3Q24 results slightly exceeded our expectations

The company announced 1-3Q24 results: revenue of 68.726 billion yuan, down 4.1% year on year, net profit of 5.309 billion yuan, up 9.7% year on year; 3Q24 revenue of 19.094 billion yuan, down 6.4% year on year, net profit of 1.603 billion yuan, up 28.3% year on year. The performance slightly exceeded our expectations, mainly due to significant cost management and significant increase in gross margin.

Cost control led to a year-on-year increase in gross margin. 1-3Q24's comprehensive gross profit margin was 23.63%, up 0.7ppt year over year. 3Q24's consolidated gross margin was 25.54%, up 2.5ppt year over year. After the state-owned enterprise reform, the company carried out unified procurement of raw materials and carried out cost reduction management. The results in the 3rd quarter were obvious.

Operating cash flow continues to improve. 3Q24 The company's sales, management, and R&D expenses ratio was -0.2/-0.2/+0.1ppt year on year, and the financial expenses rate fell 1.8ppt to 1.0% year on year. After exchange rate fluctuations in the first half of the year caused exchange losses, the company strengthened exchange rate control measures and implemented an exchange rate hedging plan. 1-3q24/3q24 The company's net interest rate increased 1/2.3ppt year-on-year to 7.7%/8.4%. The company's net cash flow from operating activities in the third quarter of 2024 was 2.04 billion yuan, both improving year on month.

Development trends

Domestic demand for construction machinery bottomed out, and export demand picked up from the second half of the year. Domestic excavator sales were 0.074 million units in the first three quarters of 2024, up 8.6% year on year, and excavator export sales were 0.073 million units, down 9.0% year on year. Since domestic excavator sales turned positive in March, sales have continued to improve. We have observed a correction in excavator sales in the second half of the year. Domestic sales of other construction machinery, such as cranes and concrete machinery, are still weak. Excavator export sales were affected by the export base and overseas sentiment. Sales declined year on year since the second half of last year, and gradually corrected in August of this year.

The results of the state-owned enterprise reform are beginning to show, and the company's risk exposure and profitability continue to improve. The company continues to strengthen risk control and continuously reduce risk assets inside and outside the balance sheet through strict control of credit lines, etc. Looking back, we believe that the recent introduction of a package of local debt resolution policies will help the company's customers return their cash flow and reduce the company's credit risk. At the same time, after the reform of state-owned enterprises, the company strengthened cost control, optimized the raw material procurement process, and the gross margin continued to improve. We expect the company's profitability to continue to improve.

Profit forecasting and valuation

We basically maintain the 2024/2025 EPS of 0.53/0.64 yuan. The company's current stock price corresponds to 2024/2025 15.4x/12.7x P/E. Considering the upward trend in the valuation center, we raised the target price by 11.1% to 10.6 yuan, corresponding to 20.0x/16.5x P/E in 2024/2025, with 30% upside.

Maintain an outperforming industry rating.

risks

Real estate construction and restoration fell short of expectations; industry price competition intensified; overseas market demand declined.