A leader in the domestic bulldozer industry, with a long history and rich heritage. The predecessor of Shantui Co., Ltd. can be traced back to the Yantai Machinery Factory established in 1952. In the 2180s, the company completed the start of bulldozers through the introduction of Caterpillar and Komatsu technology, then continued to cultivate the main bulldozer business. It was listed on the Shenzhen Stock Exchange in 1997, and jointly formed Shandong Heavy Industries Group in 2009 with Weichai Holding Group and Shandong Automobile Industry Group. After more than 40 years of R&D accumulation, the company gradually replaced 300-900HP high-horsepower bulldozers with domestic production. Currently, on the domestic side, the company's bulldozer market share has remained above 60% for many years, and its leading position has been stable for a long time; overseas, the company's international business is developing rapidly and has taken a place in emerging markets.

Reviewing the company's performance for nearly 20 years: In the 2004-2011 and 2016-2021 construction machinery upward cycles, the company's revenue CAGR was 36% and 16%, respectively, and the net profit CAGR to mother was 44% and 37%, respectively. The historical peak of the company's revenue and profit peaked along with the first cycle, reaching 14.702 and 0.84 billion yuan respectively. In the first round of the cycle, the company benefited from national policy incentives such as the rapid increase in the urbanization rate and the “4 trillion” plan. At the same time, as a bulldozer leader, it also promoted the continuous deepening of the domestic substitution process; in the second cycle, the excavator category was domestically replaced and flourished, and the company's failure to reach new heights was also due to the limitations of a single category. In 2023, the company achieved revenue and net profit of 10.541 and 0.765 billion yuan. Domestic demand bottomed out and export sales contributed significantly, and profitability recovered significantly. In the future, the company is expected to achieve innovative development through the continuous implementation of internationalization and diversified development strategies.

The core focus of Shantui Co., Ltd. is:

1) Can the company's overseas revenue continue to grow?

In 2020-2023, the company's overseas revenue grew from 1.245 billion yuan to 5.878 billion yuan, and the 3-year CAGR reached 67.76%. Among them, the export scale surpassed domestic sales for the first time in 2023, and exports became one of the core driving forces for the company's growth. In the future, whether the company's overseas revenue can continue to grow rapidly is the focus of market attention. We believe that the driving force for the continued growth of the company's overseas revenue is mainly the “two new” strategy of developing emerging markets and releasing new products such as high-horsepower bulldozers and excavators.

Looking at the regional structure: Currently, the main export regions of China's bulldozer industry are Russia, and other regions such as Southeast Asia, the Middle East and Africa are still in the initial development stage; the company focuses on emerging markets in developing countries. The market share in Europe and the US is relatively low, and there is still great potential for development; in the future, further development of overseas emerging markets is expected to support the company's overseas revenue to maintain a good growth rate.

Judging from the product structure, high-horsepower bulldozers and excavators are an incremental source of the company's overseas revenue.

In terms of bulldozers, the global bulldozer industry has a market size of about 2.5 to 0.03 million units, of which high-horsepower models are about 1500-1800 units, with an average price of more than 3 million yuan/unit, and demand mainly comes from overseas. In 2020, the company's high-horsepower bulldozer production capacity was only 10 units. Through a fixed increase production expansion project, it is expected to increase to 200 units by 2027. The company's global share of high-horsepower products is relatively low, and the gradual release of production capacity is expected to provide a significant driving force for the company's overseas revenue growth.

In terms of excavators, in 2020-2023, the company's revenue from commercial products represented by excavators increased from 0.426 billion yuan to 1.59 billion yuan, and the CAGR reached 55.12%. Among them, overseas sales of excavators contributed significantly, and the volume of exports of new products such as excavators is expected to further increase the company's overseas revenue.

2) Can the company's new excavator products grow bigger and stronger?

Excavators are one of the company's key expansion categories, and their manufacture is mainly carried out by Mountain Reconstruction Equipment (a subsidiary of Shandong Heavy Industries Group). In 2021-2023, the company's procurement amount for mountain reconstruction machines from affiliated companies rapidly increased from 0.299 billion yuan to 1.369 billion yuan; in Q1 2024, the company initiated acquisition plans for mountain reconstruction machines, and may integrate manufacturing and sales. In the future, whether the company's excavator business is competitive enough to become the second growth curve will also be the focus of market attention. We believe:

The “golden core” built on the back of the Group is the biggest competitive advantage of mountain propeller excavators.

The company is backed by Shandong Heavy Industries Group, and its brother companies include Weichai Power and Linde Hydraulics. Using resource sharing for core components within the group, the company replaced the traditional “Cummins engine+Kawasaki hydraulic parts” for excavators with “Weichai engine+Linde hydraulic parts” to achieve fuel savings of 10%-15%, increase efficiency by 10% to 15%, establish a “golden core” differentiated competitive logic, and enhance the core competitiveness of the excavator business. In addition, the company is strengthening channel sharing with other business lines within the group to drive excavator sales with bulldozer products and create integrated solutions.

3) Can the company continue to unlock profit elasticity?

In 2020-2023, the company's net profit to mother increased from 0.101 billion yuan to 0.765 billion yuan, and the CAGR reached 96.39%; of these, gross margin increased from 13.73% to 18.44%, and net interest rate increased from 1.48% to 7.29%. With continuous optimization of the demand structure and cost reduction and fee control effects, the company's profitability improved significantly. Looking ahead, the company's profit elasticity is expected to continue to unleash:

① Regional structure optimization: In 2023, the gross margins of the company's domestic and overseas business were 10.92% and 24.05% respectively. The profitability advantage of overseas business is remarkable. In the future, as the company's share of overseas revenue further increases, it is expected to drive a continuous increase in overall profitability; ② Product structure optimization: The company's core business, bulldozer, has a remarkable development trend. According to feedback from the 2021 non-public stock offering, the gross margin of the company's high-horsepower bulldozers reached 33.63%, which is higher than the comprehensive gross profit margin of 26.15% for bulldozers. The profitability of the main business is expected to increase further in the future as high-horsepower products are sold overseas.

③ Excavator manufacturing asset injection: In 2023, the gross margin of the company's commercial products, mainly excavators, was only 3.68%. The reason for the low gross margin is that the company's excavator business currently only includes gross profit on the sales side, and the gross profit on the manufacturing side still belongs to the related party Enterprise Mountain Reconstruction Machine. In the future, if the company integrates the Group's excavator assets and integrates manufacturing and sales, the gross margin of the excavator business is expected to increase significantly.

Investment suggestions: We expect the company's revenue in 2024-2026 to be 13.44, 15.81, and 18.2 billion yuan respectively, with growth rates of 27.5%, 17.7%, and 15.1%, respectively, and net profit of 0.95, 1.21, and 1.43 billion yuan, respectively, with corresponding PE 15.2X, 12X, and 10.1X respectively; Shantui Co., Ltd. is the leader in the bulldozer industry. At the same time, the international business of large tonnage bulldozers is growing rapidly, and the international business of excavators is growing rapidly. Emerging businesses such as loaders have good growth potential and good growth potential. For the first time, an investment rating of Buy-A was given. The target price for 12 months was 11.2 yuan, which is equivalent to a dynamic price-earnings ratio of 14X in 2025.

Risk warning: risk of continued decline in domestic sales, risk of slowing export growth, risk of new product development falling short of expectations, risk of international trade friction, profit forecasts falling short of expectations.