Key points of investment

The performance forecast is in line with expectations. 2024H1's performance is expected to increase by 45% to 70% year on year, and profitability is expected to increase significantly. The 2024H1 company is expected to achieve net profit of 8.90 to 1.044 billion yuan, up 45% to 70% year on year, with a median value of 0.967 billion yuan, up 58% year on year; net profit without return to mother is 8.26 to 0.979 billion yuan, up 58% to 88% year on year, and the median value is 0.902 billion yuan, up 73% year on year. In Q2, the company is expected to achieve net profit of 3.92 to 0.546 billion yuan, a year-on-year increase of 31% to 83%, a median increase of 0.469 billion yuan, a year-on-year increase of 57%; net profit deducted from non-return to mother of 3.69 to 0.522 billion yuan, a year-on-year increase of 49% to 110%, and a median increase of 0.446 billion yuan, a year-on-year increase of 79%. According to the “14th Five-Year Plan” strategic plan, the company focused on the three core tasks of “profit growth, business growth, and capacity growth”. The company's overall operating efficiency improved markedly. The sales growth rate in the international and domestic markets continued to outperform the industry. The market share continued to rise, and the improvement in gross profit margin and net interest rate exceeded expectations, promoting a significant increase in operating performance and cash flow in the first half of the year.

Mixed reform unleashes performance flexibility+rapid growth of electric loaders+increased market share of excavators, optimization of product structure 1) Mixed reform unleashed performance elasticity and enhanced profitability. The company actively promotes cost reduction and efficiency throughout the value chain around the main business line of “profit growth, business growth, and capacity growth”. In 2023, the company's ROE (weighted) was 5.4%, up 1.6 pct year on year; gross profit margin was 20.8%, up 4.0 pct year on year; net profit margin was 3.4%, up 1.0 pct year on year.

2) Electric loaders are expected to usher in a period of rapid growth. Liugong is one of the companies with the greatest upward flexibility. In June, sales of 1,570 electric loaders were sold in a single month, up 418% year on year, and the penetration rate reached 15%, which is expected to usher in a period of rapid growth. The company is the leading loader in China. The earthwork machinery business (loaders, excavators, etc.) accounted for 58% of revenue in 2023, and the company's electric loader sales increased 67% year-on-year in 2023, making it one of the companies with the greatest upward flexibility in the electric loader industry.

3) Increased market share of excavators and optimized product structure. In 2023, the domestic market share of the company's excavators exceeded 11%, and the market share increased by 3 pcts. The company plans to focus on mining, water conservancy, ports and other businesses in the future to effectively increase the proportion of large-scale excavations. With the continuous optimization of the product structure, it is expected to help improve the company's profitability.

The proposed repurchase is intended to be used for equity incentives or employee stock ownership plans. Steady and far-reaching adherence to the long-term principle 1) Buyback + dividends demonstrate the company's confidence in development.? Repurchase: On the evening of March 29, the company announced that it intends to repurchase shares not less than RMB 100 million (inclusive) and not more than RMB 200 million (inclusive), to be used for equity incentives or employee stock ownership plans. On the evening of July 11, the company plans to adjust the maximum share repurchase price from no more than RMB 9.80 per share (inclusive) to no more than RMB 15.00 per share (inclusive).? Dividends: In 2023, the company plans to pay a cash dividend of 0.39 billion yuan, accounting for about 45% of net profit attributable to mother, corresponding to the dividend rate of 1.8% on July 12, 2024.

2) Impairment accrual is expected to decrease: In 2023, the company's impairment provision is about 0.786 billion yuan (credit impairment loss 0.531 billion yuan+asset impairment loss 0.254 billion yuan). By impairing problem and risk assets, it is expected that the soundness of financial statements will be guaranteed. The company's impairment losses are expected to be accrued or reduced, which is expected to provide flexibility for performance growth.

3) Adhere to the long-term principle: The company strictly controls credit risk in overseas markets and is CITIC Insurance's top quality V-level customer.

Construction machinery industry recovery trilogy: increase in export market share, improvement in domestic demand, start of renewal cycle 1) Excavators: In the short term, total excavator sales in June were 16,603 units, up 5.3% year on year, and achieved positive growth for 3 consecutive months from April to April. Among them, there were 7,661 units in China, up 25.6% year on year, exceeding previous CME expectations (previously expected to increase nearly 20% year on year), and achieved positive growth for 4 consecutive months from March to June; exports of 8,942 units, down 7.5% year on year. Based on the low base for July-September 2023 (total excavator sales 0.013 million units, 0.013 million units, 0.014 million units), total excavator sales are expected to continue for 6 consecutive months after 3 consecutive months of positive growth from April to April 2024. In the long run, the launch of a globalization+domestic renewal cycle is expected to help the construction machinery industry cycle upward.

2) Loaders: Loader sales in June were 10,794 units, up 26.2% year on year. From April to June, sales volume in China was 5,296 units, up 22.6% year on year, and was growing for 3 consecutive months from April to April; export sales volume was 5,498 units, up 29.8% year on year, and positive growth for 4 consecutive months from March to June.

Profit forecast and valuation: Net profit due to mother for 2024-2026 is expected to be 1.54 billion, 2.02 billion, and 2.65 billion yuan, up 77%, 32%, and 31% year-on-year (2024-2026 CAGR is 32%), and PE corresponding to the closing price on July 12, 2024 is 14, 11, and 8 times. Maintain a “buy” rating.

Risk warning: Investment in infrastructure and real estate falls short of expectations; industry competition increases risk; risk of trade friction.