The global shipbuilding pattern is concentrated, and the benefits of China's leading ships are remarkable

Core views: Long construction cycle, expansion difficulties make the industry continue to focus on leading enterprises, this round of shipbuilding upward cycle China is expected to continue the previous round of South Korea, leading the development of the global shipbuilding industry. In 2022, China's three major shipbuilding indicators will occupy about 50% of the global market share, and Chinese ships will account for about 20% of China's market share and about 10% of the global market share. On the whole, the company's income side, rising demand superimposed new shipbuilding prices, civil ship construction and repair is expected to achieve volume and price rise; At the cost end, the price of shipbuilding board has fluctuated downward since 2H21, and the company's cost pressure has weakened, and its profitability is expected to improve. In addition, the company actively distributes high-value ship types such as LNG and large cruise ships, which is expected to continue to promote the upgrading of the company's product structure and enhance the company's core competitiveness.

1. Shipbuilding capacity is gradually cleared, and the Chinese market leads the world

The decade of downturn has accelerated the consolidation of shipyards around the world, with the number of active shipyards gradually decreasing and capacity gradually being cleared. Since 2008, the Marine market has entered a downturn, and the number of active shipyards worldwide has decreased, according to Clarksons data, the number of active shipyards worldwide has dropped from 1,014 in 2008 to 373 in 2022. At the same time, the consolidation of shipyards around the world is accelerating to absorb excess capacity. For example, in 2016, COSCO Shipping merged its subordinate shipyards to set up COSCO Shipping Heavy Industry Co., LTD., in 2017, China Merchants and SinoOverseas merged their subordinate shipyards, in 2019, China North-South Shipbuilding merged, Japan United Shipbuilding and Imaji Shipbuilding merged to set up a new company "Japan Shipbuilding", and in 2021, Korea Hyundai Heavy Industries and Daewoo Shipbuilding and Marine restructuring. According to Clarksons data, as of 2M23, the global Top2 shipbuilding group to undertake orders accounted for 25% of the world's orders, Top5 shipbuilding group accounted for 50% of the world's orders, and Top12 shipbuilding group accounted for 75% of the world's orders.

At present, the competition pattern of the global shipbuilding industry presents the form of "three pillars" between China, Japan and South Korea, and China's shipbuilding strength plays a pivotal role. In recent years, China, Japan and South Korea have accounted for more than 90% of shipbuilding completions. Among them, in 2022, China ranked first in the world in the three major indicators of shipbuilding completion, new orders and hand-held orders, accounting for about 50% of the world's share. According to Clarksons data and China Shipbuilding Industry Association data show that in 2022, China's new orders, orders in hand and shipbuilding completions in 10,000 DWT accounted for 55.2%, 47.3% and 49.0% of the global total, respectively. From the historical data, the global new orders as a whole show a trend of substantial growth in China and gradual contraction in Japan.

From the point of view of the single ship, the three countries have their own strengths. South Korea's overall industrial concentration is higher, the local ship distribution product loading rate is higher, the product structure is mainly high-end ship types, China, Japan to the traditional three ship types. Chinese shipping enterprises take bulk carriers, container ships, chemical tankers, refined oil tankers, general cargo ships and tugs as the main single ship types, the ship type changes are not obvious, the average tonnage has increased to a certain extent, and the construction capacity of large ships such as the three main ship types has been greatly improved, but the current LNG, LPG and other high-end ship types are still weak. The single ship type of Japanese ship enterprise is mainly bulk carrier, liquid carrier and general cargo ship, and passenger roll ship is also the focus of its order. In recent years, Japanese shipping companies have adjusted their order acquisition strategy, trying to recover their market share in the container ship field by receiving orders from Taiwan shipowners and domestic shipowners. In addition, Japanese shipping companies have twice tried to build luxury cruise ships, but both ended in failure. South Korea's high value-added ship types account for a relatively high proportion of new ship orders in the field of civil ships and offshore industry have a strong ability to receive orders, in the three main ship types, its container ships and oil tankers receive orders much higher than bulk carriers. South Korean shipping companies attach great importance to the management and maintenance of customer relations, and pay special attention to the application of new technologies such as environmental protection and energy saving on liquid cargo ships. In the field of offshore engineering, high value-added offshore equipment such as FLNG ships is mostly monopolized by South Korean shipping companies.

China's capacity utilization monitoring index continued to improve, and the capacity utilization rate of the shipbuilding industry increased. According to the data of the China Shipbuilding Industry Association, the China Shipbuilding Capacity Utilization Monitoring Index (CCI) in 2022 reached 764 points, reaching the highest point in nearly 10 years, an increase of 22 points compared with 2021, an increase of 3%. It is expected that the CCI will continue to fluctuate in the normal range in 2023. According to Clarksons data show that in 2022, the global shipyard capacity of 30.6 million CGT, of which the Chinese shipyard capacity of 7.8 million GCT, accounting for 47% of the global proportion, capacity utilization is expected to rise further.

At present, the performance of key shipbuilding enterprises in China has shown a bottom rebound trend. According to the statistics of the China Shipbuilding Industry Association, from January to November 2022, 1,093 shipbuilding industry enterprises above designated size in the country achieved 457.29 billion yuan in main business income, an increase of 8.0%. The total profit of shipbuilding industry enterprises above designated size reached 13.65 billion yuan, an increase of 70.0%, and the efficiency of shipping enterprises continued to improve.

China's leading manufacturers have significantly improved their competitiveness. According to the data of Clarksons, as of 1M23, China State Shipbuilding Group has a total of 19 shipyards, with 539 ships in hand, with a total of 44.475 million deadweight tons, ranking first; Yangzijiang Shipbuilding Group, which has four shipyards and orders 151 ships with a total of 12.848 million deadweight tons, ranks sixth and is the largest private shipbuilder in China. China's backbone ship enterprises maintain strong international competitiveness, respectively, six enterprises entered the world's shipbuilding completion volume, new orders and hand-held orders in the top 10.

Chinese shipyards continue to break through high-value ships, and the quality of new ship orders continues to improve. According to the statistics of China Shipbuilding Industry Association, in 2022, China has 12 new orders of 18 major ship types in the world, ranking first in the world, among which new orders of bulk carriers, container ships, car carriers and crude oil carriers account for 74.3%, 56.8%, 88.7% and 66.1% of the global total respectively. China has continued to make breakthroughs in the field of large LNG carriers, and the international market share of new orders for large LNG carriers in 2022 has exceeded 30% for the first time. In 2022, China has formed a number of large-scale LNG carrier construction enterprise clusters, mainly Hudong Zhonghua, Big Ship Heavy Industry, Jiangnan Shipbuilding, China Merchants Haimen and Jiangsu Yangzijiang Shipping Industry. In the following 3-4 years, China's shipping enterprises are expected to usher in the peak period of shipping, and the proportion of high-tech ships is expected to increase significantly. According to shipbuilding industry statistics, 2023-2024 is the centralized delivery period of large container ships, as planned, China will deliver 44 large container ships of 15,000TEU and above, accounting for more than 20% of the shipbuilding completed in the year. 2025-2026 is the centralized delivery period of large LNG carriers, and many companies are constructing large LNG carriers for the first time.

2. The concentration of the head of the domestic market is obvious, and China's shipbuilding looks at Chinese ships

From the perspective of domestic competition pattern, the concentration of the head of China's shipbuilding industry is obvious. According to the statistics of the China Shipbuilding Industry Association, in 2022, the concentration of the top 10 enterprises in the country's shipbuilding completion volume is 64.9%, the concentration of the top 10 enterprises in the number of new orders is 63.6%, and the concentration of the top 10 enterprises in the number of hand-held orders is 65.8%. In 2022, six shipbuilding companies in China will enter the top 10 in terms of global shipbuilding completions, new orders signed and hand-held orders.

Under the logic of concentration enhancement, the head shipbuilding listed company is expected to be the first to benefit. Since the downturn of the shipbuilding industry cycle, large shipbuilding enterprises will choose to merge shipyards to further integrate to enhance their competitiveness, and long-term investment and corporate profitability continue to decline, forcing leading companies to concentrate market share. By comparing the company, CSSC and China Heavy Industry, it can be found that the overall performance of the shipbuilding industry is affected by the cyclical fluctuations of the industry. As a domestic core shipbuilding listed company, the company has excellent overall profitability.

The company has a global market share of about 10% and a market share of about 20% in China, leading the development of the shipbuilding industry. According to the statistics of the China Shipbuilding Industry Association, among the top ten shipbuilding completed in 2022, the company's subsidiaries Waigaoqiao Shipbuilding, Jiangnan Shipbuilding and Guangzhou Shipbuilding International are listed; Among the top ten new orders, Jiangnan Shipbuilding, a subsidiary of the company, made the list. According to the company announcement, in 2021, the company undertook orders for 132 ships / 12.117 million deadweight tons, and the tonnage completed 164.37% of the annual plan. As of 1H22, the company held a total of 239 civil ship shipbuilding orders / 20.7547 million DWT, accounting for 20.2% of China's weight, accounting for 9.7% of the global proportion.

Overall, at the income level, the price of new shipbuilding continues to rise, while the company is currently full of orders in hand, the schedule has reached 2026, and the capacity of its shipyards is also relatively full. With the gradual construction of high-priced orders in 2021, the company's performance is expected to usher in greater flexibility and achieve a rise in volume and price.

1) Shipbuilding prices continue to rise. From the comprehensive price index of new shipbuilding, ship prices have continued to rise since 2021, as of 2M23, the comprehensive price index of new shipbuilding is 162.88, an increase of 5.3% compared with 3M21, an increase of 25.1%. According to Clarksons data, the new shipbuilding price index of dry bulk cargo/tanker/container was 156.4/192.1/102.2, an increase of -3.0%/4.8%/2.7% compared with 3M21, an increase of 17.4%, 27.0% and 22.8%. According to China Ocean Shipping statistics, as of 2M23 each typical ship type of new ship prices remained basically stable, VLCC, 23,000 TEU container ship and 174,000 cubic meters of LNG carrier new ship prices were $120 million, $215 million and $250 million, respectively.

2) The current shipbuilding cycle has entered the stage of volume reduction and increase, and the price of new shipbuilding is still likely to rise. Combined with the rhythm of the current upward cycle, the major shipyards are currently full of orders in hand, and the capacity schedule has been arranged to 2025-2026. We believe that the capacity expansion of the supply side of this cycle is more cautious than that of the previous cycle, and the volume and price rise stage of this cycle starts from 1M21 left to right and ends around 4M22. The maintenance time is close to 14 months, and the current time node is in the stage of volume price reduction and increase, and it is expected that the current round of volume parity increase stage will last longer, and even due to the rigid factors of shipbuilders' capacity, volume price reduction and increase begin to occur, we judge that there is still room for upward movement in the price of new shipbuilding.

3) The company has plenty of orders in hand, new ship orders have increased significantly, and it is expected that the delivery of new ships in 2023-2024 is expected to increase significantly. According to the company announcement, in 2020 and 2021, the company undertook new ship orders of 634 million and 12.11 million deadweight tons, respectively, with year-on-year growth of 130% and 91%. The company has plenty of orders in hand, as of 1H22, the company has orders for 20.75 million tons of cargo. Ship construction from new to delivery generally takes about 2-3 years, the company is expected to 2023-2024 new ship delivery is expected to peak. At the same time, with the continued high price of new shipbuilding of some ship types, the subsequent is expected to promote the company's new shipbuilding orders to increase.

On the profit side, the operating profit of the shipyard is mainly affected by the market form, raw material prices, exchange rate fluctuations, etc., and the price of shipbuilding plate steel falls, and the company's profitability is expected to continue to be repaired.

1) Ship manufacturing costs generally include equipment, raw materials, labor costs, etc. Marine supporting equipment mainly includes main propulsion, main engine, emergency engine and electrical conduction. According to the company announcement, the ratio of steel required for different ship types is different, generally accounting for about 20%-30% of the total construction cost. Due to the closed contract property of shipyards, the change of steel price has an important impact on the profit level of shipyards.

2) The company's operating costs are basically consistent with the growth of revenue scale. According to the company's announcement, the company's operating costs in 2021 increased by 8.3% year-on-year, which is basically consistent with the growth of revenue scale. Among them, in the ship repair and Marine engineering business in 2021, the material cost reached 31.897 billion yuan, accounting for about 70%. Overall, the proportion of Marine steel in the material is about 30%-40%.

3) The ship price is basically locked when the order is signed, and its cost fluctuation is mainly borne by the shipyard itself during the ship construction cycle. According to the company announcement, the main raw materials of the ship are 6mm and 20mm Marine steel plates. At the end of 2020, the price of new shipbuilding has gradually increased, but at the same time, the price of shipbuilding steel has risen with the current price of new shipbuilding. The price of shipbuilding board began to fall after reaching a peak in 5M21, and by the end of 2022, the price of 20mm shipbuilding board in Shanghai was 4,480 yuan/ton, down 17.8% year-on-year, and nearly 35% lower than the peak in 2021. The decline in the price of shipbuilding plates is conducive to increasing the company's gross profit on orders in hand, and profitability is expected to continue to repair.

3. Continuous breakthrough of high-end ship type, promoting the upgrading of product structure

China's shipbuilding to high value-added, high-tech route development. According to the statistics of the China Shipbuilding Industry Association, the structure of China's new ship orders in 2022 has been optimized and improved, and the repair load ratio (revised gross ton/deadweight ton) has reached 0.468, which is the best level in history. According to the company's announcement, the company's ship structure also continues to optimize, in 2021, the company's bulk carrier/container ship/tanker delivery volume is 352/100/1.34 million deadweight tons, an increase of -27%, 129% and 0.5%, of which the proportion of container ships increased significantly, and the proportion of high-value ship structure increased.

The company continues to make breakthroughs in high value-added ship types. At the beginning of 2018, Jiangnan Shipbuilding, a subsidiary of the company, received an order from CMA CGM of France for 23,000 TEU ultra-large LNG dual-fuel container ship, which is equipped with the world's first MARK III thin-film LNG fuel tank, and the fourth ship has been delivered in May 2022. In 2021, Jiangnan Shipbuilding signed an order for a 79,800 cubic meter MARK III thin-film LNG carrier with Guangdong Jiufeng Energy, officially entering the field of thin-film LNG carrier construction. According to the company announcement, Jiangnan Shipbuilding and ADNOC Logistics & Services, a subsidiary of ABU Dhabi National Oil Company (ADNOC), signed a contract for the construction of two 175,000 cubic meters of LNG carriers.