The new shipbuilding cycle starts, and Chinese ships lead the world



1.1. State-owned assets holding shipbuilding leading, covering the complete ship industry chain

China Shipbuilding is a leading enterprise in the world shipbuilding industry. Its main business includes shipbuilding business, ship repair business, ocean engineering and mechanical and electrical equipment. In terms of shipbuilding business, the company covers all kinds of military ships, military auxiliary ships and bulk carriers, oil tankers, container ships, large cruise ships and various types of special ships and other civilian ship types; Ship repair business mainly includes routine repair and ship modification of various ship types, including bulk carriers, container ships, oil tankers, engineering ships, research ships, offshore engineering equipment, etc. Marine engineering includes semi-submersible vessels, FPSO, offshore oil drilling platforms and other products; Electromechanical equipment products include wind tower, desulfurization tower, subway shield and so on.

The ownership structure of the company is clear, and the actual control is the State-owned Assets Supervision and Administration Commission of the State Council. The company is CSSC's core military and civilian products main business listed company platform. According to the company announcement, as of 11M22, China State Shipbuilding Corporation directly holds 44.47% of the company's shares, and indirectly holds 5.95% through CSSC Investment and CSSC Defense, holding 50.42% of the company's shares in total. The company has 4 holding subsidiaries, including 100% equity of Jiangnan Shipbuilding, 100% equity of Waigaoqiao Shipbuilding, 100% equity of CSSC Chengxi, 55.64% equity of Guangship International, and 3 participating companies, 31.63% equity of CSSC Diesel Engine, 30.98% equity of Huangpu Wenchong and 49% equity of Chengxi Yangzhou.

1.2. The company's performance is subject to cyclical effects, and the operating situation is expected to improve steadily

The company's operation is greatly affected by periodicity, and the current performance is expected to enter a new period of growth. Looking back at history, after the company completed major asset restructuring in 2006, with the upswing of the shipping industry, the company's performance increased year by year, and the company's net profit reached a historical high of 4.16 billion yuan in 2008. After 2008, due to the overcapacity of shipyards and the decline in global trade demand, the new orders signed in the shipping industry began to enter a downward cycle. The company relied on sufficient orders in hand, and the revenue remained at a relatively high level from 2009 to 2011, but the net profit declined significantly. From 2016 to 2017, due to the company's large asset impairment on the offshore work order, the new ship market downturn, the price decline and other reasons, the net profit of the mother loss of 2.6.1 billion yuan, 2.30 billion yuan. In 2019, after the company completed the acquisition of Jiangnan Shipbuilding, Guangzhou Shipbuilding International and other assets, the revenue scale entered a new level. In 2021, the company achieved revenue of 59.74 billion yuan, an increase of 8.14%. In 2022, in order to solve the problem of diesel industry competition, the company transferred the control of its subsidiary CSSC Power Group to China Power, achieving investment income of about 2.3 billion yuan, increasing the net profit attributable to listed companies by 1.20 billion yuan, and CSSC Power Group is no longer included in the scope of the company's consolidated statements. 1-3Q22 The company achieved operating income of 38.59 billion yuan, an increase of 0.96%, and realized a net profit of 1.46 billion yuan.

The company's ship repair and Marine engineering contributed to the main revenue, accounting for more than 80% of the company's main revenue for a long time. According to the company announcement, the ship repair and Marine engineering business of 1H22 company accounted for 84% of the three main business structures. The gross profit margin of the company's main business as a whole showed a large fluctuation, which was significantly affected by the ship market cycle. The higher gross profit margin of the company's ship building and repair business in 2016-2017 was mainly due to the rise of the US dollar exchange rate, the increase in total revenue of construction contracts, and the increase in gross profit, while the price of steel plates decreased significantly and the cost of completed ships decreased. In the past three years, the company's ship repair business is relatively stable, mainly maintained at about 9%.

The company's gross profit margin has remained stable in the past three years, and the net interest rate has begun to show an upward trend. The high level of the company's overall gross profit margin in 2016-2017 was mainly caused by the increase in gross profit margin of ship building and repair business. After 2019, the company's hedging instruments and projects were not included in the current profit and loss, but were reflected in the exchange profit and loss items, which kept the gross profit margin at about 10% in recent years. According to the company's announcement 1-3Q22, the company's gross profit margin is 10.03%, and the net profit margin is 3.79%. With the increase of the proportion of high-end products in the future, the delivery of high-priced ship orders while the price of shipbuilding plates continues to decline, the company's profitability is expected to continue to grow. The company's overall expense control ability is good, and the period expense rate has maintained a stable level for a long time. The significant increase in the company's period expense ratio in 2016-2017 was mainly caused by the increase in interest expense and the significant increase in the finance expense ratio caused by the depreciation of RMB, and the company's net interest rate was low in the same period. In 2018, the company implemented market-based debt-to-equity swaps, and the average total borrowings were significantly reduced, interest payments were reduced, and financial expenses were significantly reduced, so that the company's expense ratio during the period was relatively stable at a low level. According to the company's announcement, the company's R&D expense ratio increased from 1.94% in 2013 to 5.26% in 1-3Q22, and the expense ratio during 1-3Q22 was 10.38%, relatively maintaining a low level.

The company's capital in hand is relatively sufficient, and after the company completes the asset restructuring in 2020, the monetary capital strength has further increased, maintaining at more than 50 billion yuan. The company's overall operating cash flow began to show a net inflow in 2017, and the company's operating cash flow in the first three quarters of 2022 was -4.78 billion yuan. The collection of ship products of the main subsidiary companies decreased year-on-year, and the decrease of material equipment expenditure was less than the decrease of collection.

1.3. Leading enterprise of military and civilian ship manufacturing, four subordinate shipbuilding companies

The shipbuilding industry has strong cyclical attributes, and the company's overall performance is also strongly related to the overall situation of the last round of shipbuilding cycle. After more than 20 years of upward and downward stages in the shipbuilding industry, we review the company's development history in detail here. 1) The company was formerly known as Hudong Heavy Machinery. After listing, the company continued to invest in research and development, expand production and share reform, etc. In 2005, it established a joint venture diesel subsidiary with CSSC and Mitsui Shipbuilding and introduced advanced diesel engine manufacturing technology and management mode. In 2006, in order to build a modern ship industry chain system, the holding shares of the company were transferred to CSSC free of charge. After the completion of equity transfer, CSSC directly held 53.27% of the shares of Hudong Heavy Machinery, which greatly improved the status of Hudong Heavy Machinery in CSSC.

2) In 2007, with the great recovery of the shipping industry cycle, the company seized the opportunity to acquire Waigaoqiao Shipbuilding, CSSC Chengxi, Yuanhang Wenchong and other private shipping enterprises through private placement, and changed its name to "China State Shipbuilding Industry Corporation Limited". Through the first major asset reorganization, the industrial chain framework of "shipbuilding, ship repair and supporting" of the civilian products business has been built, and it has become a listing platform for the core civilian products main business of CSSC.

3) In 2012, the company began to be affected by the downward cycle of the shipbuilding industry. From 2013 to 2018, the company successively transferred the shares of Changxing Shipbuilding, Guangzhou Firewood Ship, Guangxi Sea Ship, Wenchong Shipyard, Changxing Heavy Industry and other companies, focusing on the advantageous areas and optimizing the allocation of resources. In 2016-2017, affected by the downturn in international trade, the company's continuous losses triggered the delisting risk warning, and in 2018, the delisting warning was revoked by reducing costs and increasing efficiency and implementing market-oriented debt-to-equity swaps.

4) In 2019, China State Shipbuilding Corporation injected military and civilian assets such as Jiangnan Shipbuilding and Guangzhou Shipbuilding International into the company, realizing the transformation of the civil ship business into an integrated military-civilian ship final assembly platform. In the same year, The State Council approved the joint restructuring of China State Shipbuilding Industry Group and China Shipbuilding Industry Group to establish China State Shipbuilding Group, which indirectly controlled 50.42% of the shares of China State Shipbuilding after the completion of the acquisition.

5) In 2020, CSSC will jointly establish CSSC Power Group with 100% equity of CSSC Power, 51% equity of CSSC Power Research Institute, 15% equity of CSSC Mitsui, and 100% equity of Hudong Heavy Machinery. In 2022, the third major asset restructuring will be carried out, and the controlling shares of CSSC will be transferred. After the completion of the transaction, CSSC will change from holding to participating shares, holding 31.63% of the shares. Since then, the company has set up the power business and positioned the domestic head ship assembly platform.

The company's four major shipyards have their own focus, and the subsidiaries cover the complete shipbuilding industry chain. Jiangnan Shipbuilding is mainly engaged in military ship construction, super large container ships, LNG ships, special ships, etc. Waigaoqiao shipbuilding mainly focuses on the construction of civil ship products (bulk carriers, container ships and large tankers), large cruise ships and offshore platforms. CSSC and CSSC Chengxi are mainly engaged in ship repair and modification and electromechanical business, in addition, CSSC is also engaged in the construction of military auxiliary ships and special ship types.

1) Jiangnan Shipbuilding: a national key large-scale modern shipbuilding enterprise, its predecessor was the Jiangnan Machinery Manufacturing General Administration founded in 1865 in the Qing Dynasty. In recent years, Jiangnan Shipbuilding has developed, designed and built more than 40 types of ships in 12 categories, such as multi-type national strategic high-tech products, official scientific research vessels, liquefied gas vessels, container ships, car ro-ro ships, chemical vessels, etc. Jiangnan Shipbuilding is the only shipbuilding company in China with a full range of research and development, design and construction capabilities of liquefied gas vessels, with more than 20 types of independent intellectual property rights of high value-added vessels represented by Jiangnan liquefied gas vessels, container ships, Panamax bulk carriers and chemical carriers. The company has sufficient orders, and at present, there are multi-type national defense strategic high-tech products, cutting-edge scientific research vessels, liquefied gas vessels, container ships and other high-tech and high value-added products under construction.

As of the first half of 2022, Jiangnan Shipbuilding has undertaken a batch of very large liquefied gas vessels and container ships, and its international competitiveness has continued to improve. Jiangnan Shipbuilding has successfully delivered the world's largest 99,000 cubic meter B-class very large ethane carrier (VLEC) and the world's largest 24,000 container ship. According to the company announcement, Jiangnan Shipbuilding achieved revenue of 25.079 billion yuan in 2021, an increase of 9%, and a net profit of 447 million yuan; 1H22 Jiangnan Shipbuilding achieved a revenue of 7.548 billion yuan and a net profit of 58 million yuan, a decrease of 213 million yuan year-on-year, mainly due to the impact of the novel coronavirus epidemic in the first half of 2022, the impact period is about 2.5 months, and the cost of shutdown losses and epidemic prevention is increased.

2) Waigaoqiao Shipbuilding: Founded in 1999, Waigaoqiao Shipbuilding is one of the most large-scale, modern, professional and influential shipbuilding enterprises in the shipbuilding industry. The existing business of Waigaoqiao Shipbuilding is mainly divided into three major sectors: civil ship, Marine engineering and cruise ship. In the field of civil ships, the products cover bulk carriers, oil tankers, medium and large container ships, liquefied gas vessels, etc. According to the company's official website, Waigaoqiao Shipbuilding has undertaken a total of 327 Capesizes bulk carrier orders, completed and delivered 317 ships, accounting for 16.8% of the global fleet, ranking first in the world. In the field of offshore engineering equipment, the products cover semi-submersible drilling platforms, jack-up drilling platforms, floating production and storage tankers, forming a series, mass construction and delivery capabilities. In terms of large cruise ships, the first domestically produced large cruise ships are in the critical stage of interior engineering and system commissioning.

In the first half of 2022, Waigaoqiao Shipbuilding undertook one 180,000 tons LNG dual-fuel bulk carrier and eight 7,000-box container ships, which ranked first in the world in terms of orders. In terms of delivery, Waigaoqiao Shipbuilding in 2022 fully ensured the design and construction of the first domestically produced large cruise ship, with the overall progress reaching 77.27% by the end of June, and the 210,000 tons of Newcastle conventional power bulk carriers, 158,000 tons of Suez crude oil carriers and the world's first 209,000 tons of dual-fuel power bulk carriers were successfully delivered. According to the company announcement, in 2016-2017, Waigaoqiao Shipbuilding suffered losses for two years due to the downward cycle of the ship market, large impairments of Marine products and rising raw material prices. In the past two years, the company's overall performance remained stable, with 1H22 Waigaoqiao Shipbuilding achieving a revenue of 5.747 billion yuan and a net profit of 26 million yuan.

3) CSSC Chengxi: a leading enterprise in the domestic ship repair industry, mainly engaged in ship and offshore engineering repair, construction and large steel structural parts manufacturing. In recent years, The company has successfully completed the conversion of ore and cement dump ships, container ship total loss reconstruction, car ro-ro ship modification, bulk carrier extension, multi-purpose container ship modification, engine room equipment replacement and life extension ship modification, oil tanker single hull single bottom double hull double bottom, icebreaker extension modification, asphalt tanker modification, oil tanker conversion into bulk carrier and other 10 categories of ship modification. It has a high reputation and credibility in the international ship repair market, and has established extensive and close cooperative relations with shipping companies in more than 40 countries and regions.

In terms of production and operation, as of the first half of 2022, CSSC Chengxi has achieved batch undertaking of 3 88,800 tons of bulk carriers and 12 62,000 tons of heavy lifting vessels. At the same time, CSSC Chengxi world's largest 37,000 tons of asphalt tanker and self-developed 50,000 tons of MR Refined oil tanker successfully delivered to the owner. According to the company announcement, CSSC Chengxi will achieve revenue of 5.556 billion yuan in 2021, and 1H22 will achieve revenue of 2.645 billion yuan, and the income end is relatively stable in recent years. At the profit end, the profit level of CSSC Chengxi has a continuous improvement trend, and the net profit of CSSC Chengxi in 2021 is 128 million yuan, and the net profit of 1H22 is 51 million yuan.

4) Guangship International: It is the largest military auxiliary ship production support base in South China. We can develop, design and build all kinds of ships below 400,000 DWT that meet the requirements of the world's major classification societies. The company's core competitive products are MR, LR, container ships, passenger rolling ships, polar ships, etc., and our products have expanded to high-tech, new energy, far-reaching high-end Marine equipment and other fields. In recent years, Guangsheng International has ranked first in the domestic market and the global market share of LRII (110,000 tons tanker), and first in the domestic market share of MR (50,000 tons tanker), second in the world. At the same time, GuangshipInternational also has a complete non-ship industry chain, steel structure, heavy machinery products and other non-ship products have strong market recognition.

On the operational level, Guangshan International actively undertakes dual-fuel vehicle roll-on/roll-off (PCTC), passenger roll-off vessels, polar condensate tanker and polar research vessel and other dual-high-tech vessels. As of 1H22, Guangzhou Shipbuilding International has officially delivered the world's first SueZ-type dual-fuel power tanker of 158,000 DWT, and delivered 110,000 tons of oil tankers, passenger cargo rolling vessels, 50,000 tons of methanol dual-fuel tankers and 150,000 tons of LNG dual-fuel tankers in turn. According to the company's announcement, the company's performance from 2015 to 2018 showed a significant decline, mainly due to the unfavorable impact of factors such as the downward cycle of ships and offshore industry, and the sharp decline in demand for new ships. 1H22 GSSC achieved revenue of 5.293 billion yuan, an increase of 36% year-on-year. In recent years, the company actively promoted quality and efficiency improvement and cost control, and the gross profit margin of GSSC shipbuilding products increased year-on-year.