While SANYI's net profit in 2Q23 grew only 19% YoY to RMB552mn, it was largely due to an increase in R&D spending. We do not think this is negative given SANYI's good track record in new product development through R&D commitment. The strong revenue growth (+54% YoY) and gross margin expansion (+0.9ppt YoY, +3.3ppt QoQ to 27.8%) in 2Q23 are impressive, in our view. It is worth noting that SANYI's emerging industry business (Li-ion battery equipment, solar modules and electrolysis hydrogen production equipment) generated revenue of RMB223mn in 1H23 and we expect this will become market focus going forward. Reiterate BUY with unchanged TP of HK$16.2 (19x 2023E). SANYI remains our sector top pick.

Net profit +33% YoY in 1H23: Revenue in 1H23 grew 42% YoY to RMB10.8bn (Mining equipment: +32% to RMB7.2bn; Logistics equipment: +42% to RMB3bn; Oil & Gas equipment: RMB336mn; Emerging industry equipment: RMB223mn). Gross margin expanded 2.3ppt YoY to 26.1%.

R&D expense substantially increased 80% YoY to RMB748mn. Logistics equipment's EBIT margin expanded 6.8ppt YoY to 16.5% which offset the 3.4ppt YoY contraction in mining equipment margin. Besides, Oil & Gas equipment reported 17% EBIT margin. Net profit grew 33% YoY to RMB1.2bn, representing 49% of our full year forecast (run rate in 1H22: 54%). Operating cash inflow surged 9x YoY to RMB985mn from a low base.

SANYI maintained a net cash positive as at end-Jun 2023.

Overseas sales accounted for 30% of revenue in 1H23. Overseas revenue surged 68% YoY to RMB3.2bn, accounting for 30% of total revenue (25% in 1H22). Among this, Asia (ex-China) and other regions (ex-Europe & US) are the two key regions, which grew 33% YoY and 2.2x YoY respectively.

Post-results conference call at 10:00 (HKT) today. Senior management of SANY Group and SANYI will speak in the call. Please contact us for dial- in details.

Major risk factors: (1) weakness in mining activities; (2) development of new products below expectation; and (3) rebound of raw material costs.