Xugong Machinery released its three-quarter report: Q3 achieved revenue of 19.094 billion yuan (yoy -6.37%, qoq -25.00%) and net profit of 1.603 billion yuan (yoy +28.28%, qoq -23.84%). Q1-Q3 2024 achieved revenue of 68.726 billion yuan (yoy -4.11%), net profit to mother of 5.309 billion yuan (yoy +9.71%), after deducting non-net profit of 4.889 billion yuan (yoy +11.85%). The industry is still bottoming out, and there is still some pressure on the company's revenue side, but the company's cost reduction and fee control have already begun to pay off. As a leading domestic construction machinery company, the company has increased overseas investment and optimized the cost structure to improve profitability. We are optimistic that the company will continue to increase its market share and increase profitability during the recovery phase of the domestic construction machinery industry. Maintain a “buy” rating.

24Q3 company gross profit margin 25.54% /yoy+2.53pct, net profit margin 8.31% /yoy+1.95pct in the first three quarters of 2024. During the industry adjustment period, company cost control further increased gross profit margin, with a net profit margin of 7.74% /yoy+1.03pct; of these, 24Q3 gross profit margin 25.54% (yoy+2.53pct, qoq+2.65pct), net profit margin 8.31%, up 1.95pct year-on-year.

In terms of cost ratio, the 24Q3 company's expense ratio was 16.55%, down 2.13pct year on year; among them, sales/management/ development/ finance expenses were 7.43%/3.76%/4.31%/1.05%, respectively, -0.20pct/-0.25pct/+0.15pct/-1.83 pct. The company continued to invest heavily in the development of mining machinery, electrified products, etc. in the early stages, and gradually entered the harvest period. As the company begins to strengthen cost and expense control, the company is expected to continue to improve its profitability.

The incremental policy continues to be implemented, and downstream customer repayments are expected to improve and support construction machinery demand. According to the Ministry of Finance press conference on October 12, the Ministry of Finance will launch a package of targeted incremental policy measures in the near future, focusing on steady growth, expansion of domestic demand, and risk mitigation, to step up local government debt risks, continue to increase central to local transfers, and issue 400 billion debt limits to the local community to supplement the comprehensive financial resources of the region. The next step is to study and formulate a “Three Guarantees” (protecting basic livelihood, wage protection, and operation protection) list, helmet Secure the bottom line of the “Three Guarantees” at the grassroots level. Downstream real estate and infrastructure projects for construction machinery are expected to benefit from debt conversion policies and improved repayment, thereby supporting construction machinery demand.

Profit forecasting and valuation

We maintain our profit forecast. We expect the company's net profit to be 6.594 billion yuan, 8.301 billion yuan, and 10.867 billion yuan in 2024-2026, corresponding growth rates of 23.79%, 25.89%, and 30.91%. The corresponding EPS is 0.56, 0.70, and 0.92 yuan, respectively. Comparable to the 25-year Wind, the average PE was expected to be 13.41 times, giving the company 13.41 times PE in 25 years. Corresponding target price of 9.42 yuan (previous value 7.81 yuan).

Risk warning: The competitive landscape of the industry worsened beyond expectations; overseas business expansion fell short of expectations.