Established construction machinery state-owned enterprises are revitalized, and the “Three Quans Strategy” creates world-class:

Liugong was founded in 1958 and developed over 65 years with loaders to form more than 30 complete machine product lines, including earthmoving, road construction, mining machinery, industrial vehicles, agricultural machinery, etc., and is one of the few comprehensive solutions suppliers in the world. Among them, the installed equipment and excavator business stand out in the market. The market share in 2023 was 18.29% and 8.41% respectively (the combined caliber of domestic and foreign sales in the Chinese market), ranking third among the leading domestic installed machines and excavators. The company's performance continued to be realized after the national reform, driven by cost reduction and efficiency improvements. In the first three quarters of 2023 and 2024, the company's gross margins were 20.8% and 23.5%, respectively, +4pct and +2.8pct, respectively. Net interest rates were 3.4% and 5.9%, respectively, +1pct and +2 pct, respectively. The company pays close attention to the “comprehensive solution, comprehensive intelligence, and comprehensive internationalization” strategy and implements the entire business process with “profit growth, business growth, and capacity growth”. We continue to be optimistic about the company's performance flexibility and medium- to long-term growth space driven by increased profitability.

National reforms are deepening and refining domestic skills, capital helps optimize production capacity, and increases dividends to give back to shareholders:

The company's national reform completely went through the three steps of equity incentives, mixed shareholder reform, and overall listing. The equity incentive plan was first launched in 2018 to achieve a breakthrough of zero equity incentives for Guangxi state-owned listed companies. In 2020, Liu Gong Co., Ltd., the original controlling shareholder, completed the mixed reform, introduced war investment and established an employee shareholding platform. In 2022, Liugong Limited was finally achieved through the absorption and merger of Liugong Limited. In the subsequent stage of deepening national reform: ① Steady progress in enterprise management, establishing a platform-based mechanism to coordinate research and production of sales services in multiple areas; ② gradually improving the incentive mechanism, implementing contractual management and normalized incentives, and completing the second round of equity incentives in 2023, focusing on core backbone; ③ bond conversion issuance enhances manufacturing and cost reduction capabilities. In 2023, the company issued 3 billion yuan of convertible bonds for excavators/loaders to upgrade intelligent production lines, expand parts production capacity, and “three modernization” research and development, which is one of the specific dividend measures to increase the company's capacity ④; The rate is increasing year by year, the company The dividend ratios for 2021-2023 were 31.4%, 32.6%, and 45.0%, respectively, focusing on shareholder returns and value growth.

The leading installed power is focusing on electrification, diversifying old and new businesses and growing vigorously:

(1) Electrification: The electrification trend of construction machinery has arrived. The type with the most successful commercialization is the loader. From January to September 2024, China sold 8,323 electric loaders, +296.33%, and the electrification rate reached 10.18%, an increase of about 7.2 pcts over the previous year. As a leader in the loader industry, the company started the electric technology layout early in 2014. After ten years of development, the company became the first enterprise in the industry to achieve a full range of all-electric technology applications. The sales volume of electric products is in a leading position in the global market. Among them, sales of electric loaders in the first half of 2023 and 2024 were +67% and +159% year-on-year, and the market share remained at the forefront of the industry. In the future, as the wave of electrification in the construction machinery industry deepens, the company is expected to take the lead and continue to benefit with the first-mover advantage of leading electrical equipment companies.

(2) Diversification: The company actively implements the “Three Qualities” strategy to raise the growth ceiling by developing product lineages and international markets.

① Product lineage: The company's strong cycle, the traditional dominant sector, Earthworks Machinery focuses on large-tonnage loaders and excavator products, with wide-body trucks and rigid vehicles entering the high-end mining sector, with revenue +71% year-on-year in the first half of 2024; at the same time, the company actively lays out weak cycles and emerging strategic sectors such as agricultural machinery, forklifts, and elevators. Among them, the company's sugar cane harvester has become the number one brand in China, and the high-end high-horsepower tractor business progressed in an orderly manner; Hi-Tech built the TCO optimal brand concept, and sales revenue increased 112% in 2023. In the future, as the construction of a diversified lineage matures, the company is expected to weaken cyclicality and enhance growth.

② International market: The company went through three stages of overseas layout of chasing dreams, exploration, and transformation. The first overseas subsidiary was established in 2004, and the business model changed from international trade to international marketing; in 2009, the first overseas factory was put into operation in India, starting the “overseas localization” strategy; in 2019, direct companies were established in mature markets such as the United Kingdom and North America to further explore the high-end market. The company's overseas channel transformation and capacity improvement have been accelerated since the national reform. In 2021-2023, the company's overseas revenue was 5.984, 8.119, and 11.462 billion, respectively, with growth rates of 77.09%, 35.68%, and 41.18% respectively. The revenue scale continued to reach record highs, and the internationalization strategy fully provided a strong driving force for development.

Investment advice: We expect the company's revenue for 2024-2026 to be 30.41, 34.53, and 40.43 billion yuan respectively, with growth rates of 10.5%, 13.5% and 17.1% respectively, net profit of 1.54, 2.08, and 2.72 billion yuan respectively, with growth rates of 77.3%, 35.1%, and corresponding PE 15.7X, 11.6X, and 8.9X respectively; the company is a leading domestic loader, and is expected to fully benefit from industry demand The bottom is recovering and the wave of electrification; at the same time, emerging businesses such as mining machinery, agricultural machinery, high machinery, and forklifts have injected new momentum into the company's growth, compounding the continuous optimization of the company's profitability with outstanding growth flexibility; given a buy-A investment rating, the target price for 12 months is 14.7 yuan, which is equivalent to a dynamic price-earnings ratio of 14X in 2025.

Risk warning: Domestic market recovery falls short of expectations, overseas market expansion falls short of expectations, fund-raising project progress falls short of expectations, market competition intensifies, cost reduction and fee control effects fall short of expectations, assumptions and estimates.