The domestic cycle has bottomed out, global competitiveness is enhanced, and domestic fundamentals of the construction machinery industry continue to improve marginally in the short term. In March 2024, China's domestic excavators sold 15,188 units, up 9.3% year on year, and the domestic industry is expected to reach the bottom and level throughout the year. In the medium to long term, along with the natural renewal of the service life of construction machinery, compounded by electrification trends and increased environmental requirements, construction machinery is expected to usher in a new upward cycle. Meanwhile, in recent years, China's construction machinery enterprises have flourished overseas. Driven by the “Belt and Road” infrastructure cooperation, China's OEMs “ride” overseas, forming a “four-in-one” international development model of overseas construction bases, high-quality local services, multinational mergers and acquisitions, and global product development, and global product development, and global competitiveness continues to increase. The global market space is vast, and domestic brands are still in a period of rapid growth in overseas expansion. Overseas shares have increased but are still low, and exports are still an important incremental contribution.

State-owned enterprise reform+equity incentives stimulate vitality. Liugong's new journey was founded in 1958, deepened the state-owned enterprise reform and completed mixed reform in 2020. Through restructuring in 2022, supporting assets for the production of construction machinery, agricultural machinery and construction machinery were injected into the listed companies as a whole. Liugong Group achieved an overall listing of the group's assets, further expanding its business upward and downstream, improving the overall competitive strength and profitability of listed companies. Against the backdrop of the downward domestic construction machinery cycle in 2022 to 2023, the average annual sales of domestic excavators in the industry fell by more than 40%, but Liugong's performance showed an average annual decline of more than 40%. It is superior to the industry. In 2023, the company's earthmoving machinery product sales growth rate outperformed the industry by 7 pcts, and the overseas market sales growth rate outperformed the industry by 20 pcts. According to the company's performance forecast for the first quarter of 2024, the company's 24Q1 net profit is expected to increase sharply by 45%-70% year-on-year. Compared with other leading companies in the industry, there is still room for improvement in the company's future profitability.

Focus on earthmoving machinery, diversification+electrification to create a new growth engine. The company initially focused on the traditional main excavator and loader business. In 2008, the company's earthwork machinery revenue accounted for about 83%, and the excavator market share increased from about 3.5% in 2010 to about 8.2% in 2020, and it is expected to increase further in the future; the market share of loaders has remained fluctuating around 20% since 2010, and the market position is stable. At the same time, the company continues to enrich its product line. Earthmoving machinery's revenue share fell to 58% in 2023, and new sectors such as prestress, high machinery, and agricultural machinery continued to expand. In addition, the company has responded positively to the electrification trend in the industry. Currently, many product categories have basically been electrified. In 2023, the company's electric loader sales volume was +67%, ranking first in the market share, and electrification products are expected to continue to contribute to the company in the future.

The international layout has driven a high increase in export performance, and there is still a lot of room for overseas growth. The company is an enterprise that started international business earlier in the domestic industry. Since the board of directors proposed the strategy of “building an open and international Liugong” in 2002, the company began overseas development and operation for more than 20 years. By the end of 2023, the company had 20 manufacturing bases, 5 R&D bases, 17 regional parts centers, and more than 16,000 employees worldwide, and has become the world's leading provider of equipment and technical solutions. In 2023, the company's overseas performance reached a new high. The cumulative sales volume exceeded 26,000 units, +23% year-on-year, and sales revenue exceeded 10 billion dollars, with a year-on-year increase of over 41%. Overseas profitability was significantly higher than domestic, driving the company's gross profit margin and net interest rate to increase by 4.02 pct and 0.98 pct year-on-year, respectively. While overseas business is growing rapidly, the company's overseas share is still low. In 2022, Liugong ranked 17th among the top 50 companies in the global construction machinery industry, accounting for about 1.7% of total sales, and there is still plenty of room to go overseas.

In 2024-2025, the company is expected to achieve net profit of 1,413 billion yuan and 1.929 billion yuan respectively, corresponding to PE 15 times and 11 times, respectively, giving it a “buy” rating.

Risk warning

1. The growth rate of infrastructure and real estate investment is lower than expected; 2. Overseas market expansion falls short of expectations; 3. Risk that profit forecasting assumptions are untrue or fall short of expectations.