Incident: The company disclosed the report for the third quarter of 2024. In 2024Q1-Q3, the company achieved revenue of 34.385 billion yuan, yoy -3.18%, net profit due to mother of 3.139 billion yuan, yoy +9.95%, net profit of 2.19 billion yuan, yoy -7.25%, gross sales margin of 28.37%, +0.61 pct year on year; net sales margin of 10.16%, yoy +1.54 pct year on year. Among them, the 2024Q3 company achieved revenue of 9.85 billion yuan, yoy -13.89%, net profit to mother of 0.851 billion yuan, yoy +4.42%, net profit of 0.71 billion yuan, yoy +5.53%, gross sales margin of 28.52%, +1.06 pct year over year, +0.53 pct month-on-month, net sales margin of 9.65%, +2.28 pct year on month, and -2.27 pct month-on-month.

Excavators come first, and domestic construction machinery is expected to break out of the bottom. Since the beginning of 2024, projects related to the issuance of trillion yuan treasury bonds have started one after another, and the demand side of the market has stabilized. At the same time, large-scale equipment renewal policies have accelerated the elimination of old “country 1” and “country 2” equipment, stimulating demand for some new machine updates, and domestic sales of construction machinery showed a downward recovery trend. By product, excavators are one step ahead, and cranes are still declining to a certain extent. Domestic sales of 24M1-M9 excavators and cranes were 0.074 and 0.028 million units respectively, +8.6% and -35.9% year-on-year respectively. As the construction machinery and equipment renewal cycle approaches, the country's countercyclical regulation and control efforts are strengthened, and the construction of large-scale infrastructure projects is accelerated, the industry is expected to gradually break out of its trough.

Globalization+diversification strategies reduce cyclical impact. The company continues to implement globalization and diversification strategies to reduce the impact of the domestic cycle: 1) Globalization: The company makes full efforts in R&D, manufacturing, overseas supply chain, overseas products, services, and talents, etc., and comprehensively accelerates the transformation to overseas through end-to-end, digital, and localized direct sales methods. 24H1's overseas revenue was 12.05 billion yuan, +43.90% year-on-year, accounting for 49.1% of revenue, +11.1pct year-on-year; 2) Diversification: the company's traditional dominant sector competes with emerging sectors, Emerging sectors such as earthwork, high machinery, agricultural machinery, and mining have further increased their share of revenue, and their market share and profitability have continued to increase. The total revenue of 2024H1's emerging business segment was 9.815 billion yuan, +32.73% year on year, accounting for 40.00% of revenue, +9.29pct year on year.

Risk is strictly controlled, and the quality of the company's operations has been steadily improved. The company attaches great importance to business quality. Through the construction of an end-to-end digital system, the company strengthens the control of the entire business process and achieves a steady improvement in business quality. 24Q1-Q3's net operating cash flow was 1.208 billion yuan, +5.78% year over year, and net operating cash flow for the third quarter was 0.383 billion yuan, +81.57% year over year. As of 24Q3, the sum of the company's notes receivable, accounts receivable financing, other accounts receivable, loans and advances, and long-term receivables decreased by 2.068 billion yuan from the end of 23, a decrease of 4.65%. As of 24Q3, the company's inventory decreased by 0.08 billion compared to the end of 23, a decrease of about 0.35%.

Investment advice: Considering the company's stable position in the construction machinery market, the smooth development of emerging businesses, and the continuous development of overseas markets, we predict that the company's profit for 2024-2026 will be 3.86, 5.07, and 6.37 billion yuan, respectively, corresponding to PE of 16, 12, and 9 times, respectively, maintaining the “recommended” rating.

Risk warning: Overseas market expansion falls short of expected risk; domestic construction machinery industry cycle downturn risk, emerging business development falls short of expected risk.