1H21 performance is lower than we expected.

The company announced 1H21 results: revenue of 1.644 billion yuan, an increase of 50.2% over the same period last year; net profit of 337 million yuan, corresponding to 0.40 yuan per share, an increase of 14.6% over the same period last year, and the performance was lower than we expected, mainly because the rising price of raw materials eroded profits. In a single quarter, 2Q21 achieved revenue of 749 million yuan, an increase of 5.2% over the same period last year, and its net profit was 141 million yuan, which reduced the revenue of 32.1%1H21 hydraulic parts by a large margin over the same period last year, and the price of raw materials affected the gross profit margin. According to the classification of income generated by the contract, the income of crusher and hydraulic parts of 1H21 Company is 7.05 / 914 million yuan respectively. According to the statistics of the business unit, the income of 1H21 crushing hammer and hydraulic parts increased respectively compared with the same period last year. 3%/140%o1H21/2Q21 's comprehensive gross profit margin decreased by 6.9/9.0ppt to 36.40% and 35.8% compared with the same period last year, mainly due to the upward price of raw materials and changes in the company's business structure. According to sub-sector statistics, 1H21 crushing hammer margin decreased by 10.8ppt to 36.8% compared with the same period last year, while thanks to economies of scale, hydraulic parts gross profit margin increased to 30.5% year-on-year, increased investment in research and development, and cash flow remained robust. During the period of 1H21, the expense rate increased by 2.3ppt compared with the same period last year, in which the R & D expense rate increased by 3.0ppt to 5.1% compared with the same period last year. The company continues to strengthen the development of hydraulic parts and new product lines such as robots and cemented carbide. 1H21/2Q21 's net profit margin fell by 6.4/10.4ppt to 20.5% to 18.9% compared with the same period last year. The net cash inflow from 1H21/2Q21 's operating activities is 1.52 / 143 million yuan, which is roughly the same as that of the same period last year.

Development trend

The hammer ratio of medium-and long-term excavators has room for improvement. The allocation rate of crushing hammer for domestic excavators is about 20% Mel 25% in 2016 and increased to 25% Mel 30% in 2020, but there is still a certain gap between the allocation rate of domestic excavator crushing hammer and the level of 30% Mel 40% in mature markets. According to the statistics of the Construction Machinery Industry Association, there are about 1.83 million excavators in China in 10 years by the end of 2020. We expect that during the 14th five-year Plan period, the sales volume of excavators in China is still expected to maintain a high level of about 300000, and the number of excavators still has room to increase. As a consumable product with a service life of 3-5 years, we think that the market space of the crushing hammer is still expected to grow.

Increase investment in high-end hydraulic parts. The company increases the investment of hydraulic parts such as casting production capacity and walking motor. By the end of the 1H21 period, the balance of the project under construction was 425 million yuan, an increase of 265 million yuan over the beginning of the year, of which the balance of the equipment to be installed and the hydraulic control valve project increased by 1.44 / 91 million yuan compared with the same period last year.

Profit forecast and valuation

Taking into account the downward demand of the construction machinery industry, we downgrade the 2021 / 2022 EPS forecast of 18% Universe 21% to 0.75 Universe 0.97 yuan. The company's current share price corresponds to 39.9 times PVE in 2022. Considering the profit reduction, on the basis of the target price after excluding rights and interest, we reduce the target price by 13% to 43.53 yuan, corresponding to 45 times PE in 2022, with 13% upside space. Maintain an industry rating that outperforms.

Risk

The downstream demand of construction machinery is lower than expected; the volume of new products is not as expected.