We have been deeply involved in the industry for more than 60 years, have a precise strategic layout, and have grown into a leader in the construction machinery industry. The company was founded in 1958. It has been nearly 60 years since the first modern wheel loader was launched in 1966, and has now grown into a comprehensive solution provider with products such as earthmoving machinery, lifting machinery, industrial vehicles, pavement machinery, concrete machinery, pile construction machinery, aerial work machinery, and mining equipment.

Products: From loaders and excavators to comprehensive solutions, electrification and offshore add new momentum.

1) Loaders: Leading loader companies, the Denso competition has accelerated the reshuffle of the industry, and the company's market share has steadily rebounded. The company is an established leading loader company, and its overall market share has continued to rise in recent years. As battery costs have declined, the penetration rate of electric equipment has reached 14.5% from less than 1% in early 2013 to June 2024. Currently, Denso has entered the phase of accelerated reshuffle. Liquidation is expected to be accelerated in the next 1-2 years, and the company's market share as the leading market is expected to increase further. 2) Excavators: One of the earliest domestic excavator companies. The market share has increased significantly in recent years. This is mainly due to the rapid increase in domestic small excavator sales and the overseas market share of medium and large excavators. 3) Agricultural machinery: leading sugar cane harvester companies, supported by high-horsepower tractors.

Agricultural machinery subsidies have maintained an upward trend in recent years, and agricultural machinery is an important industry for large-scale equipment upgrades. At present, the company has become one of the largest producers and sellers of sugar cane harvesters in China. Furthermore, in 2020, Liugong officially entered the tractor industry and completed the development and market application of a full range of 90 horsepower to 260 horsepower tractor products. The agricultural machinery sector is expected to focus on development in the future. 4) From a single product leader to a comprehensive solution provider: Since 2000, the company's main business categories have continued to expand. In addition to loaders and excavators, the earthmoving machinery produced by the company also includes bulldozers, graders, mining trucks, etc., which can provide customers with leading equipment and technical solutions, involving more than ten application scenarios.

Region: From internationalization to globalization, complete the “three-level jump” of international marketing, manufacturing, and mergers and acquisitions. The company is one of the earliest domestic construction machinery companies with an international layout. Caterpillar loader technology was first introduced in 1987, and a joint venture was established with ZF Germany in 1995. In 2002, the company strategically first proposed “building an open and international Liugong”. Since then, in 2003, it has established its first agent in North Africa and Australia, the first overseas subsidiary, and established its first overseas manufacturing plant, the Indian factory, in 2009, to complete the leap from international marketing to international manufacturing. In the field of mergers and acquisitions, Poland's HSW and CPMS were also successively acquired in 2012 and 2019. At present, the company has provided sales and service support to overseas customers in more than 130 countries and more than 2,700 outlets with more than 300 dealers, and has basically covered most countries and regions along the country's “Belt and Road” strategy.

Management: Mixed ownership reform+equity incentives+convertible bonds lay out new production capacity to stimulate business vitality.

1) Mixed reform: Mixed reform is an important step in Liugong's development history. In 2019-2020, the group established Liugong Limited and introduced battle investment and employee shareholding, and the group's share ratio dropped to 51%; in 2021, Liugong shares absorbed and merged Liugong Limited, and the group's assets were listed as a whole. 2) Equity incentives: In April 2023, the company released a stock option incentive plan, which further enhanced the company's operating vitality and employee enthusiasm. 3) Convertible bond financing lays out new production capacity. In 2023, the company raised 3 billion yuan through convertible bonds to build Liugong excavator smart factory projects, intelligent loader transformation projects, etc. After this fundraising project is put into operation, the company's production capacity will be further increased, while logistics and management costs are expected to be reduced.

Investment advice: We expect the company to achieve revenue of 30.76, 35.35, and 42.18 billion yuan in 2024-2026, and net profit of 1.44, 2, and 2.68 billion yuan, respectively. The corresponding PE is 14/10/7.5 times, respectively, covered for the first time, and given a “recommended” rating.

Risk warning: macroeconomic fluctuation risk, international trade friction risk, sea freight price fluctuation risk, exchange rate risk, raw material price fluctuation risk