Performance flexibility has always been a core catalyst for rising stock prices.

Since Sany International (00631) announced results that fell short of expectations for the first quarter, the company's stock price has continued to decline. On May 21, the company fell by nearly 5% in early trading. By the close, it was HK$6.55, with a turnover of about HK$674.17,400.

According to the announcement, in the first quarter of 2024, the company's comprehensive revenue was about RMB 5.13 billion (unit: RMB, same below), down about 5.7% year on year; gross profit of about RMB 1,277.5 billion, down about 4.0% year on year; profit attributable to parent company owners was about RMB 516 million, down about 20.7% year on year.

According to a report issued by CMB International, due to weakness in mining equipment and emerging industries offsetting the growth of the logistics equipment business, Sany International's net profit for the first quarter fell 21% year-on-year, less than the 15% decline expected by the bank.

Behind the contrarian decline in performance

In March of this year, the news that domestic sales of excavators picked up rapidly, reaching 9.27%, strongly boosted confidence in the construction machinery industry. Meanwhile, due to multiple factors such as favorable policies and improved operating data, the construction machinery stock market has continued to rise since the beginning of 2024. From the beginning of 2024 to May 10, the construction machinery sector increased by about 28%.

In addition to improving beta performance, company-side performance growth elasticity α is also an important reason for catalyzing stock prices.

Looking at industry data, in Q1 of 2023 and 2024, the construction machinery sector achieved revenue of 322.324 billion yuan and 81.998 billion yuan respectively, up 1.27% and 3.24% year on year, while net profit to mother was 222.68 billion yuan and 6.495 billion yuan respectively, up 27.52% and 9.62% year on year, respectively. Growth continued in the first quarter of 2024.

Sany International's performance bucked the trend and declined, triggering dissatisfaction among investors.

The company said that the main reason for the year-on-year decline in performance was

First, during the period, due to the boom in the coal industry, the revenue of the mining equipment division fell short of expectations. In fact, mining equipment has always been the core product of Sany International, contributing more than 60% of revenue.

Coal prices returned to rationality in 2023, and in the context of relatively stable supply and demand, the mid-term bottom of coal prices above 800 yuan/ton in ports gradually became clear. In the first quarter of 2024, under continuous pressure tests on the demand side, coal prices bottomed out for the second time, but it can be observed that the bottom of coking coal and thermal coal prices were both higher than the lows in 2023, which has already verified the bottom of coal prices.

According to data from the Cathay Pacific Junan Research Report, due to the year-on-year decline in coal prices, the coal industry's performance declined by about 40% year on year, exceeding market expectations; considering the year-on-year base issue and the clear bottom of coal prices in April, it is judged that the downward pressure on Q2 performance has clearly eased. 2024Q1

Considering that Q1 2024 is likely to be the moment of greatest downward pressure throughout the year. Following a recovery in the coal industry's prosperity, the company's mining equipment distribution revenue is expected to recover.

Second, the Emerging Business Division is currently still in the investment period. The business focus is on the development of new products and technologies, and R&D expenses have increased dramatically; at the same time, oil and gas equipment has not contributed as much as expected due to industry sentiment. It is worth noting that the oil and gas equipment sector had revenue of 1.5 billion yuan in 2023.

According to 2023, the mining equipment and oil and gas equipment sector contributed a total of about 13.3 billion yuan in revenue, accounting for about 66% of total revenue. The remaining nearly 40% of the logistics equipment division continued to grow rapidly in Q1. The international market grew steadily, and new products and new market expansion progressed according to plan.

Looking ahead, brokerage firms believe that the downward trend in Sany International's performance will improve due to reduced losses after selling the robotics business; wide-body trucks, large mining trucks, and logistics equipment are still strong in overseas markets; and port equipment orders may accelerate in the second half of this year, driven by the government's equipment upgrade policy.

What drives the release of flexible performance?

Looking at this stage, the Zhitong Finance App believes that the industry renewal cycle and export drive are expected to be the driving factors for the further release of the flexibility of Sany International's performance.

First, from a cyclical perspective, in 2024, construction machinery and equipment will usher in a new cycle of renewal, which is expected to become an important gripper for the recovery of the construction machinery industry.

In April 2024, China's construction machinery market index, or CMI, was 102.93, a slight increase of 0.73% year on year and a decrease of 5.30% month on month. In the same month, the number of hours that Komatsu excavators started in China was 97.0 hours, a slight decrease of 3.2% year over year and an increase of 5.0% month over month. There was an improvement over the previous month but still at a low level.

The market sentiment index and construction data all indicate that the construction machinery industry is still bottoming out, but there are signs of marginal recovery in demand. On the investment side, real estate investment has yet to improve, and investment in infrastructure and mining continues to grow. Recently, there have been frequent positive signals from the industry. The trillion-dollar treasury bonds+real estate policy “combo punch” +large-scale equipment renewal policy is imminent. The inflection point of domestic construction machinery sales due to multiple factors resonance is imminent.

At the same time, construction machinery itself has an inherent need for equipment updates. The industry expects that in the future, 70% to 80% of old equipment will be eliminated, and 20% to 30% of old equipment will generate demand for trade-in.

According to an analysis by Dongwu Securities, the upward cycle for the last round of construction machinery is from 2016 to 2020. According to the 8-year service life, 2023 replaces the low life span, and the number of updates will begin to rise year by year starting in 2024. As demand for updates increases and the base figure falls in the second half of 2024, the industry is expected to usher in a new renewal cycle, boosting the recovery of the industry.

As a leader in heavy machinery and equipment, mining machinery revenue relative to market share has been on a growing trend. During the period 2018-2022, the company's mining machinery revenue relative market share increased from 14% to 27%. It is worth mentioning that in recent years, there has been a clear trend of concentration of leading companies in the coal machine industry. Since 2018, among the top 50 companies in the industry, the top five companies have accounted for more than 40% of the revenue, and the top ten companies have accounted for more than 55% of the revenue, and these two ratios have remained stable for the past four years.

Therefore, in a situation where industry concentration is relatively stable, the company's revenue has steadily increased compared to its market share, which is rare. I believe it will benefit from the industry's recovery dividends.

It is worth noting that for domestic construction machinery companies, in recent years, with the improvement of product strength, going overseas has become a natural next step. According to data from the China Construction Machinery Industry Association, from January to February 2024, China's construction machinery import and export trade volume was US$7.856 billion, an increase of 6.3% over the previous year. Among them, imports amounted to US$382.5 million, a year-on-year decrease of 0.33%; exports amounted to US$7.473 billion, an increase of 6.67% year-on-year.

According to the export value of the China Construction Machinery Industry Association by region, Europe, North America, South America, Asia, Africa, and Oceania increased by -1.94%, -16.39%, 24.17%, 3.11%, 24.38%, and -12.10% respectively in Q1 2024. In the recovery phase of overseas supply chains, the growth of developed export markets is under certain pressure, while emerging markets still have some potential for growth.

Looking specifically at Sany International, the company is more competitive in Russia, Europe, and the US. In 2023, the company achieved revenue of 749 million yuan in the European and American markets, Russia achieved revenue of 1,512 billion yuan, and Africa achieved revenue of only 544 million yuan. It can be seen that the coverage of the company's products in emerging markets is not very large.

Furthermore, Zhonglian Heavy Industries and others are also stepping up the pace of “going overseas.” In 2023, Zhonglian Heavy Industry's overseas revenue reached 17.905 billion yuan, an increase of 79.2% over the previous year. The share of overseas revenue further increased to 38.04%, a record high.

Closely caught up with peers, if Sany International wants to continue to share the cake in overseas markets, I'm afraid it will take more trouble, especially in emerging markets such as South America and Africa.