Songfa's second-quarter results were in line with expectations, with product-mix improvement lifting gross margin while financing costs offset part of the gains

Overview

The report assesses the second-quarter 2026 results, margin improvement, order backlog, in-house marine engine supply, and future capacity expansion potential of Hengli Heavy Industries, the core asset of Songfa. Goldman Sachs believes the results were broadly in line with expectations. Better-than-expected gross margin from product-mix improvement was offset by higher financing costs and foreign-exchange losses, but the medium-term earnings upside thesis remains unchanged. It therefore maintains its Buy rating and RMB200 target price.

Core views

Hengli Heavy Industries reported net profit of RMB2.515 billion for the second quarter of 2026, up 130% quarter over quarter. Net margin was 17.2%, rising 4.9 percentage points quarter over quarter and 6.6 percentage points year over year. Revenue was RMB14.616 billion, up 64% quarter over quarter and broadly in line with Goldman Sachs' expectations. Gross margin rose to a quarterly record high of 25.0%, increasing by 3.5 and 2.9 percentage points quarter over quarter and year over year, respectively, and exceeding Goldman Sachs' forecast of approximately 24%. The margin improvement was primarily attributable to high-margin container ship and tanker orders entering the block-construction stage, as well as improved operating efficiency as production experience accumulated. The profitability of different vessel types explains the impact of the improved product mix. Management stated that container ship gross margin was approximately 30%; following increases in VLCC newbuild prices, tanker gross margin could reach 30%; while gross margin on existing bulk carrier orders was approximately 15% to 20%. However, expansionary capital expenditures weakened the pass-through of the gross-margin outperformance to net profit. Debt associated with approximately RMB10 billion of capital expenditures pushed up financing costs, which increased by RMB58 million quarter over quarter in the second quarter. The RMB appreciated by 1.7% quarter over quarter, compressing margin by approximately 1 percentage point and generating foreign-exchange losses of RMB119 million. As a result, net profit and net margin ultimately only broadly matched Goldman Sachs' forecasts. Goldman Sachs expects margins to continue rising. As higher-margin container ships and tankers make a greater contribution to the delivery mix, operating cash accumulation reduces financing costs, and more marine engines shift to in-house supply, gross margin and net margin are expected to reach approximately 29% and 22%, respectively, in 2028. The model forecasts net profit margins of 17.4% in 2026, 19.9% in 2027, and 22.5% in 2028, corresponding to adjusted earnings per share of RMB9.60, RMB14.18, and RMB16.65. The marine engine business is another key driver of better pricing, margins, and supply security. Hengli has obtained a license from Everllence, formerly MAN Energy Solutions, and currently has annual capacity of 180 units, with management guiding for expansion to 300 units per year. In April 2026, the company delivered China's first domestically produced 8G95 LNG dual-fuel engine, valued at RMB140 million per unit, boosting the average selling price and margin of its engines. The company is currently building more than 100 two-stroke marine engines. Management expects nearly all 82 vessels scheduled for delivery in 2026 to use self-produced engines, while the more than 100 vessels expected to be delivered in 2027 will also be supported largely by self-produced engines. Order momentum continues to strengthen the visibility of revenue and capacity utilization. Hengli secured orders for 207 vessels in the first half of 2026, including 94 tankers, 56 container ships, 49 bulk carriers, and 8 very large ammonia carriers, totaling approximately 6.6 million compensated gross tons and, according to Goldman Sachs' estimate, worth approximately US$17 billion. In July 2026, the company set a monthly record by securing 46 vessels with a total value exceeding RMB30 billion, equivalent to approximately US$4.4 billion. These included 33 container ships, 2 very large ammonia carriers of 88,000 cubic meters, 2 bulk carriers, and several tankers. From August through the report date, it secured additional orders for 4 VLCCs and 2 product tankers. The company's order backlog is approximately 15 million compensated gross tons, valued by Goldman Sachs at approximately US$39 billion to US$40 billion. The investment thesis also notes that, driven by the tanker supercycle and aging fleets, the order book has expanded by approximately 50% to approximately US$39 billion. Cash flow also improved alongside construction progress and collections. Net cash flow from operating activities was RMB4.5 billion in the second quarter, compared with approximately RMB4.0 billion in the first quarter. Goldman Sachs believes future cash accumulation will help reduce financing costs and, together with the rising proportion of high-value orders, drive net-margin improvement. Capacity expansion forms the foundation for medium-term growth. Goldman Sachs expects Hengli's capacity to grow at a compound annual rate of 29% from 2025 to 2027 following completion of the Phase III shipyard, significantly above approximately 3% for global peers. Its share of global capacity is expected to rise from 5% in 2025 to 7% in 2026, one year earlier than the previous forecast of 2027. Its order-book coverage is expected to decline to 2.7 years, below the global and Chinese shipyard averages of 3.6 years and 4.0 years, respectively, facilitating continued new-order intake. Goldman Sachs expects Hengli could become the world's second-largest shipbuilder by 2027. The Phase IV expansion has not yet been finalized, but Goldman Sachs views it as an additional source of earnings upside. If the Phase IV project proceeds, the additional capacity could be equivalent to as much as 100% of the existing combined capacity of the first three phases, while strong new-vessel demand is expected to absorb the expansion. Information cited in the report indicates that construction of the Phase IV docks began in August 2026, while management continues to guide for a gradual start of operations in 2027. Other reports suggest that the company plans to recruit approximately 100,000 additional employees, while management states that it currently has approximately 80,000 employees. Goldman Sachs believes these signals imply that potential capacity could double and that order-book coverage could fall further to below two years, supporting continued order intake. Following the earnings release, Goldman Sachs revised its adjusted earnings-per-share forecasts for 2026 to 2028 by 1%, -4%, and 0%, respectively, incorporating stronger gross-margin improvement, completion of the RMB7 billion private placement, and the issuance of 47.9 million new shares. The 2026 earnings-per-share forecast was raised from RMB9.51 to RMB9.60, the 2027 forecast was lowered from RMB14.80 to RMB14.18, and the 2028 forecast was marginally reduced from RMB16.67 to RMB16.65. Goldman Sachs maintains its RMB200 target price and continues to apply a 12-times price-to-earnings multiple to peak 2028 earnings. This multiple is based on the average valuation of Chinese and Korean shipyards. The report states that the stock trades at approximately 11 times forecast 2028 earnings, below the peer average of 12 times.

Analysis framework

Goldman Sachs first compared second-quarter revenue, net profit, and margins with its own forecasts and the previous earnings preview. It then decomposed the change in gross margin into vessel mix, construction stage, and operating-efficiency factors, while quantifying the offsetting effects of financing costs and RMB appreciation. The report subsequently assessed the future margin and earnings trajectory by combining gross margins across vessel types, the proportion of engines supplied in-house, order volumes and values, order-book coverage, and operating cash flow. Finally, it incorporated changes in share capital resulting from the private placement, updated its earnings-per-share forecasts, and determined the target price using the average expected 2028 price-to-earnings multiple of Chinese and Korean shipyards.

Methodology notes

• Valuation MethodologyP/E and PEG Valuation

  Target-price valuation based on the peer-average price-to-earnings multiple

  Goldman Sachs uses peak 2028 earnings per share as the earnings basis and applies a 12-times price-to-earnings multiple, in line with the average for Chinese and Korean shipyards, to derive a 12-month target price of RMB200.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Analysis of shipbuilding capacity, order demand, and order-book coverage

  The report compares Hengli's capacity growth, share of global capacity, and order-book coverage, and assesses whether market demand can absorb the expanded capacity by considering the tanker cycle, fleet aging, and new orders.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of revenue and gross margin by vessel type and delivery mix

  The report uses the different gross margins of container ships, tankers, and bulk carriers, together with changes in the delivery share of high-value vessel types, to explain the quarterly gross-margin outperformance and the path toward higher future margins.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Guangdong Songfa Ceramics Co (603268.SS)

  Improvements in the orders, capacity, and margins of Hengli Heavy Industries, the listed company's core asset, form the report's principal earnings and valuation thesis.

  Strengths

  A rising share of high-value vessel types, a substantial order backlog, rapid capacity expansion, stronger in-house engine supply capabilities, and improving operating cash flow.

  Weaknesses

  Expansionary capital expenditures generate higher financing costs, while earnings are also sensitive to the RMB exchange rate, steel prices, and vessel selling prices.

  Comparison

  The stock trades at approximately 11 times forecast 2028 earnings, below the approximately 12-times average for Chinese and Korean shipyards. Hengli's capacity is expected to grow at a compound annual rate of 29% from 2025 to 2027, above approximately 3% for global peers.

  Risks

  Delays in deliveries or capacity ramp-up, higher-than-expected steel prices, lower-than-expected order intake or average selling prices, RMB appreciation, and faster capacity expansion by other shipyards.

• Hengli Heavy Industries

  The report regards it as Songfa's core asset and the direct subject of its analysis of orders, deliveries, in-house engine supply, and capacity expansion.

  Strengths

  It secured orders for 207 vessels in the first half of 2026, has an order backlog of approximately 15 million compensated gross tons, and possesses capabilities in high-margin vessel types and self-produced marine engines.

  Weaknesses

  Large-scale capital expenditures have increased financing costs, while the final approval and commissioning schedule of the Phase IV project remain uncertain.

  Comparison

  Its share of global shipbuilding capacity is expected to reach 7% in 2026, while its order-book coverage of 2.7 years is below the global and Chinese averages of 3.6 years and 4.0 years.

  Risks

  New capacity, vessel deliveries, order intake, steel costs, vessel prices, and exchange-rate movements could affect earnings realization.

Key data

• Second-quarter 2026 revenueRMB14.616 billionUp 64% quarter over quarter and broadly in line with Goldman Sachs' expectations
• Reported net profit for the second quarter of 2026RMB2.515 billionUp 130% quarter over quarter
• Second-quarter 2026 gross margin25.0%Up 3.5 percentage points quarter over quarter and 2.9 percentage points year over year, above Goldman Sachs' forecast of approximately 24%
• Second-quarter 2026 net margin17.2%Up 4.9 percentage points quarter over quarter and 6.6 percentage points year over year
• Change in financing costsIncreased by RMB58 million quarter over quarterDriven by higher debt associated with expansionary capital expenditures
• RMB appreciation and foreign-exchange impactAppreciated 1.7% quarter over quarter; foreign-exchange loss of RMB119 millionAlso caused margin compression of approximately 1 percentage point
• Second-quarter net cash flow from operating activitiesRMB4.5 billionApproximately RMB4.0 billion in the first quarter
• New orders in the first half of 2026207 vessels, approximately 6.6 million compensated gross tons and approximately US$17 billionIncluding 94 tankers, 56 container ships, 49 bulk carriers, and 8 very large ammonia carriers
• New orders in July 202646 vessels, exceeding RMB30 billionEquivalent to approximately US$4.4 billion, setting a monthly record
• Order backlogApproximately 15 million compensated gross tons and approximately US$39 billion to US$40 billionGoldman Sachs believes the order mix continues to improve toward high-value vessel types
• Marine engine capacityCurrent capacity of 180 units per year, planned to expand to 300 units per yearMore than 100 two-stroke marine engines are currently under construction
• 2026 to 2028 earnings-per-share forecastsRMB9.60, RMB14.18, and RMB16.65Revised by 1%, -4%, and 0%, respectively
• Expected 2028 marginsGross margin of approximately 29% and net margin of approximately 22%Driven by high-value vessel types, in-house engine supply, and lower financing costs
• Share of global capacity5% in 2025 and an expected 7% in 2026The timing for reaching 7% was brought forward to 2026 from the previous forecast of 2027
• Valuation11 times expected 2028 earningsBelow the peer average of 12 times; the target price applies 12 times

Impact & implications

Goldman Sachs believes that the lack of a significant net-profit beat in the second quarter does not alter the upward earnings trend, because financing and foreign-exchange pressures obscured gross-margin improvement driven by product mix and production efficiency. A rising share of high-value orders, in-house marine engine supply, cash accumulation, and capacity additions from Phase III and potentially Phase IV are expected to continue increasing delivery volumes and margins. The strong order backlog provides support for utilization of the expanded capacity.

Risks

• Vessel deliveries or the ramp-up of additional capacity may be delayed.
• Steel prices may be higher than expected.
• New-order intake may be lower than expected.
• Average vessel selling prices may be lower than expected.
• RMB appreciation against the US dollar may exceed expectations.
• Other shipyards may expand capacity faster than expected.

What to watch

• Monitor whether the company's upward earnings trend continues as expected.
• Monitor the volume, value, and vessel-type mix of subsequent new orders.
• Monitor whether the Phase IV expansion project is ultimately implemented and begins a gradual ramp-up in 2027.