19 Oct 2020 CMB International Securities | Equity Research | Company Update SANY Heavy Industry – A (600031 CH) Excavator sales growth accelerated; Raised earnings est. & TP BUY (Maintain) Target Price RMB34.60 (previous TP RMB26.40) Reiterate BUY. The acceleration of excavator sales growth in Sep reaffirms our positive view on the industry upcycle. Besides, we remain confident on SANY’s Up/Downside +27% market share gain story, on the back of strong R&D and management execution. Current Price RMB27.29 We raised our 2020E-22E earnings forecast for SANY by 5-6%, after China Capital Goods incorporating higher sales volume assumptions. We raised our TP from RMB26.4 to RMB34.6, after rolling over our target P/E multiple (17x) to 2021E P/E, on the Wayne Fung, CFA back of 17% estimated earnings growth in 2021E. (852) 3900 0826 [email protected] Industry sales growth of excavator accelerated in Sep. According to the latest figure from CCMA, excavator sales volume by major players in China Stock Data Mkt Cap (RMB mn) 231,302 surged 65% YoY to 26k units in Sep, the highest growth rate since May. Large Avg 3 mths t/o (RMB mn) 1,762 / mid-size excavator sales growth reached 53%/106% YoY in Sep, which 52w High/Low (RMB) 28.34/13.21 suggested strong demand from infrastructure and property construction Total Issued Shares (mn) 8,435 projects. In 9M20, excavator sales growth reached 32% YoY. Source: Bloomberg Raise industry sales projection. Based on Jiangsu Hengli’s (601100 CH, Shareholding Structure SANY Group 29.9% BUY) latest production plan of hydraulic cylinders (see our latest note on Hong Kong CCASS 9.6% Hengli [link]), we foresee strong excavator demand growth with high visibility Liang Wengen 3.4% in 4Q20E. We raise our industry excavator sales volume assumption in Others 57.1% Source: Shanghai Stock Exchange 2020E/21E by 13%/10%. We expect 35%/3% YoY growth in 2020E/21E, with key drivers coming from resilient construction activities, replacement of labour Share Performance and stringent environmental policies. Absolute Relative 1-mth 8.3% 7.1% SANY continues to outpace industry growth. SANY’s excavator sales 3-mth 30.9% 24.1% volume in Sep surged 85% YoY, outpacing the industry growth of 65%. 6-mth 39.2% 11.6% Source: Bloomberg SANY’s market share reached 28.5%/26.3% in Sep / 9M20. SANY is one of the very few players that consistently delivers market share gain. We believe 12-mth Price Performance import substitution and export market are two structural drivers for SANY (RMB) 600031 CH going forward. 30.0 SHSZ300 (rebased) 25.0 3Q20E results preview: We forecast SANY to deliver 60% YoY net profit 20.0 growth in 3Q20E, driven by 44% YoY increase in revenue and operating 15.0 leverage. SANY is scheduled to report on 29 Oct. 10.0 5.0 Key risks: (1) Risk of overseas business due to pandemic; (2) Slowdown of 0.0 10/2019 1/2020 4/2020 7/2020 construction activities; (3) Risk of expanding to financing business. Source: Bloomberg Earnings Summary (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E Auditor: Ruihua CPA Revenue (RMB mn) 55,822 75,666 94,682 103,771 109,855 YoY growth (%) 46 36 25 10 6 Related Reports Net income (RMB mn) 6,116 11,207 14,773 17,225 18,417 1. SANY Heavy (600031 CH, BUY) – EPS (RMB) 0.79 1.36 1.75 2.04 2.18 2Q20 net profit +78% in line; YoY growth (%) 189.6 71.4 28.8 16.6 6.9 Strong rebound in cash flow - 28 Consensus EPS (RMB) N/A N/A 1.72 1.95 2.14 Aug 2020 2. China Construction Machinery & EV / EBITDA (x) 25.6 16.2 12.8 11.1 10.5 HDT Sector – Raise industry sales P/E (x) 34.5 20.1 15.6 13.4 12.5 forecast in 2020E-21E; Solid P/B (x) 6.8 5.2 4.1 3.4 2.8 upcycle – 30 Jun 2020 Yield (%) 1.0 1.6 2.0 2.3 2.5 3. China Construction Machinery ROE (%) 21.5 29.5 29.5 27.8 24.6 Sector – Four structural drivers to extend the upcycle to 2020-21E – Net gearing (%) Net cash Net cash Net cash Net cash Net cash 27 Nov 2019 Source: Company data, Bloomberg, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 MORE REPORTS FROM BLOOMBERG: RESP CMBR <GO> AND http://www.cmbi.com.hk 19 Oct 2020 Figure 1: China excavator sales +65% YoY in Sep Figure 2: CMBIS excavator sales projection (Units) (Units) 60,000 350,000 100% 300,000 80% 50,000 250,000 60% 40,000 40% 200,000 20% 30,000 150,000 0% 20,000 100,000 -20% 50,000 -40% 10,000 0 -60% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 2019 2018 2017 2016 Regular replacement New demand Growth (YoY) - RHS Source: CCMA, CMBIS Source: CCMA, CMBIS estimates Figure 3: China excavator market share in Sep Figure 4: China excavator market share in 9M20 SANY, 26.3% Others, 28.0% SANY, 28.5% Others, 29.6% Zoomlion, 2.0% Zoomlion, 2.2% Lingong, 8.9% XCMG, 15.7% XCMG, 13.9% Lingong, 8.3% Liugong, 8.1% Caterpillar, Liugong, 7.6% Caterpillar, 10.3% 10.8% Source: CCMA, CMBIS Source: CCMA, CMBIS Figure 5: 3Q20E earnings preview (RMB mn) 1Q19 1Q20 Change YoY 2Q19 2Q20 Change YoY 3Q19 3Q20E Change YoY Total revenue 21,295 17,266 -18.9% 22,092 31,921 44.5% 15,305 22,086 44.3% Cost of sales -14,754 -12,402 -15.9% -14,594 -21,860 49.8% -10,247 -15,019 46.6% Gross profit 6,541 4,864 -25.6% 7,498 10,061 34.2% 5,057 7,068 39.8% EBIT 4,076 2,865 -29.7% 4,419 6,689 51.4% 2,305 3,880 68.3% Pretax profit 3,976 2,640 -33.6% 4,315 7,484 73.4% 2,893 4,605 59.2% Income tax -652 -426 -34.6% -704 -1,060 50.6% -423 -654 54.5% After tax profit 3,325 2,214 -33.4% 3,611 6,425 77.9% 2,470 3,951 59.9% MI -104 -20 -80.4% -84 -150 78.5% -59 -91 54.3% Net profit 3,221 2,194 -31.9% 3,527 6,274 77.9% 2,411 3,860 60.1% Source: Company data, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 19 Oct 2020 Figure 6: Change in key assumptions Old New Change (RMB mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E Revenue Concrete machinery 26,370 30,062 32,467 27,064 30,853 33,321 2.6% 2.6% 2.6% Excavator 34,691 37,119 38,604 37,672 40,309 41,921 8.6% 8.6% 8.6% Crane machinery 16,572 18,395 19,866 16,711 18,549 20,033 0.8% 0.8% 0.8% Piling machinery 6,107 6,413 6,605 6,107 6,413 6,605 0.0% 0.0% 0.0% Earth moving machinery 2,594 2,724 2,805 2,594 2,724 2,805 0.0% 0.0% 0.0% Other machinery 2,707 3,005 3,155 2,707 3,005 3,155 0.0% 0.0% 0.0% Revenue (construction machinery) 89,041 97,717 103,502 92,855 101,852 107,841 4.3% 4.2% 4.2% Other business 1,827 1,918 2,014 1,827 1,918 2,014 0.0% 0.0% 0.0% Total revenue 90,868 99,635 105,517 94,682 103,771 109,855 4.2% 4.2% 4.1% Revenue growth ppt Concrete machinery 13.7% 14.0% 8.0% 16.7% 14.0% 8.0% 3.0 0.0 0.0 Excavator 25.6% 7.0% 4.0% 36.4% 7.0% 4.0% 10.8 0.0 0.0 Crane machinery 18.5% 11.0% 8.0% 19.5% 11.0% 8.0% 1.0 0.0 0.0 Piling machinery 27.0% 5.0% 3.0% 27.0% 5.0% 3.0% 0.0 0.0 0.0 Earth moving machinery 20.8% 5.0% 3.0% 20.8% 5.0% 3.0% 0.0 0.0 0.0 Other machinery 25.0% 11.0% 5.0% 25.0% 11.0% 5.0% 0.0 0.0 0.0 Revenue (construction machinery) 20.4% 9.7% 5.9% 25.6% 9.7% 5.9% 5.2 (0.1) (0.0) Other business 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 0.0 0.0 0.0 Total revenue 20.1% 9.6% 5.9% 25.1% 9.6% 5.9% 5.0 (0.0) (0.0) Gross margin ppt Concrete machinery 29.5% 31.5% 31.5% 29.3% 31.2% 31.2% (0.2) (0.3) (0.3) Excavator 38.0% 38.0% 38.0% 37.8% 38.0% 38.0% (0.2) 0.0 0.0 Crane machinery 21.0% 23.0% 23.0% 20.5% 23.0% 23.0% (0.5) 0.0 0.0 Piling machinery 45.5% 45.0% 45.0% 45.5% 45.0% 45.0% 0.0 0.0 0.0 Earth moving machinery 34.5% 36.5% 36.5% 34.5% 36.5% 36.5% 0.0 0.0 0.0 Other machinery 29.0% 30.0% 30.0% 28.0% 30.0% 30.0% (1.0) 0.0 0.0 Gross margin (construction machinery) 32.5% 33.3% 33.2% 32.3% 33.4% 33.3% (0.1) 0.0 0.0 Other business 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 0.0 0.0 0.0 Blended gross margin 32.0% 32.9% 32.8% 31.9% 33.0% 32.9% (0.1) 0.0 0.0 Net profit 13,962 16,288 17,589 14,773 17,225 18,417 5.8% 5.8% 4.7% Source: Company data, CMBIS estimates Figure 7: SANY revenue breakdown Figure 8: SANY gross margin trend (RMB mn) 50% Other business 45% 120,000 40% Other machinery 35% 100,000 30% 80,000 Earth moving 25% machinery 20% 15% 60,000 Piling machinery 10% 40,000 5% Crane machinery 0% 20,000 Excavator 0 Concrete machinery Excavator Concrete machinery Crane machinery Piling machinery Earth moving machinery Other machinery Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 19 Oct 2020 Figure 9: SANY’s P/E band Figure 10: SANY’s P/B band RMB RMB 50 40 45 22x 35 4.7x 40 18x 30 3.9x 35 25 30 14x 3.1x 25 20 2.3x 20 10x 15 15 1.5x 6x 10 10 5 5 0 0 Jul-14 Jul-17 Jul-14 Jul-17 Oct-11 Oct-14 Oct-17 Oct-20 Apr-14 Apr-18 Jun-20 Jun-13 Ja n-15 Jun-16 Ja n-18 Oct-11 Oct-14 Oct-17 Oct-20 Apr-14 Apr-18 Jun-13 Ja n-15 Jun-16 Ja n-18 Jun-20 Fe b-12 Ma r-13 Fe b-16 Ma r-17 Fe b-19 Ma r-20 Nov-15 Nov-12 De c-13 De c-16 Nov-18 De c-19 Aug-12 S e p-13 Aug-15 S e p-16 Aug-18 S e p-19 Fe b-12 Ma r-13 Fe b-16 Ma r-17 Fe b-19 Ma r-20 Nov-12 De c-13 Nov-15 De c-16 Nov-18 De c-19 Aug-12 S e p-13 Aug-15 S e p-16 Aug-18 S e p-19 Ma y-12 Ma y-15 Ma y-19 Ma y-12 Ma y-15 Ma y-19 Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 19 Oct 2020 Financial Summary Income statement Cash flow summary YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E Total revenue 55,822 75,666 94,682 103,771 109,855 Pretax profit 7,550 13,454 17,569 20,582 22,006 Cost of sales (38,728) (50,932) (64,436) (69,549) (73,737) Finance cost 388 120 561 683 681 Gross profit 17,094 24,733 30,246 34,221 36,118 Interest