27 Jun 2019

CMB International Securities | Equity Research | Company Update

Zhejiang Dingli - A (603338 CH) BUY (Initiation) A structural growth story in a cyclical sector Target Price RMB75.00 Up/Downside +32% We believe aerial working platform (AWP) is entering a structural growth Current Price RMB56.95 trajectory as the rising labor cost in China will make AWPs incrementally cost competitive compared with the traditional scaffolding. With AWP fleet size of only 13% of that in the US, we see explosive growth potential in China over the coming China Capital Goods years. We believe Zhejiang Dingli, a Chinese based pure AWP manufacturer, is set to become the major beneficiary given its global presence, first mover Wayne Fung, CFA (852) 3900 0826 advantage, cost competitiveness, brand recognition and strong management [email protected] execution. We forecast Dingli to deliver an impressive earnings CAGR of 34% in 2019E-21E, with further upside coming from potential capacity additions. Initiate with BUY and TP of RMB75. Stock Data Mkt Cap (HK$ mn) 19,749  Explosive growth potential in China driven by structural factors. Avg 3 mths t/o (HK$ mn) 110 According to International Powered Access Federation (IPAF), the fleet size 52w High/Low (HK$) 61.04/30.73 of AWP in China grew 29% YoY to 78k units in 2018, representing only ~5% Total Issued Shares (mn) 346.8 Source: Bloomberg of the world’s total. Rising labor cost, time cost and more awareness of safety issue make AWP more attractive to scaffolding in China. Our case analysis Shareholding Structure suggests that the cost savings by applying AWP can reach 19% at present. XU Shugen 47.5% Assuming another 40% increase in labor cost in five years (similar to the Deqing Zhongding Equity 13.4% Investment Management increment in 2013-2018), the cost savings will widen to 26%, making AWP CCASS (Hong Kong) 3.6% even more attractive to users. XU Zhilong 3.1% Free float 32.7%  Established global network; Well-designed capacity expansion plan. Source: Shanghai Stock Exchange Unlike other types of construction machinery makers in China, Dingli has established its footprints in the developed markets such as Europe and the Share Performance Absolute Relative US. This put Dingli at a favorable position to capture the growth opportunity in 1-mth +25.6% +18.8% China. Dingli raised its designed capacity from 5k units in 2014 to 26k units in 3-mth -1.6% -3.1% 2018. A new production line for 3.2k units of boom lift will commence operation 6-mth +37.5% +9.2% Source: Bloomberg in mid-2020. It is worth noting that the ASP of boom lift is 6x of that of the scissor lift (the major product of Dingli at present). 12-mth Price Performance

(RMB) 603338 CH  Valuation premium justified on secular growth outlook. Our TP of RMB75 66.0 SHSZ300 (rebased) is based on 30x 2020E P/E. Our target multiple is based on the peak valuation 56.0 level since 2016. Our target valuation is well-supported by our estimated 46.0 earnings CAGR of 34% in 2019E-21E. Unlike other types of construction 36.0 machinery names that are more cyclical in nature, Dingli is offering a structural 26.0 growth potential and we believe it is justified for a growth stock valuation. 16.0 6.0 6/2018 9/2018 12/2018 3/2019 6/2019

Earnings Summary Source: Bloomberg (YE 31 Dec) FY17A FY18A FY19E FY20E FY21E Revenue (RMB mn) 1,139 1,708 2,278 3,148 4,171 Auditor: BDO YoY growth (%) 64.0 49.9 33.4 38.2 32.5 Net income (RMB mn) 283 480 633 869 1,147 Please cast your valuable vote EPS (RMB) 0.85 1.38 1.83 2.51 3.31 for CMBI research team in the YoY growth (%) 10.8 62.7 31.8 37.3 32.0 2019 Asiamoney Brokers Poll: EV/EBITDA (x) 52.0 37.4 25.6 18.2 14.1 https://euromoney.com/brokers P/E (x) 66.9 41.1 31.2 22.7 17.2 P/B (x) 9.0 7.6 6.3 5.1 4.0 Yield (%) 0.4 0.4 0.6 0.8 1.0 ROE (%) 17.2 20.0 22.0 24.6 26.1 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, CMBIS estimates

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Contents

Focus Charts ...... 3 AWP has been widely applied in the US and Europe ...... 4 What is AWP? ...... 4 Major markets in the world ...... 4 China AWP is at the early stage of development ...... 7 Low penatration rate in China ...... 7 AWP is getting more efficient and cost effective due to rising labor cost in China ...... 7 Quantifying the cost savings ...... 9 Competitive landscape ...... 10 Major players ...... 10 Investment positives ...... 12 Dingli has already established its global presence ...... 12 Strong growth driven by strategic transformation years ago ...... 12 Well-designed capacity expansion plan and efficiency enhancement ...... 12 Further product mix enhancement with more sales of boom lift ...... 14 Clear position and pricing strategy ...... 15 Earnings projection ...... 15 We forecast revenue CAGR of 35% in 2019E-21E ...... 15 Gross margin to sustain in the foreseeable future ...... 15 We forecast 34% net profit CAGR in 2019E-21E ...... 16 Solid balance sheet for upcoming capex ...... 16 Financial Summary ...... 17 Valuation premium well-supported by strong earnings outlook...... 18 Historical valuation range ...... 18 Initate with BUY with TP of RMB75 ...... 18 Major risk factors ...... 20 More new players entering the AWP industry in China ...... 20 Weaker-than-expected construction activities in China ...... 20 Uncertainties on the US economy and trade dispute ...... 20 Increase in component cost ...... 20 Exchange rate risk ...... 20 Appendix: Dingli’s key products ...... 21

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Focus Charts

Figure 1: AWP fleet size comparison Figure 2: AWP rental revenue comparison

Units US$ bn 700,000 14

600,000 12

500,000 10

400,000 8

300,000 6 200,000 4 100,000 2 0 2017 2018 2019E 0 2016 2017 2018 2019E 2020E Europe (10 major countries) USA China Europe (10 major countries) USA China

Source: IPAF, CMBIS estimates Source: IPAF, CMBIS estimates

Figure 3: Major AWP players revenue comparison Figure 4: Major AWP players net profit comparison

US$ mn US$ mn 9,000 60% 500 80%

8,000 450 70% 50% 7,000 400 60% 40% 350 50% 6,000 300 40% 5,000 30% 250 30% 4,000 20% 200 20% 3,000 10% 150 10% 2,000 100 0% 0% 1,000 50 -10% 0 -10% 0 -20% Terex Oshkosh Linamar Haulotte Aichi Zhejiang Terex Oshkosh Linamar Haulotte Aichi Zhejiang Corporation Corporation Corporation Group Corporation Dingli Corporation Corporation Corporation Group Corporation Dingli 2017 2018 Growth (2018) - RHS 2017 2018 Growth (YoY) - RHS

Source: Company data, CMBIS Source: Company data, CMBIS

Figure 5: Dingli’s revenue and growth Figure 6: Dingli’s net profit and growth

(RMB mn) Other RMB mn 1,400 80% 4,500 64% 70% business 70% 4,000 62% 70% 60% Forklifts 1,200 50% 3,500 60% 45% 50% 1,000 50% 3,000 38% 50% Vertical lifts 800 39% 2,500 33% 32% 40% 37% 37% 28% 32% 32% 40% 2,000 30% 600 Scissor lifts 30% 1,500 18% 400 20% 20% 1,000 10% 10% 10% Boom lifts 200 500 10% 0 0% 0 0% Growth 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E (YoY) - RHS Net profit Growth (YoY) - RHS

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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AWP has been widely applied in the US and Europe What is AWP? Aerial work platform (AWP), or Mobile elevating work platform (MEWP), is a mechanical device used to provide temporary access for people or equipment to inaccessible areas, usually at height. They are generally used for temporary, flexible access purposes such as maintenance and construction work, which distinguishes them from permanent access equipment such as elevators.

AWP includes mainly boom lift, scissor lift and vertical lift. These products can be applied for a wide range of applications, such as shipbuilding, maintenance and manufacturing of large equipment (e.g. wind turbine installation and aircraft), subway, station, construction project and warehouse management.

Major markets in the world According to the latest report published by International Powered Access Federation (“IPAF”), the global fleet size of AWP was 1.47mn units in 2018. The North America (the US and Canada) is the largest market of AWP in the world, representing 47% of the world. Europe and the Middle East is the second largest market with a share of 27%, followed by the Asia Pacific (22%).

The US and Europe are the two major markets for AWP. The US is the largest market in the world, with fleet size of 627k units in 2018 (2009-2018 CAGR: 4%). Fleet size in Europe (including 10 major countries) was 294k units in 2018 (2009-2018 CAGR: 3%).

Given the nature of low utilization rate of AWP (normally <70%), rental companies normally are the major buyers and owners of AWP. Therefore, AWP rental revenue is another key indicator of the sector. According to IPAF, the AWP rental revenue in Europe and the US reached EUR2.75bn (~US$3.3bn) and US$10.4bn, respectively, in 2018. Over the past 10 years, the average retention period of AWP in Europe and the US is around eight years and five years, respectively. The fleet size of AWP and rental revenue have largely been driven by the construction spending.

Figure 7: Fleet size breakdown by region (2018) Figure 8: Fleet size breakdown by product (2018)

Units

Asia Pacific 1,600,000 22% 1,400,000 Others 1,200,000

1,000,000 Scissors Latin America 800,000 4% North America 47% 600,000 Straight 400,000 booms Europe & the 200,000 Middle East Articulated 27% 0 booms North Europe & Latin Asia World total America the Middle America Pacific East

Source: IPAF, CMBIS Source: IPAF, CMBIS

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Figure 9: US AWP rental revenue v.s. US non- Figure 10: US AWP fleet size versus US non- residential construction spending residential construction spending

15% 10.0% 10% 15.0%

10% 8% 5.0% 10.0% 6% 5% 4% 5.0% 0.0% 0% 2% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0.0% -5% -5.0% 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -2% -5.0% -10% -10.0% -4% -10.0% -15% -6% -15.0% -15.0% -20% -8%

-25% -20.0% -10% -20.0%

US MEWP rental revenue growth US MEWP fleet size growth US non-residential construction spending growth (RHS) US non-residential construction spending growth (RHS)

Source: US Census Bureau, IPAF, CMBIS Source: US Census Bureau, IPAF, CMBIS

The AWP fleet size in Europe (10 major countries: Figure 11, 12) increased from 234k units in 2009 to ~303k units in 2018, representing a CAGR of 3%. The fleet size in 2018 increased by 5% YoY, driven by both construction sectors (residential, commercial, retail and industrial) and non-construction sectors (maintenance, cleaning, utilities, events etc). Rental companies focused on both expanding and renewing their fleets with more advanced equipment.

Three markets dominate the European AWP rental market, namely Germany, the UK and France. The three countries accounted for 64% of total rental revenue in Europe.

The UK has the largest rental fleet in Europe, reaching 59k units (20% of the ten countries), following by France (57.4k units) and Germany (56.5k units).

Figure 11: European rental revenue breakdown by Figure 12: European fleet size breakdown by countries (2018) countries (2018)

Finland Norway Denmark Norway Denmark 3% 3% 3% 3% Finland 3% Spain Germany 5% Germany 4% 26% 19% Sweden 5% Spain 8% Netherlands Sweden 8% 6%

Netherlands France Italy 7% 20% 10%

France 19% Italy UK 9% 19% UK 20% Source: IPAF, CMBIS Source: IPAF, CMBIS

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IPAF estimates the fleet size in the US and Europe to increase 5% and 3%, respectively, in 2019E. We expect the annual sales volume to be largely driven by replacement demand in these regions.

Figure 13: AWP fleet size in the US and Europe Figure 14: AWP utilisation rate

Units 80% 700,000 10% 70% 8% 600,000 6% 60% 500,000 4% 400,000 2% 50% 0% 300,000 -2% 40% 200,000 -4% -6% 30% 100,000 -8% 0 -10% 20% 10%

Europe (10 major countries) 0% USA 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E Europe (10 major countries) growth rate USA growth rate Europe (10 major countries) USA

Source: IPAF estimates, CMBIS Source: IPAF estimates, CMBIS

Figure 15: AWP rental revenue Figure 16: AWP retention period

US$ bn Years 14.0 10 9 12.0 8 10.0 7 8.0 6 5 6.0 4 4.0 3 2 2.0 1 0.0 0 2016 2017 2018 2019E 2020E 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

Europe (10 major countries) USA Europe (10 major countries) USA

Source: IPAF estimates, CMBIS Source: IPAF estimates, CMBIS

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China AWP is at the early stage of development Low penatration rate in China Unlike the western countries, scaffolding is still widely applied in China while AWP has yet to become the major application. According to IPAF, China’s AWP’s fleet size grew 29% in 2018 to 78k units, representing only 13% of that in the US. The rental revenue in 2018 was RMB4.4bn (+35% YoY), which was only 6% of that in the US.

While in the US and Europe the AWP demand is largely driven by equipment upgrade and replacement, the demand in China will be driven almost entirely by new demand over the coming few years.

We see huge growth potential over the coming years as AWP is getting more cost competitive compared to the traditional scaffolding for aerial works. Based on our calculation, the number of construction worker per unit of AWP was 18 in the US, much lower than China’s 437 (figure 18). This suggests significant upside to the penetration rate of AWP. IPAF estimates 26-28% annual growth of fleet size between 2019E and 2020E.

Figure 17: AWP fleet size in China Figure 18: No. of construction worker per unit of AWP

Units 500 140,000 35% 450 400 120,000 30% 350 100,000 25% 300 250 80,000 20% 200 60,000 15% 150 100 40,000 10% 50 20,000 5% 0 Construction labour per unit of AWP 0 0% 2017 2018 2019E 2020E US China

Source: IPAF estimates, CMBIS Source: Bureau of Labor Statistics of the US, NBS, Wind, IPAF, CMBIS estimates

AWP is getting more efficient and cost effective due to rising labor cost in China The cost of project construction and installation mainly comprises (1) labor cost, (2) time cost, (3) equipment cost and (4) safety cost.

In the developed regions, AWP started gradually replacing the traditional scaffolding decades ago, as the application of AWP can improve safety, work efficiency and reduce cost. In China, AWP is still at an early stage of development. However, we have already witnessed a structural change for a few years as the overall cost is increasing, making the application of AWP more attractive.

 Labor cost According to NBS, China’s average annual wage of construction industry increased >40% between 2013 and 2018 (CAGR: 7%). Besides, many of the new generation refuse to engage in the construction work. We believe the trend of wage increase will continue over the coming years. For traditional scaffolding, it normally requires around 3-4 workers to set up and operate the scaffolding, while only 1-2 workers are needed for operating an AWP.

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 Safety Applying AWP can help reduce the risk of casualties as there is no need to move up and down the scaffold. According to the Ministry of Housing and Urban-Rural Development, there are a total of 734 incidents related to the property and municipal construction projects in China in 2018, representing an increase of ~6% YoY. The number of death was 840 in 2018, representing an increase of 4% YoY. Of the total number of incidents, falls accounted for 52%, the highest among all type of incidents.

 Time cost AWP can reduce the time needed for setting up, compared with scaffolding. Besides, by using AWP, certain assemble process can be conducted on the ground before lifting up by the AWP and therefore improve the efficiency.

Figure 19: China construction industry annual wage Figure 20: No. of incidents breakdown in 2018

RMB 60,000 10% Others 12% 9% Equipment- 50,000 8% related 6% 7% 40,000 6% Structure collapse 30,000 5% 7% 4% Falls 20,000 Crane-related 52% 3% 8% 2% 10,000 1% 0 0% Falling objects 2013 2014 2015 2016 2017 2018 15%

Construction industry annual wage (RMB) Growth (YoY)

Source: NBS, Wind, CMBIS Source: The Ministry of Housing and Urban-Rural Development, CMBIS

Figure 21: No. of incidents related to property and Figure 22: No. of deaths related to property and municipal projects municipal projects

1,400 50% 1,400 40%

40% 1,200 1,200 30% 30% 1,000 1,000 20% 20% 800 800 10% 10% 600 600 0% 0% 400 400 -10% -10% 200 -20% 200

0 -30% 0 -20%

Number of incidents Change (YoY) Number of dealth Change (YoY)

Source: The Ministry of Housing and Urban-Rural Development, Source: The Ministry of Housing and Urban-Rural Development, CMBIS CMBIS

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Quantifying the cost savings We use an equipment installation project to showcase the cost difference between scaffolding and AWP. We estimate that applying AWP can achieve project cost savings of 19%, based on the current labor and equipment cost, mainly due to less labor and time required to complete the project.

Assuming 40% increase in labor cost over the coming five years and other factors being constant (we assume rental cost to be largely stable due to more supply of AWPs and rental companies), the cost savings will widen to 26% based on our estimates. This will make AWP incrementally attractive to users.

Figure 23: Comparison between AWP and scaffolding Scaffolding AWP Currently Number of workers - 3 2 Daily labour cost per person RMB 300 300 Total daily labour cost RMB 900 600 Daily equipment rental cost RMB 20 300 Total daily cost RMB 920 900 Construction period Days 30 25 Total construction cost RMB 27,600 22,500 Total cost savings RMB - 5,100 % - 18.5%

Assuming 40% increase in labour cost in five years Number of workers - 3 2 Daily labour cost per person RMB 420 420 Total daily labour cost RMB 1,260 840 Daily equipment rental cost RMB 20 300 Total daily cost RMB 1,280 1,140 Construction period Days 30 25 Total construction cost RMB 38,400 28,500 Total cost savings RMB - 9,900 % - 25.8%

Source: CMBIS estimates

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Competitive landscape Major players The AWP manufacturing industry has long been dominated by Western and Japanese brands. JLG Industries (a brand of Oshkosh Corporation [OSK US]), Genie (a brand of Terex [TEX US]), Haulotte (PIG FP), Skyjack (a brand of Linamar Corporation [LNR CN]), and Aichi (6545 JP) are the major international manufacturers with strong competitive strength in terms of R&D, technology, manufacturing capability and distribution network. That said, over the past couple of years, the Chinese manufacturers gradually emerged on the back of enhancement of product quality and cost advantage. These players include Dingli (603338 CH, BUY), Jingcheng heavy Industry (unlisted) and Sinoboom (unlisted). Besides, traditional leading construction machinery manufacturers such as XCMG (000425 CH) and Zoomlion (1157 HK, BUY) also started entering AWP industry since 2018.

Figure 24: Global AWP manufacturer comparison Company Year Terex Corporation Oshkosh Corporation Linamar Corporation Haulotte Group Aichi Corporation Zhejiang Dingli Ticker (TEX US) (OSK US) (LNR CN) (PIG FP) (6345 JP) (603338 CH) Financial year end Dec Sep Dec Dec Mar Dec Unit (US$ mn) (US$ mn) (CAD mn) (EUR mn) (Yen mn) (RMB mn) Group revenue 2016 4,443 6,279 6,006 458 57,108 695 2017 4,363 6,830 6,546 499 62,608 1,139 2018 5,125 7,706 7,621 556 61,474 1,708

Group revenue growth 2017 -1.8% 8.8% 9.0% 9.1% 9.6% 64.0% 2018 17.5% 12.8% 16.4% 11.3% -1.8% 49.9%

AWP revenue 2016 1,978 3,012 866 n/a n/a 669 2017 2,072 3,026 1,116 n/a n/a 1,099 2018 2,560 3,777 1,886 n/a n/a 1,641

AWP revenue growth 2017 4.7% 0.5% 28.9% n/a n/a 64.3% 2018 23.6% 24.8% 68.9% n/a n/a 49.3%

Gross profit 2016 712 1,056 1,003 115 13,225 294 2017 816 1,174 1,079 129 14,533 478 2018 967 1,356 1,237 132 14,252 709

Gross margin 2016 16.0% 16.8% 16.7% 25.1% 23.2% 42.3% 2017 18.7% 17.2% 16.5% 25.8% 23.2% 42.0% 2018 18.9% 17.6% 16.2% 23.7% 23.2% 41.5%

Net profit 2016 (176) 216 522 23 4,601 175 2017 129 286 549 18 5,119 283 2018 114 472 591 18 5,785 480

Net profit growth 2017 - 32.0% 5.2% -24.2% 11.3% 62.0% 2018 -11.7% 65.2% 7.7% 1.5% 13.0% 69.6% Note: For Linamar, AWP revenue is included in the Industrial segment. Source: Company data, CMBIS

Figure 25: Revenue and growth comparison Figure 26: Gross profit and margin comparison US$ mn US$ mn 9,000 60% 1,600 45%

8,000 40% 50% 1,400 7,000 35% 1,200 40% 6,000 30% 1,000 5,000 30% 25% 800 4,000 20% 20% 600 3,000 15% 10% 400 2,000 10% 0% 1,000 200 5%

0 -10% 0 0% Terex Oshkosh Linamar Haulotte Aichi Zhejiang Terex Oshkosh Linamar Haulotte Aichi Zhejiang Corporation Corporation Corporation Group Corporation Dingli Corporation Corporation Corporation Group Corporation Dingli 2017 2018 Growth (2018) - RHS 2017 2018 Gross margin - RHS

Source: Company reports, CMBIS Source: Company reports, CMBIS

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Figure 27: Net profit and growth comparison Figure 28: Oshkosh’s revenue breakdown (2018) US$ mn 500 80% Oshkosh Corporation 450 70% Europe, Africa Rest of World and the Middle 5% 400 60% East 350 50% 11% 300 40% Other North America 250 30% 4% 200 20% 150 10% United States 100 0% 80% 50 -10% 0 -20% Terex Oshkosh Linamar Haulotte Aichi Zhejiang Corporation Corporation Corporation Group Corporation Dingli 2017 2018 Growth (YoY) - RHS

Source: Company reports, CMBIS Source: Oshkosh, CMBIS

Figure 29: Terex’s revenue breakdown (2018) Figure 30: Terex’s AWP revenue breakdown (2018)

Terex Corporation (Group) Terex Corporation (AWP revenue) Rest of World Rest of World Asia-Pacific 6% 9% 10% Asia-Pacific 13%

Western Europe Western Europe 23% North America 21% 55%

North America 63%

Source: Terex, CMBIS Source: Terex, CMBIS

Figure 31: Haulotte’s revenue breakdown (2018) Figure 32: Linamar’s revenue breakdown (2018)

Haulotte Group Linamar Corporation Latin America 8% North America 14% Europe 33%

Canada Asia Pacific Europe 50% 18% 60%

Asia Pacific 6% Other North America 11% Source: Haulotte, CMBIS Source: Linamar, CMBIS

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Investment positives Dingli has already established its global presence Zhejiang Dingli was founded in 2005, headquartered in Deqing, Zhejiang. Dingli is engaged in the development, manufacture and marketing of various high-end AWPs, including boom lifts (12% of total revenue in 2018), scissor lifts (75%), vertical lifts (9%) and others (4%). Dingli has established a strong presence in the US and European markets, and is one of the major aerial working platform manufacturers in China. Currently, the annual production capacity is ~26k units. XU Shugen is the controlling shareholder with ~47.5% interest in Dingli. The Company has been listed in SSE since Mar 2015.

Unlike other construction machinery makers in China, Dingli has established its footprints in the developed markets such as Europe and the US. Dingli is now one of the few Chinese AWP manufacturers that successfully entered into these developed regions. Over the past seven years, overseas revenue accounted for 51-65% of total revenue. First mover advantage, proven track record and good reputation put Dingli at a favorable position to capture the fast growing trend in China.

Strong growth driven by strategic transformation years ago Forklift was one of the key products of Dingli in 2012, contributing 22% of total revenue. Dingli realized the keen competition landscape of forklift and therefore gradually scaled down the business and exited the business entirely in 2016. At the same time, Dingli put its effort in the fast growing AWP business. We believe the transformation was critical to change the future of the Company, suggesting strong management capability.

Well-designed capacity expansion plan and efficiency enhancement Dingli raised its AWP designed capacity from 5k units in 2014 to 11k units in 2016, financed by the capital raised from IPO in 2015. In 2018, Dingli completed the capacity expansion plan for its small-size scissor lifts with annual capacity of 15k units, taking the total capacity of the Company to 26k units. On the back of the well-planned capacity expansion and successful marketing strategy, Dingli’s AWP sales volume increased from 6k units in 2012 to 27k units in 2018.

It is worth noting that the actual production can be raised above the designed capacity for couple of reasons: (1) the Company has already established a fully automatic production line for its scissor lifts and has continued to improve the production efficiency. For example, the production time for one set of large-size scissor lift reduced from 15 minutes years ago to 10 minutes at present. The production time for a set of small-size scissor lift reduced from 8 minutes last year to 6 minutes currently; (2) the Company can add shifts to raise the production.

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Figure 33: Revenue breakdown by region Figure 34: Capacity expansion plan

100% Units 90% 35,000

80% 30,000 70% 25,000 60%

50% Overseas 20,000 China 40% 15,000 30% 10,000 20% 5,000 10%

0% 0 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 2019E 2020E

Source: Company data, CMBIS Source: Company data, CMBIS estimates

Figure 35: Dingli’s laser cutting robots Figure 36: Dingli’s bending machine

Source: CMBIS Source: CMBIS

Figure 37: Dingli’s automatic production line Figure 38: Dingli’s boom lift and scissor lift products

Source: CMBIS Source: CMBIS

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Further product mix enhancement with more sales of boom lift According to IPAF, boom lifts normally accounted for 35-40% of the total AWP fleet size in the US and Europe. In China, boom lifts accounted for slightly below 30% of the total fleet size.

Dingli’s scissor lifts and vertical lifts accounted for 82% and 16%, respectively, of the total sales volume in 2018. Boom lift accounted for only 2% of the total sales volume. Dingli is currently adding a new fully-automated production line for 3.2k units of large-size boom lift. The Company expects the capacity will commence operation in mid-2020. This will raise the Company’s total capacity to 29.2k units. It is worth noting that the ASP of boom lift is >6x of that of scissor lift. In other words, the revenue and profit contribution will be much higher. In longer term, we see further upside potential for Dingli’s boom lift, given the Company’s proven track record on capacity growth.

Figure 39: AWP fleet size breakdown in the US Figure 40: AWP fleet size breakdown in Europe

100% 100%

90% 90% Others 80% 80% Others 70% Vehicle-mounted 70% platforms 60% 60% Vehicle-mounted Scissors platforms 50% 50% Scissors 40% Booms 40%

30% 30% Booms 20% 20%

10% 10%

0% 0% 2012 2013 2014 2015 2016 2017 2018 2019E 2012 2013 2014 2015 2016 2017 2018 2019E

Source: IPAF estimates, CMBIS Source: IPAF estimates, CMBIS

Figure 41: AWP fleet size breakdown in China Figure 42: Dingli sales volume breakdown

100% 100% 90% 90% Forklift 80% Others 80% 70% 70% Vertical lifts 60% Scissors 60% 50% 50% 40% Scissor lifts 40% Booms 30% 30% 20% Boom lifts 20% 10% 10% 0%

0% 2016 2017 2018

Source: IPAF estimates, CMBIS Source: Company, CMBIS estimates

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Clear position and pricing strategy Leasing companies are the major customers of Dingli in both China and overseas markets. According to Dingli, the number of AWP leasing company is around 800-900 in China, and the Company expects the number to continue to increase going forward. In 2018, Dingli signed a strategic agreement with Horizon Construction Engineering, a subsidiary of Far East Horizon (3360 HK, NR). Dingli became the first Chinese manufacturer supplying AWP to Horizon Construction Engineering.

Dingli positions itself in the high-end segment. In terms of pricing strategy, Dingli’s ASP is ~20% lower than the major overseas brands such as JLG Industries (a brand of Oshkosh Corporation [OSK US]) and Genie (a brand of Terex [TEX US]), due to cost advantage. Compared with domestic players, Dingli prices its product slightly higher. Dingli adopts a prudent credit policy for customers. On average, down payment received from customers is ~20-30%, and the total credit term is within a year.

Earnings projection We forecast revenue CAGR of 35% in 2019E-21E Dingli delivered an impressive revenue CAGR of 34% in 2013-2018, on the back of strong sales volume growth. Revenue in 1Q19 increased 23% YoY. While we expect revenue growth in 2Q19 could be slightly affected by the China-US trade disputes, we expect the growth to accelerate starting 2H19E driven by favorable policies to boost infrastructure spending in China.

We forecast Dingli to deliver revenue growth of 33%/38%/33% in 2019E/20E/21E, driven by sales volume growth. We forecast the growth in 2019E to be driven mainly by the full utilization of its 15k units of scissor lift capacity. In 2020E, we expect the new production line of boom lift (3.2k units) to commence operation in mid-2020 and start revenue contribution.

Gross margin to sustain in the foreseeable future Dingli maintained a respectable gross margin range of 41-44% in 2013-2018. We believe the higher-than-peers gross margin was due to its focus on AWP business, continuous product mix enhancement and excellent operating efficiency.

We project Dingli’s gross margin to stay at ~42% in 2019E-21E for a couple of reasons:

 The strong demand growth for AWPs should reduce the risk of price war even if more players enter the industry;  In 2018, Dingli’s boom lift segment gross margin was 34.6%, lower than the Company’s blended average of 41.5%. That said, the commencement of the 3.2k units of boom lift capacity will significantly enhance the production efficiency and lift the segment gross margin due to economies of scale.  The 25% import tariff imposed by the US government will be applied on Dingli’s product shipping to the US. Based on our understanding, Dingli will absorb 9 ppt of the tariff while the remaining 16 ppt will be absorbed by Dingli’s customers and the end users. We believe the overall impact on gross margin is manageable as the aforementioned factors should offset the tariff factor.

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Figure 43: Revenue breakdown by products Figure 44: ASP by products

(RMB mn) RMB Other 700,000 4,500 64% 70% business 4,000 600,000 60% Forklifts 50% 3,500 500,000 45% 50% 3,000 38% Vertical lifts 400,000 2,500 33% 32% 40% 28% 300,000 2,000 30% Scissor lifts 1,500 18% 200,000 20% 1,000 10% 100,000 10% Boom lifts 500 0 0 0% Growth 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E (YoY) - RHS Boom lifts Scissor lifts Vertical lifts

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 45: Gross margin by products Figure 46: Net profit and growth

70% RMB mn 1,400 80% 60% 70% 1,200 62% 70% 50% 60% 1,000 50% 40% 50% 800 37% 39% 37% 30% 32% 32% 40% 600 30% 20% 400 10% 20% 10% 200 10% 0% 0 0% 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E Boom lifts Scissor lifts Vertical lifts Net profit Growth (YoY) - RHS

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

We forecast 34% net profit CAGR in 2019E-21E Dingli’s net profit CAGR reached 43% in 2013-2018, driven by strong revenue growth and operating leverage. In 1Q19, net profit grew 44% YoY to RMB101mn. We forecast Dingli to deliver earnings growth of 32%/37%/32% earnings growth in 2019E/20E/21E. While we have not assumed further capacity expansion plan after the 3.2k units of new boom lift production line, we believe Dingli has room to further raise capacity given the track record of the Company and the strong demand in China over the coming years. Any new capacity expansion plan will offer upside to our forecasts.

Solid balance sheet for upcoming capex Dingli has maintained a solid balance sheet with net cash position since listing. We expect Dingli to maintain a prudent approach on balance sheet management. Dingli has budgeted a total of RMB880mn capex for its new boom lift capacity. Part of the capex was invested over the past 1-2 years and Dingli expects the remaining budget of ~RMB600mn will be spent in 2019E and 2020E. We forecast Dingli’s operating cash flow to be more than enough to cover the upcoming capex.

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Financial Summary

Income statement Cash flow summary YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E Total revenue 1,139 1,708 2,278 3,148 4,171 Pretax profit 333 565 745 1,022 1,350 Cost of sales (661) (999) (1,324) (1,829) (2,431) Finance cost 25 0 10 11 12 Gross profit 478 709 954 1,319 1,740 Interest income 0 (22) (49) (62) (82) Surcharge (11) (10) (14) (19) (25) P rofit / loss of associates 0 13 (11) (11) (12) S&D expenses (51) (92) (123) (170) (225) Depreciation and 24 25 71 111 117 Administrative expenses (72) (118) (144) (192) (250) Incomeamortization tax paid (50) (85) (112) (153) (202) Asset impairment (4) (7) (7) (9) (13) Change in working capital 27 (82) (47) (221) (469) EBIT 340 482 667 929 1,227 Others (10) 2 0 0 0 Net finance income/(cost) (23) 36 40 51 70 Cash flow from operation 349 416 607 696 713 Finance income 2 37 49 62 82 Net capex on PP&E (154) (199) (330) (330) (50) Finance expenses (25) (2) (10) (11) (12) Interest received 6 27 49 62 82 Other gains/(losses) 16 60 27 31 42 Others (886) 329 0 0 0 Profit of JV & associates 0 (13) 11 11 12 Cash flow from investing (1,035) 157 (281) (268) 32 Pretax profit 333 565 745 1,022 1,350 Proceeds from equity 868 0 0 0 0 Income tax (50) (85) (112) (153) (202) Netfinancing/(repurchase) bank borrowings 62 163 30 30 30 After tax profit 283 480 633 869 1,147 Dividend paid (29) (71) (87) (114) (156) MI 0 0 0 0 0 Interest paid (3) (9) (10) (11) (12) Net profit 283 480 633 869 1,147 Others (4) 0 0 0 0 Cash flow from financing 894 83 (66) (95) (138) D&A 24 25 71 111 117 Change in cash 208 656 260 334 607 EBITDA 364 507 738 1,039 1,343 Cash at beginning of the year 247 751 1,045 1,306 1,639 FX gains/(losses) & others 296 (362) 0 0 0 Cash at the end of the year 751 1,045 1,306 1,639 2,246

Balance sheet Key ratios YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec FY17A FY18A FY19E FY20E FY21E Non-current assets 656 1,027 1,315 1,591 1,675 Revenue mix (%) PP&E 211 232 494 717 653 Boom lifts 9 12 13 19 30 JV/associates 0 206 217 228 239 Scissor lifts 75 75 77 73 63 LT trade receivables 151 278 296 342 481 Vertical lifts 13 9 7 6 5 Intangible assets 146 143 140 137 134 Others 4 4 3 2 2 AFS investments 105 0 0 0 0 Total 100 100 100 100 100 Others 34 167 167 167 167 Profit & loss ratio (%) Deferred tax assets 8 0 0 0 0 Gross margin 42.0 41.5 41.9 41.9 41.7 Current assets 2,123 2,607 2,956 3,904 4,929 EBITDA margin 32.0 29.7 32.4 33.0 32.2 Inventories 243 359 461 571 800 EBIT margin 29.9 28.2 29.3 29.5 29.4 Trade and bill receivables 440 899 886 1,391 1,580 Net profit margin 24.9 28.1 27.8 27.6 27.5 Prepayment 8 5 5 5 5 Growth (%) Others 680 298 298 298 298 Revenue 64.0 49.9 33.4 38.2 32.5 Cash 751 1,045 1,306 1,639 2,246 Gross profit 62.8 48.2 34.6 38.3 31.9 EBITDA 87.0 39.2 45.6 40.8 29.3 Current liabilities 478 882 962 1,422 1,530 EBIT 96.0 41.6 38.5 39.2 32.1 Trade and bill payables 308 521 582 1,022 1,109 Net profit 62.0 69.6 31.8 37.3 32.0 Bank borrowings 28 150 170 190 210 Balance sheet ratio Tax payable 57 70 70 70 70 Current ratio (x) 4.4 3.0 3.1 2.7 3.2 Advance from customers 11 11 11 11 11 Receivable turnover days 116 143 143 132 130 Others 74 129 129 129 129 Inventory turnover days 117 110 113 103 103 Non-current liabilities 98 151 161 171 181 Payable turnover days 135 152 152 160 160 Bank borrowings 34 75 85 95 105 Net debt / total equity (%) Net cash Net cash Net cash Net cash Net cash Deferred tax liabilities 0 2 2 2 2 Profitability (%) Deferred income 62 64 64 64 64 ROA 13.6 15.0 16.0 17.8 19.0 Others 1 10 10 10 10 ROE 17.2 20.0 22.0 24.6 26.1 Equity 2,203 2,601 3,148 3,903 4,893 Per share data Shareholders' equity 2,203 2,601 3,148 3,903 4,893 EPS (RMB) 0.85 1.38 1.83 2.51 3.31 MI 0 0 0 0 0 BVPS (RMB) 6.35 7.50 9.08 11.25 14.11 DPS (RMB) 0.20 0.25 0.33 0.45 0.60 Source: Company data, CMBIS estimates

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Valuation premium well-supported by strong earnings outlook Historical valuation range Dingli has been trading at an average of 28x forward P/E since listing in 2015.

 In 2016-17, Dingli traded at 24-30x PE. The valuation was supported by the strong earnings growth during the period.  In 2018, as a result of the weak A-share market in general, Dingli’s trading range moved downward to 18-24x.  That said, starting from this year, the valuation range has returned to 24-30x, back to the level in 2016-17.

Initate with BUY with TP of RMB75 We are initiating coverage on Dingli with a BUY rating and TP of RMB75, based on 30x 2020E P/E. Our target multiple is based on the peak valuation level since 2016, which is 7% above the historical average. Our target valuation is well-supported by our estimated earnings CAGR of 34% in 2019E-21E. Unlike other types of construction machinery names that are cyclical and therefore trading at lower multiple, Dingli is offering a structural growth potential and we believe it is justified to apply a growth stock valuation. Besides, compared with AWP peers, Dingli delivered outstanding growth and profitability.

Figure 47: Dingli 12M forward P/E band Figure 48: 12M forward P/B band

RMB RMB 100 80 2019 YTD: 24-30x PE 7.5x 90 42x 70 6.5x 80 36x 60 70 5.5x 30x 2016-17: 24-30x PE 50 60 4.5x 50 24x 40 3.5x 40 18x 30 30 20 20 10 10 2018: 18-24x PE

0 0

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Source: Bloomberg, Company data, CMBIS estimates Source: Bloomberg, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 18 27 Jun 2019

Figure 49: Peers comparison 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 2.80 4.72 69% 1,111 8.5 7.0 1.1 1.0 5.2 4.3 3.5 4.3 3339 HK Equity LONKING HOLD 2.10 3.15 50% 1,151 5.5 5.3 0.9 0.8 3.2 3.1 11.6 12.1 1157 HK Equity ZOOMLION HEAVY-H BUY 5.29 5.83 10% 6,535 11.7 10.5 0.9 0.9 8.1 7.6 7.7 8.6 2338 HK Equity WEICHAI POWER-H BUY 13.02 16.20 24% 13,897 9.1 8.6 2.0 1.8 4.7 4.6 6.1 6.4 3808 HK Equity SINOTRUK HK LTD BUY 13.76 21.50 56% 4,865 6.8 6.5 1.1 1.0 3.1 3.0 5.2 5.4 564 HK Equity ZHENGZHOU COAL-H NR 3.68 - - 1,367 5.2 4.5 0.5 0.4 4.1 3.6 4.3 4.9 HK listed average 7.8 7.1 1.1 1.0 4.7 4.3 6.4 7.0 A share 603338 CH Equity ZHEJIANG DINGLI -A BUY 56.95 75.00 32% 2,867 31.2 22.7 6.3 5.1 25.6 18.2 0.6 0.8 600031 CH Equity SANY HEAVY IND-A NR 12.95 - - 15,743 11.5 10.3 2.7 2.2 7.9 7.1 2.8 3.0 000425 CH Equity XCMG CONSTRUCT-A NR 4.53 - - 5,151 11.4 9.4 1.2 1.1 7.5 6.5 2.0 2.6 000157 CH Equity ZOOMLION HEAVY-A NR 5.99 - - 6,531 15.0 13.5 1.2 1.1 10.4 9.7 6.0 6.7 000528 CH Equity GUANGXI LIUGON-A NR 6.70 - - 1,434 8.6 7.7 0.9 0.9 8.2 7.6 3.9 4.3 600815 CH Equity XIAMEN XGMA-A NR 3.14 - - 437 n/a n/a n/a n/a n/a n/a n/a n/a 600761 CH Equity ANHUI HELI CO-A NR 9.67 - - 1,039 10.5 9.1 1.4 1.3 4.3 3.8 4.9 5.8 603298 CH Equity HANGCHA GROUP-A NR 12.55 - - 1,127 11.9 10.1 1.8 1.6 7.8 6.6 3.0 3.1 000338 CH Equity WEICHAI POWER-A NR 12.25 - - 13,890 9.7 9.2 2.1 1.9 5.0 4.9 5.7 6.0 000951 CH Equity CNHTC JINAN T-A NR 16.50 - - 1,607 9.3 7.9 1.6 1.5 6.6 5.7 5.6 6.4 601100 CH Equity JIANGSU HENGLI-A NR 30.87 - - 3,952 22.9 18.7 4.9 4.1 16.2 13.4 1.3 1.6 601717 CH Equity ZHENGZHOU COAL-A NR 5.79 - - 1,366 9.3 8.0 0.9 0.7 7.3 6.4 2.4 2.8 600582 CH Equity TIAN DI -A NR 3.47 - - 2,084 9.8 8.2 0.9 0.8 7.2 5.9 n/a n/a 002526 CH Equity SHANDONG MININ-A NR 2.35 - - 608 n/a n/a n/a n/a n/a n/a n/a n/a 002691 CH Equity JIKAI EQUIP MA-A NR 7.00 - - 345 n/a n/a n/a n/a n/a n/a n/a n/a A-share average 11.8 10.2 1.8 1.6 8.1 7.0 3.8 4.2 Overseas CAT US Equity CATERPILLAR INC NR 133.7 - - 76,465 10.8 10.3 3.7 3.1 6.7 6.6 2.7 2.9 6305 JP Equity HITACHI CONST MA NR 2,786.0 - - 5,578 8.9 8.9 1.1 1.0 6.2 6.2 3.6 3.8 6301 JP Equity KOMATSU LTD NR 2,543.0 - - 23,010 9.7 9.5 1.2 1.1 6.4 6.3 4.4 4.5 042670 KS Equity DOOSAN INFRACORE NR 6,480.0 - - 1,165 4.9 4.6 0.6 0.6 6.0 5.9 0.0 0.0 Overseas (AWP players) TEX US Equity TEREX CORP NR 31.0 - - 2,206 7.7 7.9 2.3 1.9 6.9 7.1 1.4 1.5 OSK US Equity OSHKOSH CORP NR 82.1 - - 5,740 10.6 10.5 2.1 1.9 7.2 7.4 1.3 1.4 LNR CN Equity LINAMAR CORP NR 47.4 - - 2,350 5.3 5.2 n/a n/a 4.3 4.2 1.0 1.0 PIG FP Equity HAULOTTE GROUP NR 7.3 - - 261 8.2 7.1 0.8 0.7 6.1 5.8 3.7 4.0 6345 JP Equity AICHI CORP NR 666.0 - - 492 10.1 11.9 0.8 0.7 5.1 5.6 3.3 3.3 Overseas average 8.5 8.4 1.6 1.4 6.1 6.1 2.4 2.5 Source: Bloomberg, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 19 27 Jun 2019

Major risk factors More new players entering the AWP industry in China Due to the attractive industry outlook and decent profitability, there are more new players entering the market. Some of them are the traditional construction machinery makers such as Zoomlion (1157 HK, BUY) and XCMG (000425 CH, NR). These players have strong R&D and distribution network. Faster-than-expected supply growth might exert pressure on the existing players such as Dingli.

Weaker-than-expected construction activities in China While we see AWP as a structural growth product in China, the demand is still subject to the change in macro economy in the near term. Failure to boost infrastructure spending might reduce the demand for AWPs.

Uncertainties on the US economy and trade dispute Any unfavorable changes in the US economic outlook and a prolonged China-US disputes might hurt the sentiment of Dingli’s customers and therefore affect Dingli’s sales in the US.

Increase in component cost Steel is one of the direct costs as well as the cost of the components. While the steel price has declined since the peak level in 2018. Any rebound of steel price will exert pressure on the production cost. Besides, any unexpected price increase or shortage of components (such as hydraulic pumps) will affect the cost and production volume.

Exchange rate risk Dingli generated more than half of the revenue from the overseas markets and the transactions were mainly settled with US$ and EUR. Appreciation of RMB is unfavorable to Dingli’s profit margin given that majority of the cost items are settled in RMB.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 20 27 Jun 2019

Appendix: Dingli’s key products

Figure 50: Boom lift Figure 51: Articulated boom lift

Source: Company, CMBIS Source: Company, CMBIS

Figure 52: Scissor lift Figure 53: Vertical lift

Source: Company, CMBIS Source: Company, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 21 27 Jun 2019

Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

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