Incident: Recently, Sany Heavy Industries released its 2023 report and 2024 quarterly report.

Comment:

Profitability picked up in 2023. In 2023, the company achieved revenue of 74.019 billion yuan, a year-on-year decrease of 8.44%; net profit to mother was 4.527 billion yuan, an increase of 5.53% over the previous year. Gross margin was 27.71%, up 3.69 pct year on year, mainly due to factors such as improvements in domestic and foreign market structure and product structure, cost reduction and efficiency measures; net margin was 6.29%, up 0.79 pct year on year. The sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio were +0.60pct, +0.31pct, -0.65pct, and -0.27pct, respectively. With 2023Q4, the company achieved revenue of 17.882 billion yuan, down 17.58% year on year, up 10.24% month on month; net profit to mother was 480 million yuan, down 30.74% year on year and 25.87% month on month. Gross margin was 25.23%, down 2.03 pct year on year, down 3.96 pct month on month; net margin was 2.59%, down 0.59 pct year on year and 1.47 pct month on month. The sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio were +0.77pct, +0.49pct, -1.82pct, and -3.35pct, respectively, with month-on-month changes of -0.40pct, -0.06pct, +0.81pct, and -2.72pct, respectively.

2024Q1's performance increased month-on-month. With 2024Q1, the company achieved revenue of 17.830 billion yuan, down 0.95% year on year and 0.29% month on month; net profit to mother was 1,580 billion yuan, up 4.21% year on year, up 229.21% month on month. Gross margin was 28.15%, up 0.55 pct year on year and 2.92 pct month on month; net margin was 9.19%, up 0.41 pct year on year, up 6.60 pct month on month. The sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio were +0.51pct, -0.25pct, -0.57pct, and +1.39pct, respectively, with month-on-month changes of -1.55pct, -0.17pct, -1.90pct, and +0.62pct, respectively.

The share of overseas revenue reached a record high, and improved product structure helped increase gross margin. In 2023, the company's overseas product sales covered more than 180 countries and regions, and Europe and America are the fastest growing regions overseas. Overseas revenue in 2023 was 43.564 billion yuan, up 19.12% year on year, accounting for 58.86% of total revenue, a record high, up 13.61 pct year on year. From a regional perspective, Asia and Australia achieved revenue of 16.50 billion yuan, an increase of 11.10%; the European region achieved revenue of 16.250 billion yuan, an increase of 37.97%; the American region achieved revenue of 7.580 billion yuan, an increase of 6.82%; and the African region achieved revenue of 2,920 billion yuan, an increase of 2.56% over the previous year. Benefiting from the expansion of overseas sales scale and improved product structure, the gross margin of the overseas market was 30.94%, an increase of 4.58pct over the previous year.

Domestic market excavators are bottoming out, and policies help increase demand. In 2023, the company's excavation machinery business achieved revenue of 27.636 billion yuan, a year-on-year decrease of 22.71%; the concrete machinery business achieved revenue of 15.315 billion yuan, an increase of 1.55%; the lifting machinery business achieved revenue of 12.999 billion yuan, an increase of 2.60%; the pavement machinery business achieved revenue of 2,485 billion yuan, a year-on-year decrease of 19.32%; and the pile machinery business achieved revenue of 2,085 billion yuan, a year-on-year decrease of 31.97%. The year-on-year decline in excavation machinery business revenue is mainly due to continued weakness in downstream demand for construction machinery, and domestic sales of excavators are bottoming out. In March 2024, after experiencing a three-year downward cycle, the year-on-year growth rate of domestic sales of excavators was corrected for the first time in a single month. The cumulative decline in growth gradually narrowed. Combined with the promotion of equipment renewal policies and the renewal and replacement of old models, it is expected to stimulate demand for construction machinery and help the company's performance grow.

Investment advice: Maintain a “buy” rating. The company's 2024-2026 EPS is expected to be 0.72 yuan, 0.92 yuan, and 1.16 yuan respectively. The corresponding PE is 22 times, 18 times, and 14 times, respectively, maintaining a “buy” rating.

Risk warning: (1) If downstream demand falls short of expectations, demand for the company's products weakens; (2) if overseas market demand for domestic companies' products decreases, it will put pressure on the company's performance; (3) if raw material prices rise sharply, the company's performance will face great pressure.