Key points of investment

Leading domestic loaders set a new high when going overseas independently

Liugong was founded in 1958 and is the first listed construction machinery company in China. The loader is the company's best product, and its sales volume is steadily ranked first in the industry. In 2016-2023, the company's revenue increased from 7.01 billion yuan to 27.52 billion, CAGR about 22%, and net profit to mother increased from 0.05 billion yuan to 0.87 billion yuan, and CAGR of about 51%. The company's overseas business expanded smoothly. Overseas revenue grew from 6 billion yuan in 2021 to 11.5 billion yuan in 2023, with a CAGR of about 38%, and the share of revenue increased from 21% in 2021 to 42% in 2023. The company's overseas expansion was successfully combined with the release of mixed energy efficiency. 2024H1's revenue was 16.1 billion yuan, up 7% year on year, of which overseas revenue was 7.7 billion yuan, up 19% year on year, accounting for 48%; net profit to mother was 0.98 billion yuan, up 60% year on year.

Domestic demand for construction machinery bottomed out and rebounded, and the logic of going overseas was gradually realized

In this downward cycle, sales of medium and large companies have declined by more than 70% in 3 years, which is close to the decline in the previous cycle. We believe that domestic sales of construction machinery are bottoming out, and that upgrading and electrification of existing equipment may be the core driving force for the new round of upward domestic sales of construction machinery. At the same time, going overseas has become a must-compete place for domestic OEMs. The export sales of construction machinery increased from about 0.27 million units in 2020 to about 0.66 million units in 2023, with a CAGR of about 35%. However, the overseas share of domestic leaders is still low, and electrification may be the key to breaking through overseas.

The electrification of loaders is trending, leading the way in a new global journey. We are optimistic about the electrification trend of loaders. The main factors are: (1) the price difference between electric and fuel loaders is gradually narrowing; (2) the operating cost of electric loaders is low and the economy is prominent throughout the life cycle; (3) electrical equipment can meet the working environment with high environmental requirements. Electric loaders can save about 0.28 million yuan in operating costs every year; considering the 5-year life cycle, electric loaders can reduce total costs by about 40%.

We expect the global loader market to be about 299 billion yuan in 2028, of which the electric loader market is about 69 billion yuan, and the electrification rate is about 25%; China's loader market is estimated to be about 54 billion yuan in 2028, of which the electric loader market is about 22.4 billion yuan, and the electrification rate is about 42%.

Mixed reform creates alpha, and the globalization+electrification layout welcomes the “mixed reform+equity incentives+convertible bonds” of the company during the harvest period, and profitability is expected to increase significantly. After the “mixed reform”, the company integrated the Group's assets to complete the overall listing and introduced strategic investors and employee shareholding platforms to complete marketization. Furthermore, the company has been adhering to the global strategy for more than 20 years. Overseas revenue exceeded 10 billion dollars in 2023, and globalization+electrification ushered in a harvest period. In the short term, as a leading domestic loader, the company is expected to overtake cars on overseas curves with electrification; in the medium term, the excavator market share will increase significantly, and medium and large excavators will continue to expand and improve profitability; in the long run, the agricultural machinery & prestress & mining machinery sector is expected to become a new growth curve.

Optimistic about the company's mixed transformation and efficiency improvement & global electrification, we expect the company's 2024-2026 revenue to be 30.39/35.11/40.52 billion yuan, respectively, up about 10%/16%/15% year over year; net profit to mother will be 1.54/2.66 billion yuan, up 77%/37%/26% year on year respectively; EPS will be 0.8/1.1/1.3 yuan/share, respectively, and the 2024-2026 CAGR will be 32%. In view of the company's mixed reform gradually releasing profit flexibility and the smooth expansion of overseas expansion, coverage was given a “buy” rating for the first time.

Risk warning: Domestic demand recovery falls short of expectations, overseas expansion falls short of expectations, industry competition intensifies