CMSC: Continue to be optimistic about the volume increase of mainstream ship types, maintain a "recommended" rating for the shipbuilding industry.

CMSC released a research report stating that the stock performance of the shipbuilding sector in the first half of 2025 is under pressure, and the proportion of fund holdings has significantly decreased year-on-year. The core reason for the weak stock performance is the sluggish volume and price in the ship market in the first half of the year. However, the performance of shipbuilding stocks is satisfactory, as pre-orders are gradually translating into profits. Profit growth far exceeds revenue growth. Looking ahead, the bank believes that mainstream ship types such as bulk carriers and oil tankers have a relatively low order capacity, which still needs to be filled, continuing to drive the upward trend of the shipbuilding cycle. The bank continues to maintain a "buy" rating on the shipbuilding industry. CMSC's main points are as follows: In the first half of the year, the stock performance of the shipbuilding sector is under pressure, with most companies failing to outperform the Shanghai and Shenzhen 300 Index. The fund holdings of typical China Shipbuilding Corporation (CSSC) companies in the second quarter of 2025 have decreased year-on-year, but have increased compared to the first quarter. In 2025, the stock prices of the shipbuilding sector are generally under pressure due to the continued decline in new ship orders and the impact of the U.S. section 301 tariffs on the Chinese shipbuilding industry. In the first half of 2025, only CSSC Offshore & Marine Engineering (A) outperformed the Shanghai and Shenzhen 300 Index, thanks to its relatively strong performance on the Hong Kong Stock Exchange. Looking at fund holdings, taking China CSSC as an example, the fund holdings in the first and second quarters of 2025 decreased by 3.8 and 4.9 percentage points year-on-year, respectively. However, the fund holdings in the second quarter of 2025 showed a significant increase compared to the first quarter, indicating that institutions are increasing their positions in CSSC and its affiliated companies. The performance of shipbuilding stocks in the first half of the year is satisfactory, with most companies seeing higher profits than revenues. The core reason for the significant profit growth is the gradual delivery of high-priced orders from around 2022, and the cost of steel materials during this period has fallen significantly compared to 2021, contributing to a profit margin expansion. In addition, looking at the performance of CSSC's key subsidiary companies such as Shanghai Waigaoqiao Free Trade Zone Group and CSSC Chengxi, representative private shipyards have achieved continuous growth in net profit margins and ROE in multiple reporting periods. Fundamentally, the shipbuilding market in the first half of the year was weak, with new orders and shipbuilding prices under significant downward pressure. Firstly, the downstream shipping market experienced significant declines in freight rates, with average prices for major ship types falling by over 20% year-on-year, with LNG and car carriers experiencing the largest declines, while oil tankers saw a slight increase. Secondly, new ship orders globally have shown a significant year-on-year decline in all months so far this year. In May 2025, global new ship orders fell to 1.67 million CGT, the lowest level in a single month in nearly four years. The Clarkson Global Shipbuilding Price Index fell from its peak of 189.96 in September 2024 to 186.69 in May 2025. The decline in the domestic shipbuilding market is mainly attributed to the impact of the U.S. section 301 tariffs, the over-extension of some orders from 2024, and the relatively low willingness of domestic top-tier shipyards to accept new orders. In the long term, the shipbuilding industry is currently experiencing a short-term downturn, but the order capacity of bulk carriers and oil tankers is relatively low, and the average age of ships continues to increase. The subsequent ship market cycle is expected to benefit from increased orders for mainstream ship types. In June 2025, the order capacity ratios for bulk carriers and oil tankers were only 10.4% and 15%, respectively, far below the level of container ships at 39.4%, and historically at the bottom range. The external manifestation of the shipbuilding cycle is the rotation of ship types, with a significant recovery in orders for bulk carriers and oil tankers still not apparent, indicating that this cycle is far from reaching its peak. BIMCO estimates that the potential number of shipbreaking in the next ten years will reach 16,000 ships, totaling 7 billion dead weight tons (DWT), double the number of shipbreaking in the past decade and nearly three times the total dead weight tons. The bank continues to recommend the shipbuilding sector. Although short-term orders are under pressure, the order capacity ratios for mainstream ship types, especially bulk carriers and large oil tankers, are still relatively low, and a possible decrease in the dollar interest rate is expected to catalyze the supply-demand conflict in an aging fleet. Therefore, the bank continues to strongly recommend China CSSC, China Shipbuilding Industry Group Power (military industry), and suggests paying attention to CSSC Offshore & Marine Engineering, China International Marine Containers (A), Asian Star Anchor Chain, Jiangsu Rainbow Heavy Industries, and other shipbuilding companies and ship equipment manufacturers. Risk factors: 1. Shipbuilding upgrades are not as expected; 2. US Federal Reserve interest rate cuts are not as expected; 3. Continuous increase in raw material or equipment costs; 4. Global shipping carbon emissions reduction progress is not as expected.