Key points of investment

1. One-sentence logic

It is one of the leading construction machinery leaders in China. Globalization+ category expansion highlights growth. The overseas localization strategy has achieved remarkable results. The company's performance+valuation is expected to improve, and leapfrog development to gradually enter the international leading ranking.

II. Drivers

1. Rapid global expansion: In 2020-2023, the company's overseas revenue CAGR was 67%, up from 6% to 38%, and the share of overseas gross profit increased from 3% to 45%. Overseas revenue for the first quarter of 2024 was 5.7 billion yuan, up 53% year on year, accounting for 48% of total revenue.

2. New categories continue to expand: earthmoving and aerial machinery are growing rapidly, and agricultural machinery and mining machinery are ready to go. In 2023, the company's earthwork and aerial machinery accounted for 14% and 12% of revenue, and revenue increased by 89.3% and 24.2% year-on-year. The growth rate of the company's earthmoving machinery was significantly higher than that of the industry, and the relative share of revenue increased from 3% to 9%. Hi-Tech has the highest market share of domestic small and medium-sized customers, and subsequent spin-offs are expected to seize opportunities and accelerate development. There is plenty of room for agricultural machinery and mining machinery to grow.

3. Consolidate core business: concrete machinery and hoisting machinery industry domestic bottoming+export two-wheel drive. Construction machinery industry recovery trilogy: renewal cycle initiated, domestic demand improved, and exports stabilized. The domestic concrete and lifting machinery renewal cycle is similar to that of excavators, and the renewal cycle starts gradually. In May 2024, 890 truck cranes were exported, up 16.6% year on year. Cumulative exports of 3,986 units were exported, up 11.7% year on year. The export performance was clearly superior to excavators.

III. Logic that exceeds expectations

Market expectations: Domestic demand for construction machinery is still weak, and real estate demand expectations are insufficient.

We believe that the inflection point of the construction machinery industry is expected to gradually approach, and the domestic renewal cycle is expected to begin. In the short term, CME expects overall excavator sales in June to be around 16,000 units, up about 1.5% year on year, and is growing for 3 consecutive months; domestic sales volume is expected to be 7,300 units, up nearly 20% year on year, and has been growing for 4 consecutive months. Based on the low base of overall excavator sales (13,000 units, 13,000 units, 14,000 units) in July-September 2023, overall excavator sales are expected to continue to grow for 6 consecutive months after 3 consecutive months of positive growth in April-June. In the long run, 2015 is the bottom of the excavator launch cycle. Based on an 8-10 year renewal cycle, it is estimated that large-scale equipment renewal action plans have been implemented. It is expected that domestic renewal demand will bottom out in 2024, and the cycle is expected to rise in the future.

IV. Inspection and Catalysis

1. Inspection indicators: monthly excavator sales; domestic real estate, infrastructure investment, new construction; excavator operating rate; excavator export sales; company gross profit margin and net interest rate.

2. Catalysts: The company's performance exceeded expectations; sales of cranes and other types ended; domestic real estate and infrastructure investment, new construction started and policies were favorable; domestic downstream workload rebounded and the operating rate increased; industry exports exceeded expectations.

5. Research value

1. A unique understanding: Construction machinery, represented by excavators, is expected to continue to increase in overseas market share, and the domestic market share is expected to rise in 2024, gradually starting an upward cycle driven by renewal. Crane machinery, concrete machinery, and excavators have similar periodicity, gradually starting the cycle upward. The company has obvious advantages over its peers. The product structure and overseas location advantages are prominent. Combined, the overseas market continues to expand, and it is optimistic that its performance will continue to increase.

(1) Expansion of new categories: Demand for core products, automobiles and tower cranes, has stabilized, and the contribution of emerging products has increased: In 2023, demand performance for non-excavator categories such as truck cranes was superior to excavators. In 2023, the company's revenue share of cranes, concrete machinery, and earthmoving machinery was 41%, 18%, and 14%. The product market share was further consolidated and less affected by the decline in demand in the excavator industry. Excavators and high machinery are all emerging business segments of the company, and the trend is expected to continue in 2024.

(2) Rapid overseas expansion: Demand from the Middle East and Russian-speaking regions is expected to continue to be strong, supporting high export growth: The company's main export revenue comes from the Middle East, Russian-speaking regions, etc., and internationalization is expected to continue to break through. Oil-producing countries such as Turkey, Saudi Arabia, and the United Arab Emirates are promoting infrastructure, and demand is growing rapidly and is highly sustainable.

2. Different understanding from before: Asset risk exposure is low, calculation is relatively adequate, and future financial risk and operating risk are manageable. In 2023, the company's risk asset exposure was 56.8 billion, corresponding to Sany Heavy Industries and Xugong Machinery, accounting for 43.4% of total assets, 53.1% and 92.3% for Sany Heavy Industries and Xugong Machinery, 16.2, and 17.7 and 28.1 for Sany Heavy Industries and XCMG Machinery. The ratio of risk asset exposure to total revenue was 1.2, corresponding to Sany Heavy Industries and Xugong Machinery. The accounting ratio of the company's accounts receivable in 2023 is about 18%, corresponding to Sany Heavy Industries and XCMG Machinery. The accrual is relatively sufficient, and future financial risks are manageable.

6. Profit forecast and valuation

The company is expected to achieve net profit of 45.3, 60.2, and 7.69 billion yuan in 2024-2026, up 29%, 33%, and 28% year-on-year (CAGR of 30% in 2024-2026). The corresponding PE is 15, 11, 9 times, and the current PB is 1.17 times. Compared to similar companies, the company's valuation is below the industry average. Maintain a “buy” rating.

7. Risk Reminder

(1) The restoration of real estate and infrastructure demand fell short of expectations; (2) overseas exports fell short of expectations; (3) fluctuations in raw materials.