news

author | ding ping

on september 2, the shipbuilding sector experienced a sudden and sharp decline, withchinese shipbuilding、cssc defenseandchina heavy industrythey closed down 9.04%, 6.53% and 6.39% respectively.

while market participants were still analyzing the reasons for the plunge, an explosive news about the merger of china shipbuilding and china heavy industry quickly swept the entire market.

the two companies announced that china shipbuilding plans to merge with china heavy industry by issuing a shares to all shareholders of china heavy industry. to this end, the stocks of the two companies will be suspended from trading from september 3, and the suspension period is expected to be no more than 10 trading days.

this move marks the largest asset integration of china shipbuilding group since the merger of the north and south shipbuilding groups five years ago.

however, this restructuring has caused serious disagreements in the capital market.is the merger of the two ships a boon to the market, or does it hide unknown negative consequences?

good news or bad news?

before the specific plan is announced, it is difficult for us to accurately judge the trend of china shipbuilding and china heavy industry after the resumption of trading, but what is certain is that the merger of the two ships is good for my country's shipbuilding industry.。

this restructuring plan was within expectations and marked substantial progress in the asset restructuring of china shipbuilding group.

looking back at history, in order to solve the problem of separation of government and enterprises and establish a moderate competition mechanism, in 1999, the former china state shipbuilding corporation was split into china state shipbuilding corporation.(china state shipbuilding corporation)and china shipbuilding industry corporation(china shipbuilding industry corporation), commonly referred to as "south ship" and "north ship" in the industry.

the two groups are mainly divided into three parts: one is the ship assembly platform, china shipbuilding and china shipbuilding defense are in the south shipbuilding group, and china shipbuilding is in the north shipbuilding group; the other is the supporting platform, such aschina power, south shipcssc, mainly responsible for providing supporting services such as factory buildings for shipyards; the third is the innovation platform, mainlychina haiphongandcssc emergency, which belongs to the strategic emerging sector.

however, there is still competition within china shipbuilding group. in order to completely eliminate competition among peers and improve overall operational capabilities, on june 30, 2021, china shipbuilding group issued a letter of commitment, promising to(before june 2026)steadily advance the integration of relevant assets and businesses.

regarding the specific plan for asset restructuring, it is expected that there will be two main aspects:

（1）integration of ship assembly platform: china shipbuilding group may accelerate the integration of its listed companies, absorb and merge china shipbuilding industry corporation and china heavy industry, inject hudong-zhonghua, an unlisted company with good ship receiving quality, and gradually divest non-performing assets;

（2）integration of power business: the power business will be divested and merged into china power, making it a platform for power and supporting businesses.

the merger of the two companies will help improve the operating efficiency and competitiveness of china's shipbuilding industry, conform to the trend of globalization, and will be beneficial to the entire shipbuilding industry as a whole.

in addition, the capital market also responded optimistically - on september 3, the shipbuilding sector（BK0729）it rose against the trend and achieved a 3.67% increase on the day.

despite this,the future of china shipbuilding and china heavy industry after the resumption of trading is still uncertain, mainly because the specific restructuring consideration is not yet clear。

in addition, whether the plan can be successfully passed also depends on the opinions of minority shareholders who hold a larger proportion of shares.china merchants securitiesit is mentioned that the conversion price of china heavy industry's previous debt-to-equity swap was 5.74 yuan. currently, there are still six shareholders ranked among the top ten shareholders.

as of the end of june, these shareholders held approximately 15% of the shares, which is relatively high. if they have stronger demands, they may push for a higher absorption price, which is not necessarily good for china shipbuilding.

so what consideration is reasonable?

reasonable consideration should take into account many factors, especially the historical price of debt-to-equity swaps. based on the debt-to-equity swap price of 5.74 yuan, the corresponding pb of china heavy industry is about 1.55 times. based on past experience in ship restructuring, it is usually carried out at a pb of 1.5 times. therefore, we believechina shipbuilding's acquisition of china heavy industry at a price of about 1.5 times its pb can be considered a reasonable consideration.

an absorption merger at a premium or discount will affect the other party.

in short, before the specific plan is settled, the market can only speculate on the future trends of china shipbuilding and china heavy industry.

certainly,even if the final merger plan of the two ships does not meet expectations and the market feedback is pessimistic, it will only be a short-term disturbance and will not change the fundamental trend of the sector.

investment logic remains unchanged

for the shipbuilding sector, the core of investment is profit realization. at this stage, the sector has entered the profit realization period, and the focus of capital game will shift to the accelerated release of profits in the third quarter.。

the shipbuilding industry has obvious cyclical characteristics. similar to most cyclical stocks, the core of the investment framework lies in judging the relationship between supply and demand. generally speaking, the supply of the shipbuilding industry is considered rigid, so the main factor determining cyclical fluctuations is the demand side.

the demand mainly comes from two aspects:new demand from economic growth and replacement demand from the elimination of aging ships。

the former focuses on the prosperity of the downstream shipping marketwhen the shipping market is booming or enters a new round of ship replacement cycle, shipowners will place new orders with shipyards to increase or maintain capacity.

the last round of super ship cycle was a typical case of being driven by new demand. the acceleration of globalization and the rise of china led to a surge in demand. shipowners were too optimistic in this boom, misjudged the prosperity of the shipping market, and blindly placed orders for new ships, pushing the cycle to an unprecedented height.

however, the financial crisis broke out in 2008, global financial institutions tightened credit, and shipowners lacked liquidity support and abandoned ships one after another. coupled with the previous substantial expansion of shipbuilding capacity, the shipbuilding market has experienced more than ten years of silence. it was not until november 2020 that a new shipbuilding cycle quietly began, this time driven by a surge in demand and replacement demand.

replacement demand focuses on the average age of the global fleetgenerally speaking, the life of a ship is between 20 and 25 years. according to statistics, in 2023, about 12.5% ​​of the ships in the global fleet are over 20 years old, indicating that the fleet is entering a concentrated aging stage. we expect that by 2028, the global ship replacement will reach its peak.

although this cycle started as early as november 2020, the capital market remained cautious before the sector's profits were realized. this is because the shipyard's process from order receipt to construction to delivery, plus order scheduling, often spans 1-2 years or even longer. during this period, it will face various uncertainties that affect the realization of final profits.

finally, in the first quarter of 2024, the profit inflection point of the sector was confirmed, and the capital market gave an optimistic response. from november 2023 to april 2024, the share prices of china shipbuilding and china heavy industry rose by more than 50% and 30% respectively;

in the second quarter of 2024, the profits of the sector were released at an accelerated pace: china shipbuilding achieved a net profit of 859.9 million yuan after deducting non-recurring items, a month-on-month increase of 154%; china heavy industry achieved a net profit of 354.8 million yuan after deducting non-recurring items, a month-on-month increase of 299%; china shipbuilding industry corporation achieved a net profit of 105.8 million yuan after deducting non-recurring items, a month-on-month increase of 319%.

overall, the profit level of the shipbuilding sector in the second quarter was in line with market expectations. however, after the results were released, the sector underwent a major adjustment, mainly due to two reasons:

(1) market style shift: changes in the style of the capital market may lead to capital outflows;

(2) flaws in china's shipbuilding performance: the market is worried about problems with the fundamentals.

specifically, china shipbuilding's gross profit margin in the second quarter was 8.87%, up only 2.26 percentage points year-on-year, which fell short of market expectations. analysis shows that this was mainly due to the increase in supporting equipment and labor costs, as well as the high initial innovation costs of the delivered liquefied gas ships, which is an occasional impact and is not sustainable.

in addition, china shipbuilding's operating income in the second quarter fell 3.42% year-on-year. this was mainly because due to the impact of the epidemic last year, some orders were postponed from the first quarter to the second quarter, resulting in a high base in the second quarter of last year.

at the same time, the net cash outflow from operating activities in the second quarter was 715.8 million yuan, because the number of newly started orders during the reporting period was greater than the number of delivered orders, that is, the funds outflow for purchasing raw materials was greater than the funds inflow for delivery, reflecting the trend that the number of new orders received was higher than the number of completed orders, which promoted the continued growth of orders in hand.(china heavy industry also maintains this trend)。

in the first half of 2024, china shipbuilding received a total of 109 civilian ship orders with a deadweight tonnage of 8.5577 million tons and an order value of 68.425 billion yuan; in terms of completion, a total of 48 ships were delivered with a deadweight tonnage of 4.0345 million tons, completing 59.87% of the annual plan. as of the end of june 2024, china shipbuilding had 322 civilian ship orders with a deadweight tonnage of 23.6218 million tons and an order value of 199.639 billion yuan.

according to the analysis, taking chinese ships as an example,the performance in the second quarter of 2024 did not show any negative fundamentals. on the contrary, its order quality improved significantly, providing a guarantee for the release of profits.。

in the first half of 2024, the new orders received by china shipbuilding mainly include: 35 oil tankers, 31 bulk carriers, 18 liquefied gas carriers, 14 pctc ships and 10 container ships. among these new orders, green ship types account for more than 50%, mid-to-high-end ship types account for more than 70%, and batch orders account for more than 70%.

next,the event driving the shipbuilding sector is the progress of the restructuring of the two shipbuilding companies. from an industrial logic, market funds will focus on the performance of the third quarter to accelerate the release of gaming profits.。

based on the past changes in shipbuilding price index, steel prices and exchange rates, we can speculate thatthe shipbuilding sector is likely to deliver more orders with high ship prices and low steel prices in the third quarter, and the market profit is likely to be released faster.。

（1）depressed market environment: negative news may be amplified and affect investment confidence;

（2）rmb appreciates sharply: affects the exchange gains of shipbuilding enterprises;

（3）global recession expectations rise：the market is worried that shipowners may abandon orders;

（4）newbuilding price trend falls short of expectations：if a stop or pullback occurs, it will affect market confidence.