original first release | jinjiao finance (id: f-jinjiao)

author: chong lei, cfa

nearly ten years after the birth of the "chinese magic car" and five years after the merger of the "north and south ships", the "chinese magic ship" is about to come out.

recently, two platforms with a market value of hundreds of billions of yuan under china shipbuilding industry corporation simultaneously issued announcements to initiate a merger and reorganization.

after the restructuring is completed, the total assets of the surviving listed company will be close to 400 billion yuan, the market value will be close to 300 billion yuan, the annual operating income will exceed 100 billion yuan, and the global new shipbuilding market share will account for one-third.become the world's largest listed shipbuilding company.

this is a landmark event in china's shipbuilding industry.

in recent years, china's shipbuilding industry market share has been far ahead of the world, taking on 2/3 of the world's new orders in 2023, and the proportion increased to 3/4 in the first half of 2024.

but the status of a major shipbuilding country also attracts attention. in april, the biden administration launched a section 301 investigation into a specific chinese industry for the first time since taking office, targeting the shipbuilding industry.

facing geopolitics is like sailing in a rough ocean: the bigger the ship, the more risks it can withstand.

the birth of the magic ship is the product of this idea, and china's shipbuilding industry's voice in the world has reached a new level.

super merger

participating in this major mergerchinese shipbuildingandchina heavy industry, which plays an important role in china's shipbuilding industry.

in,china ship is the original "nan ship"——the core listed shipbuilding platform under china state shipbuilding corporation, with its main shipbuilding capacity in the south of the yangtze river. it has four major shipbuilding companies under its jurisdiction, namely jiangnan shipyard (group) co., ltd., shanghai waigaoqiao shipbuilding co., ltd., cssc chengxi ship repair co., ltd. and guangzhou shipyard international co., ltd.

china heavy industry is the former "beichuan"——the core listed shipbuilding platform of china shipbuilding industry corporation, with its main shipbuilding capacity in northern china, including dalian shipyard, wuchang shipyard, beihai shipyard and other subsidiary shipbuilding enterprises.

in the first half of 2024, china shipbuilding received a total of 109 civilian ship orders with a total tonnage of 8.5577 million deadweight tons and rmb 68.425 billion, a year-on-year increase of 38.21%, accounting for 16% of the chinese market share.11% of the global market share.

during the same period, china heavy industry received a total of 68 civilian ship orders with a total tonnage of 11.671 million tons and a total of rmb 43.6 billion in the first half of the year, a year-on-year increase of 231% in tonnage, accounting for 15% of the chinese market share.it accounts for 22% of the global share.

as of the close of september 2, the total market value of china shipbuilding and china heavy industry was 156.1 billion yuan and 113.6 billion yuan, respectively.

it is worth noting thatthe birth of china's magical ship was foreshadowed as early as five years ago when the "north and south ships" merged.

in 2019, china shipbuilding industry corporation (south ship) and china shipbuilding industry corporation (north ship) merged into china shipbuilding group after 20 years of separation.

on june 30, 2021, china shipbuilding industry corporation, which completed its merger and reorganization, issued a "letter of commitment on avoiding competition with china shipbuilding marine defense and equipment co., ltd." and will do so within five years from the date of issuance of the letter of commitment.promote the integration of relevant assets and businesses that are eligible for injection into listed companies to resolve issues of intra-industry competition.

after that, the listed companies under china shipbuilding industry corporation underwent a new round of restructuring.

in august 2019, china shipbuilding group determined a 33.6 billion yuan asset replacement plan to eliminate thecssc defensein august 2022, the group restructured its diesel engine business at a price of rmb 22.5 billion; in october of that year, the group injected wind power and other related new energy assets into thecssc technology。

by the middle of this year, china heavy industry began asset restructuring.

on july 27, 2024, china heavy industry announced that it plans to purchase part of the assets of the lingang plant of hong kong shipbuilding heavy industry for rmb 4.044 billion through its subsidiary cssc tianjin. the target assets to be acquired include one 500,000-ton and one 300,000-ton large dry dock, as well as supporting production facilities and shoreline resources.

at the same time, in order to fill the gap in production capacity, wuchang shipyard, a wholly-owned subsidiary of china heavy industry, plans to purchase 100% of the equity of wuchang shipbuilding and aviation finance with its own funds of approximately 1.044 billion yuan.

in addition, in order to carry out large-scale mergers and reorganizations, china heavy industry has also optimized its production capacity layout.

on july 27, china national heavy industry corporation (cnhi) announced that its subsidiary dalian shipbuilding plans to transfer its 100% equity in bohai shipbuilding heavy industry co., ltd. to its affiliated company china state shipbuilding corporation bohai shipbuilding co., ltd. at a price of rmb 114 million. bohai shipbuilding heavy industry has accumulated losses of more than rmb 3.4 billion since 2016, which has seriously dragged down cnhi's operating performance.

industry insiders said,the merger and reorganization took place much earlier than expected by the industry.after the merger, a series of issues still need to be resolved, including how to resolve the competition between the new listed company and china shipbuilding industry corporation (cssc) defense, whose production capacity is in south china, and how to place the group's best shipbuilding assets, hudong-zhonghua, into the new listed company.

huatai securitiesthe company said that the reorganization will deeply integrate the advantageous scientific research and production resources and supply chain resources of china shipbuilding and china heavy industry, and promote the deep integration and upgrading of advanced shipbuilding and repair technologies. it expects the net profit attributable to the parent company of the new listed company after the merger to be 5.36 billion yuan, 9.04 billion yuan and 11.75 billion yuan in 2024-2026, and maintains a "buy" rating.

reversing the trend of “big but not strong”

in the past, china's shipbuilding industry has always had the image of being big but not strong, especially in terms of profitability.i have been overwhelmed by orders and have been losing money.

taking the two giants of this merger as an example, in 2023, china shipbuilding's non-net profit was a loss of 291 million yuan, and china heavy industry's non-net profit was a loss of 1.062 billion yuan, even though china's shipbuilding industry took on 2/3 of the world's new orders last year.

that changed this year.

in the first half of 2024, data from the china shipbuilding industry association showed that china received new ship orders of 54.22 million deadweight tons, a year-on-year increase of 43.9%.it accounts for about three quarters of the world market share and continues to lead by a large margin。

compared with last year, the profitability of the two major shipbuilding giants has also undergone a significant change.

according to the interim report of china shipbuilding, its operating income in the first half of the year was 36.017 billion yuan, up 17.99% year-on-year; its non-net profit was 1.198 billion yuan, compared with a loss of 117 million yuan in the same period last year.achieve a turnaround。

china shipbuilding said that since 2024, supported by factors such as sufficient backlog of orders at shipyards and limited supply of available space, the price of new ships has continued to rise; the company has continued to improve production efficiency, with the number of ships delivered and the average price per ship increasing in the first half of the year, and operating income increasing.

in the first half of 2024, china shipbuilding delivered 48 civilian ships with a total deadweight tonnage of 4.0345 million tons, 10 more than the same period last year. the tonnage completed 59.87% of the annual plan, an increase of 3.2% year-on-year.

regarding the cost of new shipbuilding, china shipbuilding said in its semi-annual report that although the prices of ship supporting equipment have increased along with the ship price, and labor costs have also increased rigidly,the price of steel used in ships delivered in the first half of the year has dropped to a certain extent year-on-year, which resulted in an increase in operating income slightly higher than the increase in operating costs.

china shipbuilding specifically pointed out in the report thatfirst halfwaigaoqiao shipbuildingandcssc diesel engineprofits increased significantly year-on-yearin the first half of the year, due to the increase in ship deliveries and rising ship prices, waigaoqiao shipbuilding's net profit reached 670 million yuan, a year-on-year increase of 460 million yuan, reversing the huge losses caused by the construction of large cruise ships;

at the same time, due to the current shortage of ship engines, cssc diesel engine sales increased significantly in the first half of the year, and order prices also increased. net profit during the period reached 540 million yuan, an increase of 360 million yuan year-on-year.

the semi-annual report of china heavy industry, another giant in the merger, showed that its operating income in the first half of the year was 22.102 billion yuan, a year-on-year increase of 31.05%; its non-net profit was 444 million yuan, a year-on-year increase of 259.70%.

china heavy industry said that during the period, the company's marine transport equipment business revenue was 8.224 billion yuan, a year-on-year increase of 71%, and the gross profit margin was 7.46%, an increase of 6.39 percentage points year-on-year. the company said that in the first half of the year, by improving production organization and management, it continued to improve shipbuilding production efficiency, increased product deliveries, and correspondingly increased revenue; at the same time,strengthening cost control, gross profit margin increased year-on-year.

in the first half of the year, china heavy industry completed and delivered 26 civilian ships with a total gross tonnage of 843,000 tons, a year-on-year increase of 10.5% in gross tonnage. at the same time, the company received 68 civilian ship orders with a total value of 43.6 billion yuan, a year-on-year increase of 83.8% and 130.2% respectively.

one of the important factors for the change in profitability of the two giants is the increase in both price and volume in the industry under the influence of geopolitics, especially the shortage of shipping capacity caused by the red sea crisis and the demand for replacing old ships.

in the first half of this year, the new shipbuilding market ushered in a wave of orders. at the same time, according to data from shipping consulting firm clarksons, as of the end of june 2024, the new ship price index was 187.23 points, up 55% from 121 points when the market started in 2020, and just one step away from the historical high of 191.6 points.

as for the future trend of the shipbuilding industry, collet, senior vice president and general manager of greater china at the norwegian classification society (dnv), believes that shipowners are forced to comply with international shipping decarbonization rules. some ships are too old and not suitable for modification, and new ships need to be ordered as replacements. in recent years, shipowners have made profits in the booming market and also have investment needs.

"it is difficult to predict market trends, but based on the demand for green transformation, market fundamentals will remain strong for at least the next two to three years."

it is worth noting that collet is optimistic about the development prospects of china's shipbuilding industry.

he believes that china's shipbuilding prices are competitive, the quality has improved significantly in the past few years, and its design capabilities have improved significantly;compared with decades ago, china's shipbuilding industry has undergone revolutionary changesall large ships can be built in china, and have been developed into high-end ship types such as large container ships, liquefied natural gas carriers, car carriers and even large cruise ships.

fighting korea against the us

although china's market share is far ahead and the world's largest listed shipbuilding company is about to be born, it is not enough to rely on temporary cyclical factors if china's shipbuilding industry is to truly reverse the phenomenon of "big but not strong".the real vision should be to beat south korea in high-end games.

in 2006, south korea, which had been the world's largest order-receiving country for many years, was overtaken by chinese shipyards. however, the sino-south korean shipbuilding war did not end. in the years that followed, the global shipbuilding industry formed a pattern in which china had a market share and south korea controlled the high-end market.

compared with china, korean shipbuilders pay more attention to leveraging their technological advantages and shifting the focus of orders to high value-added ships.

especially in terms of lng carriers, this high-end ship, together with aircraft carriers and luxury cruise ships, is known as the "three pearls" in the crown of the global shipbuilding industry. against the background of global energy transformation, it has become a key sub-sector of the shipbuilding industry.

data from shipping consulting firm clarksons shows that from 2020 to 2023, new orders for lng carriers were 54, 82, 183 and 66 respectively. new orders from january to april 2024 have reached 47 ships, while the average of the previous 10 years was only 41 ships.

south korea has accumulated technological advantages in the construction of lng tankers. against the backdrop of the shipping industry's energy transformation, many international shipowners will give priority to korean shipyards when ordering alternative fuel ships.

as a result, korean shipbuilders have received a large number of orders for container ships and lng carriers in 2021-2022, with production scheduled until 2027. samsung heavy industries, hyundai heavy industries and the former daewoo shipbuilding have long taken over 70% of the world's orders.

control over the high-end market also gives korean shipbuilders the confidence to face china's "offensive".

faced with the fact that chinese shipbuilders are far ahead in market share, south korea's three major shipbuilders, hd hyundai heavy industries, hanwha marine and samsung heavy industries, have all stated that they will continue to adopt a selective order-taking strategy of "profit first, focusing on high-value-added ship types and high-quality orders" to improve profitability.

however, china is making efforts to catch up.

currently, amid the wave of lng carrier orders, jiangnan shipyard and dalian shipbuilding industry under china shipbuilding group, china merchants industry haimen shipyard under china merchants group, and private shipbuilding company yangzijiang shipbuilding have all begun to build large lng carriers.

clarksons data shows that chinese shipyards currently have orders for 89 large lng carriers, and their global market share is slowly rising to a quarter.

also,china state shipbuilding corporationit also received the largest single lng shipbuilding order this year.

on april 29, china state shipbuilding corporation signed a contract with qatar energy group for 18 271,000 cubic meter lng carriers. the estimated cost of each lng carrier in this order is about us$308 million, and the total amount of the 18 ships will exceed us$5.5 billion (about rmb 40 billion), setting a record for the amount of a single shipbuilding order in the world.

of course, if china really wants to challenge south korea in high-end games, there are still many problems to be solved.

a chief engineer of a central enterprise shipyard said that even without considering the difficulty and complexity of construction, china would not have more shipyards competing for large lng ship orders.

he said that before accepting an order, the shipyard needs to invest hundreds of millions of rmb to transform its hardware facilities; after obtaining the order, it will have to pay about 10 million us dollars in membrane tank patent fees for each large lng carrier. the patent is owned by the french company gtt.

obstacles other than industry competition come from the united states.

on april 17 this year, the united states trade representative (ustr) announced its decision to launch an investigation into china's actions, policies and practices in key maritime, logistics and shipbuilding sectors in accordance with section 301 of the u.s. trade act. this is the first time the biden administration has conducted a 301 investigation into a specific chinese industry since it took office in 2021.

the "301 investigation" is an action taken under section 301 of the u.s. trade act of 1974. in essence, section 301 authorizes the president of the united states to take "all appropriate actions" including retaliatory measures.

less than half a year after the united states sent out its suppression signal, the "chinese magic ship" is about to set sail, which is undoubtedly the strongest response from china's shipbuilding industry.

references:

caixin: "china's two largest listed shipbuilding companies will merge to account for 1/3 of the global market share"

caixin: "net profits of the three major shipbuilding companies of cssc surged in the first half of the year, and the cost of new ships is approaching the historical peak"

caixin: "csic wins qatar energy's 40 billion yuan lng carrier order, the world's largest single shipbuilding order"