GF SEC: The performance of marine engines lags behind that of ships in the long term, indicating greater potential market space and flexibility.

GF SEC released a research report stating that the engine is a core component that affects the overall cost of a ship, with orders and stock prices lagging behind the ship. Ship engines are the core equipment of ships, accounting for about 20% of the ship's total cost. Orders for engines lag behind those for ships, while delivery is ahead of ships, resulting in a certain time lag between orders, stock prices, and ships. Engines play a key role in controlling operating costs such as fuel consumption for ship owners and in the transition to low-carbon. It has been observed that the supply and demand relationship for low-speed engines continues to improve, but stock performance still lags behind. In the long term, a new round of technological and business model changes will bring greater potential market space and flexibility. GF SEC's main points are as follows: Demand: Economic prosperity and environmental protection drive total demand beyond historical peaks, opening up a new market space worth billions. Demand for marine engines is closely related to new ship orders, driven by economic conditions, aging replacements, and environmental upgrades. The mild recovery of downstream private shipyards is expected to drive continued expansion of engine demand. Unlike ships, environmental technology drives engine technology changes at a faster pace, resulting in greater value enhancement. The bank estimates that global annual demand for engines in 24-25 will be about 22.5 million horsepower, with an average market space of about 65 billion yuan per year from 25-30; it is expected to reach 150 billion in the future, with potential space doubling. In addition, the space for after-sales service for low-speed engines is vast, with high profit margins and excellent business models. The bank estimates that demand space for the years 24-30 will be about 100-120 billion yuan per year, potentially bringing new growth opportunities to leading companies. Supply: Weak recovery + strong structure - the situation of supply exceeding demand is certain, environmental transformation and large-scale trends accelerate towards concentration. The engine supply structure is concentrated. Since the upturn in the cycle, it has entered a situation of oversupply, with the pace and magnitude of supply recovery weaker than that of ships. The expansion of engine production is mainly limited by five conditions: (1) State-owned enterprises account for over 70% domestically, with shares mainly controlled by state-owned enterprises; (2) the dual-fuel transformation leads to effective capacity loss; (3) patent restrictions strictly limit new players from entering; (4) there are limits on supporting supply chain capacity; (5) the capital intensity of engine production is higher than that of ships. Chinese manufacturers have a global market share of about 40%, and their market share has significantly increased in recent years, further raising barriers to competition due to environmental transformation and large-scale trends, favoring the concentration of market share among leading companies. Profit: Positive certainty in both quantity and price, long-term upward shift in profit center. The unit price of China Shipbuilding's low-speed engines has risen by 67% since the bottom, surpassing the peak of the previous cycle. With lower labor and raw material costs, operating profit margins are in the middle to upper range compared to Japanese and Korean manufacturers. Engine structures and cost structures are more favorable, with profit margins expected to surpass those of ships in the medium to long term: on the one hand, the concentration of engines is higher than that of ships, with bargaining power firmly in the hands of leading manufacturers; on the other hand, the price increase for core components like crankshafts is relatively limited, and labor costs account for a lower proportion, resulting in less impact from rising labor costs. Investment advice: The stability and upward shift of the core demand for ship engines, coupled with value incrementing brought by environmental technological transformation, the continuous acceleration and optimization of the supply structure, currently marks a turning point in the cycle, technology, and post-market model transition. China Shipbuilding Industry Group Power, as a leading manufacturer of marine low-speed engines, is expected to benefit from production line technological improvements, technological advances, and post-market layouts, with the profit center continuing to expand. It is recommended to focus on China Shipbuilding Industry Group Power (600482.SH) for the ship engine segment, and on China CSSC (600150.SH), Cssc Offshore & Marine Engineering (00317,600685.SH) for the assembly segment. Also recommended are China Shipbuilding Industry (601989.SH), Guangdong Songfa Ceramics (603268.SH), and Xingmin Intelligent Transportation Systems (002355.SZ). Risk Warning: Risks include global macroeconomic downturn, cost and exchange rate fluctuations, and fuel price volatility.