[Investment points

Alpha attributes are prominent, and Q2 performance is above the median forecast

2024H1 achieved operating income of 16.06 billion yuan, up 6.8% year on year; net profit due to mother 0.98 billion yuan, up 60.2% year on year; net profit after deducting non-return to mother 0.9 billion yuan, up 73.0% year on year. Looking at Q2 alone, the company achieved operating income of 8.12 billion yuan, a year-on-year increase of 12.1%; net profit to mother of 0.49 billion yuan, an increase of 62.5%; net profit after deducting non-return to mother of 0.45 billion yuan, an increase of 79.5% year-on-year, and the performance was above the median forecast. By product: (1) earthwork machinery: 2024H1 revenue of 9.94 billion yuan, +15.9% year over year, mainly benefiting from increased domestic share & overseas market expansion; (2) other construction machinery and components: 2024H1 revenue of 4.67 billion yuan, compared to -7.5%. We judge that domestic demand for construction machinery and other products is mainly weak and dragged down. The sales growth rate of 2024H1's domestic earthmoving machinery sector is better than the industry's 8.8 pct, and the overseas market sales growth rate is better than the industry's 21.8 pct. The alpha attribute is prominent.

The mixed reform reduced costs and increased efficiency & improved revenue structure. Profitability continued to increase 2024H1's gross sales margin by 23.4%, +3.3 pct year on year. Its gross margin in China/overseas was +4.0/+1.1 pct year on year, respectively; the net profit margin on sales was 6.3%, up 2.2 pct year on year. Looking at Q2 alone, the company's gross profit margin for 2024Q2 was 24.0%, +2.4pct year on year, net sales margin 6.2%, +2.1pct year on year, and profitability continued to increase. 1) Margin side: On the one hand, the increase in gross margin was due to cost reduction and efficiency from the manufacturing & procurement side after the company's mixed reform; on the other hand, thanks to the increase in the share of high-margin overseas business revenue, 2024H1 overseas revenue was +18.8% year-on-year, higher than the overall revenue growth rate. 2) On the cost side, the 2024H1 company's cost rate for the period was 14.0%, +1.1 pct. Among them, the sales/management/R&D/finance expense ratios were +0.8/-0.1/+0.0/+0.4 pct year over year, respectively. The increase in sales expense ratio was mainly due to increased overseas channel deployment, and the increase in financial cost ratio was mainly due to the impact of exchange.

Electrification & internationalization continue to gain strength, and there is broad room for future growth (1) Electrification: 2024H1 electric loader sales also increased by 159%, leading the market share in the industry.

The price and gross margin of a single Denso unit is higher than that of OIL, and it is highly recognized overseas, which is expected to drive the scale of revenue and profit to continue to expand. (2) Internationalization: The company is steadily advancing the internationalization process and responding positively to overseas demand in many categories. The overseas revenue growth rate of 2024H1 small construction machinery, mining trucks, truck cranes, and high machinery all exceeded 100%; sales of pavers and milling machines grew by more than 300%, and the results of expanding the international category were remarkable.

Mixed reform improves business quality, equity incentives and fixed increases strengthen competitiveness. In 2022, the company completed mixed reform and achieved overall listing. After the mixed reform was completed, equity incentives and fixed increases were issued one after another to effectively expand production capacity, upgrade smart factories, stimulate employee enthusiasm, and greatly enhance overall competitiveness: ① Equity incentives: bind 974 executives and core technical personnel. Performance evaluation indicators focus on business quality, demonstrating the company's confidence in development. ② Fixed increase: Raise 3 billion yuan for factory upgrades, component capacity expansion, and “three modernization” research and development. After the excavator project is put into operation, the factory will be upgraded to a smart factory and the production capacity of medium and large excavators will double; after the loader project is put into operation, large-scale loaders will be arranged to enhance competitiveness; after the new Zhongyuan Hydraulic Business plant is fully put into operation, the production capacity of hydraulic components will expand dramatically, and the increase in component autonomy will help reduce costs and increase efficiency, and the overall competitiveness will be further enhanced.

Profit forecast and investment rating: The company's 2024H1 performance is above the median forecast. We maintain the company's net profit forecast value of 1.456/1.938/2.728 billion yuan for 2024-2026. The current market value corresponds to PE 13/10/7x, respectively, maintaining a “buy” rating.

Risk warning: Domestic industry demand recovery falls short of expectations, industry competition intensifies, overseas trips fall short of expectations, and breakthroughs in electrification technology fall short of expectations.