It has both “deterministic+undervaluation”, and the long-term value of construction machinery leaders can be expected. According to the Yellow Table, Xugong Machinery ranked fourth in the global construction machinery company in 2023, and China's construction machinery company ranked first. After the company's national reform, the overall listing of construction machinery assets was achieved. The synergy between various divisions within the group was strengthened, and corporate governance was optimized, which is expected to further enhance its overall competitiveness. From a deterministic perspective, XCMG's profit improvement has some certainty and room: Comparing the three leading machine manufacturers with complete business structures, Xugong Machinery, Sany Heavy Industries, and Zhonglian Heavy Industries had gross margins of 22.38%, 27.71%, and 27.54% respectively. Xugong's reform and deepening the reform of the remuneration system and incentive mechanism have stimulated the company's operating vitality, while also reducing costs in multiple dimensions starting with the organizational structure, which is expected to open up space for improving the company's profitability. From a valuation perspective, Xujiao is a leading machine manufacturer with a complete business structure for new and old businesses: according to wind data and its consistent forecast (as of July 4, 2024), the average 2024E-2026E average PE of comparable companies (Sany Heavy Industries, Zhonglian Heavy Industries, Shantui Co., Ltd., Liugong) is 16.2X, 12.6X, 10.1X, and the average PB is 1.52X, 1.37X, 1.23X; according to our profit forecast, Xugong Machinery PE is 11.9X, 9.9X, 7.8X, and PB respectively With 1.31X, 1.25X, and 1.16X, XCMG's undervaluation attributes stand out.

Build a “model” for state-owned enterprise reform and seek high-quality development. Xugong's national reform is mainly divided into “three steps”: 1) Mixed shareholder reform: In September 2020, Xugong Limited, the company's former controlling shareholder, completed mixed reform, introduced a strategic investor and employee shareholding platform through equity transfers and capital increases. State-owned assets and private capital were fully bordered, and the corporate governance structure was optimized and upgraded, and the interests of management, employees, shareholders and other parties were coordinated; 2) Overall listing: In September 2022, the company completed the purchase of shares to absorb and incorporate high-quality assets such as excavators, mining machines, concrete machinery, and tower cranes into the listed company to achieve optimal integration of multiple businesses Business structure After the overall listing in 2022, the gross margin was about 3.97 pct higher than in 2021; 3) Equity incentives: In May 2023, the company completed the equity incentive plan and granted about 0.109 billion shares, accounting for about 1% of the total share capital at the time, covering all executives and all middle level cadres. The focus is on international talents, digital talents, technical marketing talents, etc., which is a move of deepening the company's national reform. The incentive and restraint mechanism for continuous, stable, long-term and short-term integration continues to improve. Judging from the results of the reform: profitability increased steadily. In 2023, XCMG's gross margin was 1.73 pct year on year, and net interest rate was +1.06 pct year on year. Raw material costs+internal control cost reduction contributed to profit improvement; asset quality gradually improved. In 2023, XCMG's accounts receivable and inventory were about 40 and 32.4 billion, respectively, down 0.5 and 2.7 billion from year on year, respectively.

In 2024, the company will continue to focus on the “three projects” of increasing gross margin and reducing accounts receivable and inventory pressure, and continue to implement the high-quality development results of national reform.

“New products+going overseas” may be a competitive factor in the construction machinery industry in the new stage, and XCMG continues to step up. According to the China Construction Machinery Industry Association, in 2020-2023, domestic sales of excavators in China fell from a cyclical high of 0.293 million units to about 0.09 million units, a decline of about 69%, while exports increased from 0.035 million units to 0.105 million units, accounting for half of the country. At the same time as the sales structure of the industry has changed significantly, the driving force of the domestic market is also gradually shifting from new demand driven by real estate and infrastructure investment. We believe that the development of China's construction machinery industry has entered a new stage, domestic demand elasticity is slowing down, and the importance of going overseas is increasing. New category expansion, overseas capacity building may become a new core competitive factor to promote enterprise growth. XCMG is actively laying out new momentum for growth: ① New products: The company's strategic emerging businesses include mining machinery, aerial work platforms, port machinery, agricultural machinery, etc. According to the 2023 annual report, the company's strategic emerging industries are growing at a close rate of revenue growth. 30%, accounting for more than 20% of the contribution, an increase of 4.5 pct.

Among them, the large-scale emerging business is the third largest aerial work platform in the world, and the fifth in the world for open pit mining equipment; ② Internationalization: In 2023, the company achieved overseas revenue of 37.22 billion yuan, +33.7%, accounting for 40.09%, or +10.42pct year on year. XCMG's international layout has gone from “going global” for initial trade and exports to “going in” with deep localization. It is accelerating its progress towards a “step up” stage of high-quality development, with export trade, overseas factory construction, multinational mergers and acquisitions, and global research and development.

Investment advice: We expect the company's revenue in 2024-2026 to be 98.62, 107.81, and 121.15 billion yuan respectively, with growth rates of 6.2%, 9.3% and 12.4% respectively, net profit of 6.58, 7.9, and 10.05 billion yuan respectively, with growth rates of 23.6%, 20.1%, and corresponding PE 11.9X, 9.9X, and 7.8X respectively; Xugong Machinery's traditional business market position is stable, which is expected to benefit from future cycle recovery and injecting growth into emerging businesses New momentum, and the active layout of an international strategy, the national reform continues to deepen to promote profit improvement. It has both growth and certainty, and has outstanding undervaluation characteristics; given a buy-A investment rating, the target price for 6 months is 8.4 yuan, which is equivalent to a dynamic price-earnings ratio of 15X in 2024.

Risk warning: Domestic demand recovery falls short of expectations, risk of global macroeconomic fluctuations, risk of increased trade friction, increased risk of market competition, overseas expansion falls short of expectations, profit forecast assumptions fall short of expectations