Incident: The company released its 2023 annual report and 2024 quarterly report, and the performance was in line with market expectations.

Key points of investment

Performance is in line with expectations, and the performance growth rate is higher than that of the industry

In 2023, the company achieved total operating income of 74.019 billion yuan, a year-on-year decrease of 8.44%. Net profit to mother was 4.528 billion yuan, an increase of 5.53% year-on-year, after deducting net profit of 4.388 billion yuan, an increase of 40% over the previous year. Sales in the excavator industry fell 24% year on year in 2023, and the company's growth rate was significantly higher than that of the industry. In 2024, the company's total revenue in Q1 was 17.830 billion yuan, down 0.95% year on year, and net profit to mother was 1.58 billion yuan, up 4.21% year on year. The excavator industry declined 13% year on year in the first quarter of 2024, highlighting the company's alpha attributes. By product in 2023, the company's market position is stable: (1) Excavation machinery: revenue was about 27.636 billion yuan, down 22.71% year on year, continuing to rank first in the industry. (2) Concrete machinery:

Achieved revenue of 15.315 billion yuan, an increase of 1.55% year over year. (3) Crane machinery: Achieved revenue of 13.0 billion yuan, an increase of 2.6% over the previous year. Among them, the overseas growth rate exceeded 50%, and the global market share increased sharply.

The share of overseas revenue increased to 60% in 2023. We are optimistic that the internationalization strategy will continue to advance. Looking at the subregions in 2023: (1) domestic: achieved revenue of 28.26 billion yuan, a year-on-year decrease of 31.97%; (2) overseas: achieved revenue of 43.26 billion yuan, an increase of 18.28% year-on-year, and the share of overseas revenue increased to 60.5%, an increase of 12.5 pcts year-on-year. By the end of 2023, the company's overseas product sales had covered more than 180 countries and regions, and Europe and America had become the fastest growing overseas region. Sales by overseas region in 2023: ① Asia and Australia reached 16.5 billion yuan, an increase of 11.10%, accounting for 38.14%; ② the European region was 16.25 billion yuan, an increase of 37.97%, accounting for 38.26%: ③ The American region was 7.58 billion yuan, an increase of 6.82%, accounting for 17.52%; ④ Africa region was 2.92 billion yuan, an increase of 2.56%, accounting for 6.75%. The company's overseas profit margin was higher than at home. The overseas gross margin in 2023 was 30.9%, up 4.6 pct from the previous year. The domestic gross profit margin was 23.0% during the same period, and the overseas gross margin was 7.9 pcts higher than that of the domestic market. We judge that future overseas expansion will still be the main driving force for the company's growth.

I am optimistic that profitability will continue to recover. Repayments and cash flow will remain at a high level. In 2023, the company's gross sales margin was 27.72%, up 3.7 pct year on year, and the net sales margin was 6.3%, up 0.8 pct year on year. In the first quarter of 2024, the company's gross sales margin was 28.1%, up 0.6 pct year on year, and the net sales margin was 9.2%, up 0.4 pct year on year. The company's profitability has increased significantly. Our judgment is mainly due to: (1) optimization of the product structure and increase in the proportion of medium to large tonnage products with high gross margin; (2) promotion of internationalization strategies, overseas profit margins are higher than domestic and continue to increase. Looking forward to the future, the company's overseas markets are still expected to maintain rapid growth. Profitability is expected to continue to rise under the three major factors of scale effect, cost reduction and efficiency brought about by the steady recovery of the domestic market. The company's repayment rate in 2023 was 99.38%, maintaining a good level of repayment. The company's net operating cash flow for the first quarter of 2023 and 2024 was $57/4.4 billion, up 39%/375% year-on-year, and repayments and cash flow remained high.

Introducing a new round of employee stock ownership plans, showing long-term growth value. On April 4, 2024, the company plans to launch an employee shareholding plan. The establishment scale is no more than 592 million yuan. The shares are derived from previous repurchases of shares, totaling no more than 43.9264 million shares, accounting for about 1.0% of the company's total share capital. The employee stock ownership plan aims to motivate about 6,972 people, including 9 directors and supervisors, accounting for 3.46%. The rest are middle management and core employees, accounting for 96.54%. This plan has no performance assessment requirements. It collaborates with the interests of the company and employees, and shows confidence in long-term development.

Construction machinery: It is expected to usher in a “large-scale equipment update+industry self-renewal” dual-cycle resonance CME estimates that sales of excavators (including exports) will be around 18,500 units in April 2024, down about 1.5% year on year, and the decline has improved from month to month. By market, the estimated sales volume in the domestic market is 9,500 units, which is basically the same as the previous year. The export market estimated sales volume of 9,000 units, a year-on-year decrease of 2.8%, and the decline improved month-on-month. Looking ahead, special treasury bonds and special debt are gaining strength, pressure on the construction machinery base weakened in the second quarter, and industry data is expected to continue to pick up. The upward cycle of last-round construction machinery is 2016-2020. According to the eight-year service life, the last-round sales equipment is already in a large-scale life cycle replacement period. A series of policies such as large-scale equipment updates have boosted the industry's recovery, which is expected to resonate with the dual cycle of “large-scale equipment update+industry self-renewal”.

Profit forecast and investment rating: Considering the uncertain pace of the industry cycle recovery, due to prudential considerations, we lowered the 2024-2025 net profit forecast to 63 (original value 70) /85 (original value 101) billion yuan. The company's net profit for 2026 is estimated to be 11.3 billion yuan, and the current market value corresponds to PE 22/16/12 times, respectively. The renewal cycle of the domestic construction machinery industry is getting closer, and the international strategy is reinventing Sany Heavy Industries, which is firmly optimistic about the company's long-term growth and maintains a “buy” rating.

Risk warning: industry cycle fluctuations, increased industry competition, international trade frictions, exchange rate and raw material price fluctuations, etc.