10 Feb 2020 CMB International Securities | Equity Research | Sector Update China Construction Machinery Scenario analysis on the resumption of factory production OUTPERFORM (Maintain) Factories in China, except Hubei, are scheduled to resume operation today. We China Capital Goods evaluate the companies under our coverage from several dimensions, including location of factories, capacity utilization, downstream demand and cash flow Wayne Fung, CFA management. Our base case scenario suggests that the overall earnings impact (852) 3900 0826 for the full year should be limited, as the sales volume in 1Q (the traditional peak [email protected] season) will potentially be shifted to 2Q or 3Q (low seasons) when the construction activities pick up when the epidemic is under control. We believe potential share price volatility in the near term will serve as opportunities to accumulate quality names such as SANY Heavy (600031 CH, BUY, TP: RMB19.0), Jiangsu Hengli (601100 CH, BUY, TP: RMB54.0) and Weichai Power (2338 HK, BUY, TP: HK$17.9 / 000338 CH, BUY, TP: RMB15.9). Utilization rate to gradually increase. For the companies under our coverage, no production base is located in Hubei province (figure 1). Some companies such as Weichai, SANY Heavy and Zoomlion have already resumed production since last week while others will restart today. That said, we do expect most of them will only ramp up its production gradually due to the potential labour shortage in the near term. Companies are trying their best to ramp up production to fulfil the existing orders, based on our check. Related Reports Expect mild delay on downstream demand. Demand for construction 1. SANY International (631 HK, BUY) machinery are mainly driven by infrastructure, property and mining activities. – Significant increase in 2019E Delay of the construction activities will affect the demand for the construction earnings; Normal operation at present – 4 Feb 2020 machinery in the near term. For mining equipment, however, the impact is 2. China Heavy Duty Truck Sector – relatively smaller as major coal miner such as Shenhua (1088 HK, NR) has Potential change in market share already resumed operation, as the government has ordered for the security of due to Wuhan Pneumonia – 29 Jan 2020 energy supply. We therefore believe that SANYI (631 HK, BUY, TP: HK$5.6) 3. China Construction Machinery is relatively resilient. Sector - SANY & Hengli issued +ve profit alert; Expect SANYI the Prudent cash flow management. Most companies have maintained strong next – 21 Jan 2020 balance sheet with net cash position. What’s more, we understand that some 4. Zoomlion-A (000157 CH, BUY) – 2019E net profit to grow 113-123% companies have started asking their suppliers to extend the credit term in YoY; in line with expectation – 16 order to protect the cash flow. We see little risk for big companies to encounter Jan 2020 financial difficulties. 5. Zoomlion-H (1157 HK, BUY) – 2019E net profit to grow 113-123% Base case scenario - The epidemic to come under control by the end of YoY; in line with expectation – 16 Jan 2020 1Q. Under this assumption, we expect the procurement of construction 6. China Construction Machinery machinery will pick up in 2Q and the capacity utilization rate to return to normal Sector - Excavator sales growth level in 1-2 months. In particular, we expect infrastructure spending will serve accelerated to 26% in Dec; above expectation – 10 Jan 2020 as important measure to stabilize the economy going forward. Machinery 7. SANY International (631 HK, BUY) sales volume in 2Q will likely see strong YoY and QoQ growth, while the full – Raising earnings forecast & TP year sales will be little affected under this scenario. on new product development – 7 Jan 2020 Bear case scenario - The epidemic will only be contained until the end 8. SANY Heavy Industry – A (600031 CH, BUY) – To acquire financing of Jun. In such case, we project the construction machinery demand company from parent co. – 12 Dec (including earth moving, crane and concrete) will see no growth this year, and 2019 HDT sales will see 10% YoY decline (due to weak demand for logistic trucks). 9. China Construction Machinery Sector – Four structural drivers to We calculate that earnings downside for major players in 2020E will be extend the upcycle to 2020-21E – 7-21%, with largest impact on Sinotruk (3808 HK, BUY, TP: HK$19.4). 27 Nov 2019 PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 10 Feb 2020 Figure 1: Location of production base and numbers of employee Company Ticker Key production base* Number of Production Province No. of confirmed nCoV employee** resumption date case in the province*** Zoomlion 1157 HK / 000157 CH Changsha, Hunan 15,121 5th Feb Hunan 772 Changde, Hunan (Total) Yiyang, Hunan Wuhu, Anhui Anhui 665 Bozhou, Anhui Kaifeng, Henan Henan 914 Linhai, Zhejiang Zhejiang 1,006 Weinan, Shaanxi Shaanxi 184 Shanghai Shanghai 269 Siping, Jilin Jilin 65 Weichai 2338 HK / 000338 CH Weifang, Shandong 20,547 5th Feb Shandong 379 Xian, Shaanxi 23,103 Shaanxi 184 SANY Heavy 600031 CH Changsha, Hunan 17,383 5th Feb Hunan 772 Huzhou, Zhejiang (Total) Zhejiang 1,006 Kushan, Jiangsu Jiangsu 408 Beijing Beijing 297 SANYI 631 HK Zhuhai, Guangdong 2,749 10th Feb Guangdong 1,018 Changsha, Hunan (Total) 10th Feb Hunan 772 Shenyang, Liaoning 10th Feb Liaoning 94 Jiangsu Hengli 601100 CH Changzhou, Jiangsu 4,103 10th Feb Jiangsu 408 Zhejiang Dingli 603338 CH Deqing, Zhejiang 984 10th Feb Zhejiang 1,006 Sinotruk 3808 HK Jinan, Shandong 25,148 5th Feb Shandong 379 Hangzhou, Zhejiang (Total) Zhejiang 1,006 CIMC Vehicles 1839 HK Guangdong 14,990 10th Feb Guangdong 1,018 Shenzhen (Total) Henan Henan 914 Anhui Anhui 665 Jiangsu Jiangsu 408 Shandong Shandong 379 Shaanxi Shaanxi 184 Gansu Gansu 70 Liaoning Liaoning 94 Lonking 3339 HK Shanghai 8,424 10th Feb Shanghai 269 Tsugami China 1651 HK Pinghu, Zhejiang 1,572 10th Feb Zhejiang 1,006 Xingda International 1899 HK Xinghua, Jiangsu 6,800 10th Feb Jiangsu 408 Dongying, Shandong (Total) 10th Feb Shandong 379 Note *China only **2018 figures ***cumulative figures as of 6th Feb 700 or above 301-700 0-300 Source: NHC, Company data, CMBIS PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 10 Feb 2020 Figure 2: Scenario analysis on construction machinery Figure 3: Earnings change for selected companies and HDT demand under different scenarios Base Bear Diff Company 2020E net profit (RMB mn) Diff 2020E 2020E Base Bear Sales volume (unit) Sinotruk 5,073 3,997 -21.2% Earth moving machinery Excavator 265,722 241,566 -9% Jiangsu Hengli 1,572 1,334 -15.2% Wheel loader 123,563 111,207 -10% SANY Heavy 13,352 11,536 -13.6% Crane Zoomlion 5,346 4,689 -12.3% Truck crane 48,256 41,961 -13% Lonking 1,312 1,202 -8.4% Tower crane 27,464 21,126 -23% CIMC Vehicles 1,519 1,405 -7.5% Concrete machinery Weichai Power 10,519 9,803 -6.8% Concrete mixer truck 63,967 55,623 -13% Concrete pump truck 7,461 5,740 -23% Source: CMBIS estimates Heavy duty truck 1,186,000 1,056,591 -11% Base Bear Diff (ppt) 2020E 2020E Sales volume growth (YoY) Earth moving machinery Excavator 10% 0% (10.0) Wheel loader 0% -10% (10.0) Crane Truck crane 15% 0% (15.0) Tower crane 30% 0% (30.0) Concrete machinery Concrete mixer truck 15% 0% (15.0) Concrete pump truck 30% 0% (30.0) Heavy duty truck 1% -10% (11.0) Source: CCMA, CMBIS estimates Figure 4: Peers comp Ticker Company Rating Price TP Upside/ Market cap PE (x) PB (x) EV/EBITDA (x) Dividend yield (%) (local (local (downside) (US$ mn) FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E currency) currency) HK listed 631 HK Equity SANY INTERNATIONAL BUY 4.27 5.60 31% 1,695 13.1 10.3 1.7 1.5 7.8 6.2 2.3 2.9 3339 HK Equity LONKING HOLD 2.13 1.90 -11% 1,167 5.6 6.3 0.9 0.9 2.5 2.7 11.4 10.2 1157 HK Equity ZOOMLION HEAVY-H BUY 5.83 7.92 36% 6,535 8.9 7.6 1.0 1.0 6.7 6.0 6.7 7.9 2338 HK Equity WEICHAI POWER-H BUY 14.60 17.90 23% 14,983 10.6 10.0 2.3 2.1 5.2 4.9 5.2 5.5 3808 HK Equity SINOTRUK HK LTD BUY 14.40 19.40 35% 5,091 7.7 7.1 1.3 1.1 3.4 3.2 4.5 5.0 1839 HK Equity CIMC VEHICLES -H BUY 5.66 6.90 22% 1,279 5.9 6.0 0.9 0.8 4.1 3.9 5.0 5.0 564 HK Equity ZHENGZHOU COAL-H NR 3.87 - - 1,371 5.1 4.7 0.5 0.4 4.3 3.8 2.9 3.2 HK listed average 8.1 7.4 1.2 1.1 4.8 4.4 5.4 5.7 A share 000338 CH Equity WEICHAI POWER-A BUY 13.34 15.90 19% 15,313 11.0 10.4 2.4 2.2 5.4 5.1 5.0 5.3 601100 CH Equity JIANGSU HENGLI-A BUY 47.13 54.00 15% 6,034 32.7 26.4 7.5 6.2 25.4 21.0 1.0 1.2 603338 CH Equity ZHEJIANG DINGLI -A BUY 66.44 72.00 8% 3,344 38.4 27.8 7.4 6.0 32.6 22.9 0.5 0.6 600031 CH Equity SANY HEAVY-A BUY 15.79 19.00 20% 19,312 11.7 10.0 3.0 2.5 8.8 7.6 3.4 5.0 000157 CH Equity ZOOMLION HEAVY-A BUY 5.97 7.55 26% 6,679 10.3 8.8 1.2 1.1 7.8 7.0 5.8 6.8 000425 CH Equity XCMG-A NR 4.75 - - 5,401 9.8 8.1 1.2 1.1 9.0 7.7 2.3 2.8 000528 CH Equity GUANGXI LIUGONG-A NR 6.29 - - 1,348 8.8 7.8 0.9 0.8 9.4 8.6 4.2 4.5 603638 CH Equity YANTAI EDDIE P NR 27.52 - - 1,650 32.9 24.1 8.0 6.3 23.7 17.6 1.1 1.5 600761 CH Equity ANHUI HELI CO-A NR 9.23 - - 992 10.9 9.6 1.4 1.3 4.7 4.3 4.0 4.3 603298 CH Equity HANGCHA GROUP-A NR 12.43 - - 1,117 12.2 10.5 1.8 1.6 6.4 5.4 3.1 3.9 000951 CH Equity CNHTC JINAN T-A NR 17.50 - - 1,705 10.0 8.8 1.7 1.5 7.8 7.2 3.3 3.8 601717 CH Equity ZHENGZHOU COAL-A NR 5.91 - - 1,401 8.8 8.1 0.9 0.8 7.5 6.6 1.7 1.8 600582 CH Equity TIAN DI -A NR 2.85 - - 1,712 n/a n/a n/a n/a n/a n/a n/a n/a A-share average 12.8 10.6 2.2 1.9 9.4 8.0 3.2 3.8 Overseas CAT US Equity CATERPILLAR INC NR