Today, I will talk about several poor expectations of the shipbuilding industry. The following are some common market doubts, and we will analyze them one by one.
1. The shipbuilding industry is a tough industry, it exists only to provide jobs, and the profits cannot be too high.
Many investors, including some investors who invest in container shipping, dry bulk, and oil transportation, hold an inherent thinking that the shipbuilding industry is a hard-pressed industry that exists only to provide jobs, and the profits cannot be too high. Some radical teachers may think that the shipbuilding industry is an insult to our maritime control compared with the tall container shipping industry! Indeed, in the past ten years, the shipbuilding industry has been in a state of meager profits, with huge losses in a few years, and even being ST once. But what I want to say is that this state of meager profits in the shipbuilding industry is unsustainable. I will address this question in several dimensions. First of all, the shipbuilding industry is not less valuable than other industries in the entire shipping industry chain, and even the value of the industry is higher. The barriers to entry in the shipbuilding industry are stronger than those in container shipping, dry bulk shipping, and tanker shipping. The biggest barrier for shipping companies or ship owners is capital. In such a strong cycle industry, the biggest difficulty is to judge the length and strength of the shipping cycle! Many people comment that those shipping companies are building ships at the high point of the shipping industry, thinking that they are irrational! Actually there is a reason for this. Few people and institutions can accurately judge the cyclical situation of the shipping industry (especially oil transportation) every time, including the well-recognized giant Maersk (in early 2021, it was not accurately predicted that the prosperity of the container shipping industry would be so high). If you don’t keep up with the boom times when a large number of ships are built, others will accumulate more capital when the boom period is high. When the boom period is low, you can survive a long period of downturn. It is possible that your company will bankrupt. As for the companies that dare to buck the trend, there are very few companies, because it is difficult to judge the length of the downturn in the shipping industry. However, the shipping industry has a relatively simple rule with a high winning rate, that is, a cycle of more than ten years. Therefore, the main barriers for shipping companies are capital and the ability to judge the cycle of the shipping industry (of course, the ability to manage fleets is also very important). In the shipbuilding industry, in addition to these barriers, there is another very important barrier that is R&D and personnel training. You can take a look at the research and development expenses of Chinese ships. In 2020 and 2021, it is more than 3 billion yuan, while the operating income is only 5-60 billion yuan, and the research and development expense rate is about 5%, reaching or even exceeding many so-called high-tech companies. Let’s take a look again, and the R&D expenses of Haikong, the shipping company with the largest market value in A-shares, in 2020 and 2021 are 220 million and 880 million, and the operating income is as high as 170 billion and 330 billion. Shipbuilding is a high-end manufacturing industry, and it is not a simple matter of welding some parts together, so the research and development costs are high. In addition, specialized personnel in the shipbuilding industry (especially high-caliber personnel) need to be cultivated for a long time and are very valuable. Secondly, the shipbuilding industry has undergone major supply-side reforms in the past ten years, and the market concentration has increased significantly. When the last round of the shipbuilding cycle was booming, there were about 900 shipyards above designated size, and there are only more than 300 at present. A large number of shipyards closed down or were annexed! At present, the shipyards of China, Japan and South Korea have basically achieved an oligopoly. For the specific data, you can still read the article I wrote before, “Dragon in the Deep – Chinese Ships”. In the past ten years, the container shipping industry has also continuously improved the competition pattern, and finally formed the pattern of three major alliances. Once the competitive landscape is substantially improved to form an oligopoly, it will be a matter of time before industry profits will improve. Finally, from the perspective of the industrial chain, it is impossible for all industries in the industrial chain to make money, and only the shipbuilding industry loses money. Analogy to the automobile industry and the aircraft industry, it is impossible for taxi companies to make big profits, airlines to make big profits, and Volkswagen and Boeing to lose money. From the perspective of high-end manufacturing, the valuation system of the shipbuilding industry is definitely higher than that of the shipping industry. If the market sentiment is more optimistic, I would not dare to think about it with reference to the valuation system of new energy vehicles, but there is such a possibility, although the possibility is very small. After all, after the implementation of the new IMO environmental protection regulations in 2023, the shipbuilding industry will be analogous to the carbon reduction movement of the new energy vehicle industry.
2. The profits of the shipbuilding industry will not be realized until after 2023, and the stock price cannot rise at this stage.
Those who hold this view believe that the stock price will only react when the profits of the own shipbuilding companies are released. Indeed, the price of steel has risen sharply in the past two years, and the cost of shipbuilding has risen rapidly. In addition, the low-priced orders received from the end of 2020 to the beginning of 2021 are currently in the manufacturing stage, and will gradually be reflected on the income statement, and the short-term income statement will not look good. But in fact, the share price of shipbuilding stocks has a greater relationship with the shipbuilding price and order volume, and the release of profits is already the high point of the share price. A very important catalyst for the rise in ship stock prices last year was the heavy volume of shipbuilding orders. Later, BDI fell rapidly, the expectation of heavy orders fell, and the stock price also fell. Therefore, looking at the short-term rise and fall of ship stock prices, I personally think that we should look at the order situation of the shipbuilding industry or the expected situation of orders. The share price of cyclical stocks generally reacts ahead of profit release. Generally, the rise of the stock price of cyclical stocks has a process of first pulling up the valuation and then lowering the valuation.
3. The surge in container shipping rates last year was caused by the epidemic blocking ports. This year’s surge in crude oil shipping rates was stimulated by the battle between Da Mao and Er Mao, and the boom cycle of the shipping industry has not yet arrived.
Those who hold this view believe that the boom cycle for the shipping industry is far from here. Because according to the last round of shipbuilding peaks from 2006 to 2009, the service life of ships is calculated at about 20 years (or even longer), and there will be at least 4 years before a large number of them will be eliminated, and then the shipping industry will usher in the outbreak. Here I am talking about three issues: First, the service life of ships does have great flexibility. Some ships can be used for more than 30 years. But the older the ship, the worse the economy will be. Especially in the current situation of high oil prices and environmental protection constraints, the rate of elimination of old ships will be faster. The second is to match the increase in the size of the fleet with the demand for transportation capacity. Although a large number of ships were built from 2006 to 2009, in the following ten years, shipbuilding orders continued to decline, and the growth of shipping capacity did not match the demand for shipping capacity. Even if these old ships are not eliminated, the current shipping industry is in a state of tight balance. Of course, the tight balance of different ship types is not the same. Because dry-distribution, consolidation, and oil tankers are all in different business cycles. After the tight balance of the shipping industry appears, once there is a slight change in the demand side or the supply side, the freight rate will skyrocket. Many people say that the surge in container freight rates last year was caused by the epidemic blocking the port, and the surge in crude oil freight rates this year was stimulated by the battle between Da Mao and Er Mao. So in the second half of this year or next year, I don’t know what will cause the skyrocketing freight rate.
4. The shipyards in the shipbuilding industry are full and cannot receive high-priced orders.
Those who hold this view worry about the continuity of orders in the shipbuilding industry. In fact, it is a good thing that the dock is full! Here I make three points. First, the dock is full, indicating that the shipping industry is booming, and positive feedback will be formed later. If the orders of the shipbuilding industry cannot be released in time and the supply side cannot be replenished in time, the prosperity cycle of the shipping industry will be prolonged. The prosperous cycle of the shipping industry has been extended, which will stimulate the continued volume of shipbuilding orders. Second, after the dock is full, the pricing power of the shipyard will increase, and the price increase will be more confident. Generally speaking, when the order is delivered after 2.5 years, the shipyard will have some pricing power. Because at this time, these orders can feed these workers. As the delivery time of orders is getting longer and longer, shipyards can choose high-priced ships or high-value-added ships to build, so that the shipbuilding price will rise. Third, there is no need to worry about the continuity of orders. Some people worry that many people in the shipping industry will be unwilling to place orders because of the long-term downturn after the last boom cycle. Rest assured, they will place the order. The prosperity of the shipping industry is just like the bull market in the stock market. Once the bull market begins, optimism will spread, and they will find various reasons to convince themselves (such as environmental protection constraints). This is human nature. The container shipping industry was booming last year, and shipbuilding orders hit a record high!
Without wind, the things I talked about today are all code words, there is no data and charts, everyone will take a look. $China Shipping(SH600150)$ $COSCO SHIPPING Holdings(SH601919)$ $China Merchants Shipping(SH601872)$
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