbuilding's share price and PE (TTM). From 2002 to 2008, we were generally divided into two stages: First, from 2002 to 2006, Hudong Heavy Machinery's stock price performance was quite stable, but profits have continued to improve, so the overall PE showed a downward trend; Secondly, from 2006 to 2008, under the influence of the leading effect of the high prosperity of the shipping market + backdoor listing + the great bull market of the stock market in 2008, China Shipbuilding ushered in the golden period of stock price growth, the stock price increased from 3.76 yuan in early January 2006 to the highest 132.24 yuan in November 2007. An increase of 35 times, far outpacing the broader market.

The lesson of this review is as follows: The upward cycle of ships, whether it is driven by new demand or renewal of stock, is generally driven by renewal in the early stage. For example, the main driver from 2002 to 2005 is the renewal of oil tankers. In this process, the market reaction is relatively flat, at this time the EPS of shipping companies continues to increase, and PE continues to decline. Until it reaches a point where it's undervalued. However, this point often represents an inflection point, as the capacity shortage reflected in the long-term replacement of old and new capacity can become particularly severe when the demand structure changes, and ship and freight rates explode, which is a fundamental departure from low valuations. Therefore, the end of the ship's upward cycle may show high investment sentiment due to the long-term suppression of low valuations and rapidly improving fundamentals, ushering in Davis double click.

Looking forward to the new round of ship cycle 22 years later, we need to note that the current industry environment and its own characteristics are very different from the previous cycle. In the past 10 years, the concentration of the shipping industry has increased rapidly, and the expansion cycle of ship capacity is relatively slow, so the leaders who retain capacity and survive in the previous low-price competition are expected to be the first to benefit. In addition, China's ship repair load ratio has increased in recent years, indicating that the manufacturing capacity has continued to optimize, and the ballast water tank and desulfurization tower in the core ship distribution market are still high net worth businesses, and manufacturers that can make progress in these aspects will gain greater growth momentum. Then, considering that the large cycle of the ship also means the large cycle of changing the ship, the traditional power ship faces the challenge of alternative fuel ships. Finally, we expect steady growth in defense spending in the future, which will steadily benefit shipbuilding companies related to military and civilian products.

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.