Key points of investment
Leading medium to large tractors; benefiting from high-end horsepower, increasing overseas demand, and concentration of competitive patterns 1) The company is a leading medium to large tractor company. Short-term: Beneficiary countries switched four, subsidies contracted, industry demand bottomed up, and the competitive landscape concentrated at the top. Medium to long term: Benefiting from larger and more high-end tractor horsepower and increased export demand, room for growth continues to open up.
2) Revenue CAGR for the past 5 years was 19%, and net profit CAGR to mother was 101%. The geometric ROE level for the past 5 years was 6.7%. The company's tractor and diesel engine sales have been rising steadily. In the past five years, CAGR was 17.6%/17%, respectively, and CUHK's domestic market share was 24%.
Agricultural machinery industry: global trillion-level market space, scattered domestic landscape, large room for leading growth 1) Agricultural machinery industry: the cornerstone of an agricultural power. As the world's largest manufacturer and consumer of agricultural machinery, China has huge demand in the agricultural machinery market, providing huge demand space for agricultural machinery equipment. Among them, tractors are common “engines” in the industry and are a top priority.
2) Market space: The global agricultural machinery market in 2022 was US$162 billion (trillion yuan market), CAGR = 5.4% in the past 5 years, of which the tractor market space was US$70.4 billion (forecast for 2024). We believe that the core of the industry's growth space is driven by 3 major factors:
——Policy side: Short-term: We expect the impact of the “National 4” ranking switch to begin at the end of 2022 to subside and demand to bottom up. Long-term: Agricultural machinery subsidies reached 24.6 billion yuan in 2024, an increase of 4% over the previous year, reaching a record high and driving up industry demand.
——Technical side: Short-term: mechanization rate — machine farming rate, and machine yield rate in 2022 were 86%/62%/67% respectively; high horsepower penetration rate — large tractors accounted for 48%/20% in 2023, respectively; both still have room for improvement. Long-term: In the context of an aging population, land transfer policies and high-standard farmland construction are expected to continue to advance, increasing the ceiling of high horsepower and mechanization rates.
——Market side: Short-term: Stock update — In the context of stable and upward food prices, we expect the total demand for agricultural machinery purchases to reach 218.5 billion yuan and an average annual demand of 72.8 billion yuan in 2024-26, building the basic market for industry demand. Long-term: Export demand - The export value of agricultural machinery took 2 years of negative growth. Since February 2024, it has returned to a positive growth trend, benefiting from the bottom of overseas demand and a recovery.
3) Competition pattern: Global pattern - CR4 = 40.8% in '21, leading European, American and Japanese monopoly the middle and high-end markets. The domestic landscape is fragmented - CR4 = 11% in '21; with high horsepower, rising overseas demand, and the influence of policy factors, the competitive landscape will focus on the head in the future.
Yituo Co., Ltd.: leading tractors, benefiting from large-scale expansion, increased overseas demand, and more room for growth 1) Technical side: The company has acquired French agricultural machinery companies, strengthened its technical heritage of high horsepower, and moved towards leading medium and large tractors. At the same time, the integrated layout of the company's complete machine+core components (the core of expanding to high-end), diesel engines were simultaneously recognized by the export market.
2) Market side: In 2022, the domestic market share of the company's medium and large tractors reached 24%, with sales of 88,000 units. In the past five years, CAGR = 14%; in 2023, the company's tractors ranked first in the industry popularity list, and high brand strength created positive feedback on the high used residual value rate.
3) Growth potential: The company strengthened overseas markets, accounting for 8.5% of overseas revenue in 2023. Compared to overseas leaders, the company's revenue in 2022 was only 12.6 billion yuan. Compared with the global leader John Deere of the United States (375.6 billion yuan in '22), there is still a lot of potential room for growth.
Investment advice: Leading domestic tractors, benefiting from the recovery of domestic sentiment and the acceleration of overseas exports, the company's net profit is expected to be 11.3/13.4/15.01 billion yuan in 2024-2026, an increase of 13.4%/18.8%/12.3% year-on-year, corresponding to PE 15/13/11 times. First coverage, giving a “buy” rating.
Risk warning: Market competition increases risk; risk of subsidy policy adjustment; risk of overseas market development.