Soochow: The strong market of new shipbuilding is expected to continue in 2024, with Chinese shipyards establishing a turning point in profitability.

Soochow released a research report stating that the global new shipbuilding market orders and ship prices will remain high in 2024, and the industry's prosperity is expected to continue beyond 2030. Chinese shipyards are the biggest beneficiaries in this cycle, with a 59% year-on-year increase in new orders in 2024, achieving a global market share of 74%. Combined with the rigidity of production capacity and the demand for low-carbon transformation, the turning point in profitability has already emerged. It is recommended to focus on the main line of domestic substitution of ship total assembly, power systems, and core components, and recommended targets include China CSSC (600150.SH), China Shipbuilding Industry Group Power (600482.SH), Neway Valve (603699.SH), etc. Soochow's main points are as follows: Orders and ship prices will remain high in 2024, and the new shipbuilding market will continue to be prosperous (1) Contracts: In 2024, shipyards signed new orders for a total of 170 million deadweight tons and 658.1 million gross tons, representing a year-on-year increase of 31% and 34% respectively. The total value of new orders amounted to $203.8 billion, a 55% increase year-on-year. Apart from bulk carriers, most ship types performed well, with container ships showing the fastest growth and a significant increase in market share. (2) Ship prices: The new ship price index at the end of 2024 was 189, a 6% increase from the beginning of the year. During the same period, the price indices for various ship types all increased, with container ships up by 13%, tankers up by 7%, bulk carriers up by 6%, and gas carriers up by 5%. With rigid supply, shipyards have weak willingness to offer discounts for new orders. (3) Backlog and deliveries: By the end of 2024, global shipyards had a total backlog of 365 million deadweight tons/157 million gross tons, representing an increase of 30%/19% from the beginning of the year. During the same period, total deliveries by global shipyards amounted to 88.87 million deadweight tons/41 million gross tons, a year-on-year increase of 1%/15%. The global shipyard backlog coverage ratio was 3.8 years, at a historical high, with the proportion of backlog capacity at 12%, at a historical low level. Supply-demand gap difficult to resolve, shipbuilding industry prosperity expected to continue beyond 2030 The bank believes that the supply-demand gap in the shipbuilding industry is difficult to resolve in the short to medium term, and the prosperity of the shipbuilding industry is expected to continue: (1) Supply side: Shipyards outside of China have difficulty expanding their capacity, with global shipyard capacity and active ship numbers in 2024 at 0.5 billion CGT and 402 respectively, down 26% and 60% from the peak in 2011, while global fleet size increased by 58% during the same period. Current shipbuilding capacity is gradually recovering, but compared to the previous cycle, the supply side still shows significant rigidity. Clarkson predicts that global ship deliveries in 2025-2026 will be 44.33/44.72 million CGT (10/11 billion deadweight tons) respectively, with limited growth rates. Ship deliveries in 2026 in China, Japan, and South Korea are 1.1/0.6/0.7 times the peak in 2010, and regions outside of China are unlikely to restart and expand capacity on a large scale. (2) Demand side: The average age of the global fleet continues to increase, leading to a continuous demand for fleet renewal over the next 10 years. As of the end of the third quarter of 2024, ships over 15 years old accounted for about 33% in terms of total tons, those over 20 years old accounted for about 16%, and those over 25 years old accounted for about 8%. Approximately 33% of existing vessels will need to be replaced over the next 10 years. At the same time, the transition to new energy sources is a long-term trend in the shipbuilding industry, with the ratio of alternative energy ships in deliveries/new orders increasing year by year, reaching 36%/49% in 2024. With stricter environmental policies, shipowners with slow decarbonization processes may face increased shipping costs, regulatory fines, and reduced competitiveness. The bank judges that the low-carbon transformation of ships will accelerate the pace of replacement. Taking into account forecasts for future maritime trade volume, fleet growth rates, and existing fleet age structure by Clarkson and Trafigura, as well as the conservative estimate of global annual ship delivery demand from 2025 to 2030 of about 1.1 billion deadweight tons, over 50% of which will be for the replacement of old ships. Chinese shipyards have benefited the most in this cycle and have reached a turning point in profitability Chinese shipyards have benefited the most in this upward cycle: According to data from the Ministry of Industry and Information Technology, China's shipbuilding completion volume reached 48 million deadweight tons in 2024, a year-on-year increase of 14%; new orders reached 110 million deadweight tons, a year-on-year increase of 59%. By the end of December, the backlog reached 210 million deadweight tons, an increase of 50% year-on-year. In 2024, China's shipbuilding completion volume, new order volume, and backlog volume accounted for 56%, 74%, and 63% of the global total deadweight tons, respectively. Risk warnings: risks of fluctuating material prices, exchange rate fluctuations, intensifying industry competition, etc.