Key points of investment

Shantui Co., Ltd.: High-horsepower bulldozer exports increase profitability, and the excavator business is expected to gain strength

The company is a listed construction machinery company under Shandong Heavy Industries Group. Shandong Heavy Industries Group owns famous domestic and foreign brands such as Weichai Power, German Linde Hydraulics, German Kaiao, Sinotruk, and Lovol Heavy Industries.

1) The company's bulldozer sales volume is the third highest in the world, after Caterpillar and Komatsu, and is also the leading bulldozer market in China. In 2023, the domestic market share of bulldozers exceeded 70%; Komatsu's competition+ relied on the experienced management of Shandong Heavy Industries Group+, and excavators are expected to become an important development direction in the future.

2) From 1997 (listing) to 2023, the compound growth rate of the company's revenue was 13%, the compound growth rate of net profit to mother was 11%, and the ROE (diluted) geometric average was about 6%.

3) By product: Construction machinery mainframes and accessories accounted for 64% and 26% of revenue respectively in 2023; by subregion: foreign and domestic revenue in 2023 was 5.9 billion yuan and 3.6 billion yuan respectively, accounting for 56% and 35% of revenue, with year-on-year changes of +34% and -20%. According to the company's announcement, the company targets overseas revenue of 8.5 billion yuan in 2024, an increase of about 45% over the previous year.

Bulldozers: The leading position is stable. High-horsepower bulldozer exports have increased profitability. In recent years, the global market capacity of bulldozer products is about 25,000-30,000 units, and the domestic market capacity is about 7,000 units. Among them, the global capacity of high-horsepower products is about 1,500-1,800 units. The domestic market share of the company's bulldozers has remained above 60% for many years.

1) Bulldozer exports continued to prosper, and exports of high-horsepower bulldozers grew rapidly. From January to May 2024, China's cumulative export value of crawler bulldozers was 350 million US dollars, an increase of 16% over the previous year; the cumulative export value of crawler high-horsepower bulldozers (above 320 horsepower) was 130 million US dollars, an increase of 121% year on year.

2) High-horsepower bulldozer export+domestic replacement is expected to help improve profitability. The company is actively promoting domestic substitution and export of high-horsepower bulldozers. In the future, as the share of high gross margin increases, it is expected to increase the company's profitability.

Excavators: Relying on bulldozer sales channels and the platform advantages and supply chain advantages of Shandong Heavy Industries Group, it is expected to rise rapidly 1) Industry recovery trilogy: exports, domestic demand, and renewal.? Exports: Globalization continues to advance, and overseas market share is expected to continue to increase;? Domestic demand: Real estate policies continue to be favorable, trillions of treasury bonds increase investment in infrastructure, and domestic demand expectations are expected to gradually improve;? Update: The domestic excavator cycle is expected to bottom up, and we look forward to the launch of the renewal cycle. 2015 was the bottom point of the previous cycle. Based on an 8-10 year update cycle, demand for updates is expected to bottom out in 2024, and the cycle is expected to rise in the future.

2) Excavator business gains strength:? In 2022, the company cut capital and withdrew from Komatsuyama to lift restrictions on excavator competition;? The company's excavator products are expected to be sold through bulldozers and other product channels. Currently, the company has a complete layout of domestic and foreign sales channels. The products are exported to more than 160 overseas countries and regions, and have now developed more than 140 overseas agents and dealers.? The company is a subsidiary of Shandong Heavy Industries Group. The group's subsidiary has high-quality construction machinery assets such as Mountain Reconstruction Equipment and Lovol Heavy Industries; the Group's companies such as Weichai Power, German Linde Hydraulics, Germany's Kaiao, Sinotruk, and Lovol Heavy Industries are expected to provide resources and business collaboration;? Shandong Heavy Industries Group has a rich background, and the company's management is experienced in production and operation. Many management leaders have worked for companies such as Shandong Heavy Industries Group, Weichai Holding Group, Weichai Power, Sinotruk, and Mountain Reconstruction Machinery.

Relying on Shandong Heavy Industries Group: Resources and business collaboration “1+1>2”, Weichai engine+Linde hydraulic components build supply chain advantages. Shandong Heavy Industries Group includes famous domestic and foreign brands such as Weichai Power, German Linde Hydraulics, German Kaiao, Sinotruk, and Revo Heavy Industries. The company continues to strengthen resource and business collaboration with the Group's strong capital, technology, talent support and channel coordination support.? Product strength advantages: Weichai engines, Linde hydraulic parts and mountain propulsion components can achieve professional matching, create differentiated advantages, and enhance product competitiveness;? Channel advantage and brand influence: The company's excavators are expected to use the company's own product channels such as bulldozers and the influence of brands such as Weichai Power, Sinotruk, and German Kaiao to achieve product sales.

Profit forecast and valuation: The company's net profit for 2024-2026 is expected to be 941 million, 1.03 billion yuan, and 1,439 million yuan, respectively, up 23%, 28%, and 20% year-on-year (2024-2026 CAGR is 24%), corresponding PE is 15, 11, and 10 times, respectively. The 2025 PE valuation is relatively low. First coverage, giving a “buy” rating.

Risk warning: risks associated with trade frictions; risk of fluctuating sea freight rates.