Key investment points

1. One-sentence logic

Bulldozer leaders are becoming global, high-horsepower bulldozer exports increase profitability, and the excavator business is expected to gain strength.

II. Logic that exceeds expectations

1. The market believes:? The bulldozer industry has relatively limited market space;? The market is worried about whether the company's excavator business can grow bigger and stronger.

2. We believe that:

1) The plan is to acquire 100% of the shares of Mountain Reconstruction Equipment for 1.8 billion yuan, which is expected to open up market space and increase the company's valuation through the excavator business. On the evening of November 11, the company announced that it plans to acquire 100% of the shares of Mountain Reconstructor in cash for 1.8 billion yuan. From January to September 2024, the market share of Yueshan Reconstructor excavators was 4.03%. At the same time, Shandong Heavy Industries Group promised to resolve peer competition issues in the excavator business of Leiwo Heavy Industries, Weichai Qingdao and Shantui Co., Ltd. within 5 years.

2) The excavator business relies on bulldozer sales channels and the platform advantages and supply chain advantages of Shandong Heavy Industries Group, and is expected to rise rapidly

? Gold core: The “Golden Core” is a power transmission system assembly that is professionally matched, improved, and verified on the basis of Weichai engines, Linde hydraulic components, and Shantui transmission parts in collaboration with six domestic and international research centers of Shandong Heavy Industries Group, NeiShantui Co., Ltd., Weichai Power, and Linde Hydraulics. It has the unique advantages of being more fuel-efficient, more efficient, and more reliable. Shantui's “Golden Core” series products: Under the same efficiency, the standard fuel saving is 10-15%; under the same fuel consumption, the benchmarking efficiency is increased by more than 15%; the three-warranty period for key core components can be extended to 0.01 million hours for 5 years.

? Channel collaboration: The company's excavator products are expected to be sold through product channels such as bulldozers. Currently, the company's domestic and foreign sales channel layout is perfect. The products are exported to more than 160 countries and regions, and has now developed more than 160 overseas agents. At the same time, the company's excavators are expected to use the influence of brands such as Weichai Power, Sinotruk, and German Kaiao under Shandong Heavy Industries Group to achieve product sales.

III. Inspection and Catalysis

1. Inspection indicators: the company's excavator business revenue; the growth rate of the company's net profit to mother, the growth rate of net profit after deduction; the company's high-horsepower bulldozer sales.

2. Possible catalysts: The company achieved a breakthrough in the excavator business; the company's performance exceeded expectations; sales of high-horsepower bulldozers exceeded expectations; favorable real estate and infrastructure policies.

IV. Research value

1. Unique understanding: The market is concerned that the excavator industry is relatively competitive, and the company's excavator business can grow bigger and stronger. We believe that through the acquisition of Mountain Reconstructors, the company is expected to develop its strength in the excavator business. At the same time, Shandong Heavy Industries Group promises to resolve peer competition issues in the excavator business of Lowe Heavy Industries, Weichai Qingdao and Shantui Co., Ltd. within 5 years, and the excavator business can be expected in the future. At the same time, the company's excavator business is expected to rise rapidly, relying on bulldozer sales channels and the platform advantages and supply chain advantages of Shandong Heavy Industries Group.

2. A different understanding from before: Previously, the company's business mainly focused on the bulldozer business. Currently, the company is actively developing the excavator business. We believe it is expected to build the company's second growth curve, open up market space, and increase the company's valuation.

5. Drivers

The company's bulldozer sales volume is third in the world, after Caterpillar and Komatsu. It is also the leading bulldozer in China. In 2023, the domestic market share of bulldozers exceeded 70%. The company is expected to continue to narrow the gap with Caterpillar and Komatsu and increase its global market share.

1) Large export sales are expected to increase profitability: exports from the bulldozer industry remain booming, and exports of high-horsepower bulldozers are growing rapidly. From January to September 2024, the cumulative export value of China's crawler bulldozers was 0.63 billion US dollars, an increase of 10% over the previous year; the cumulative export value of crawler high-horsepower bulldozers (above 320 horsepower) was 0.23 billion US dollars, an increase of 37% over the previous year. The company is actively promoting the high-horsepower bulldozer business, boosting its share of high gross margin, which is expected to increase the company's profitability.

2) The excavator business is expected to grow: Relying on bulldozer sales channels and the platform advantages and supply chain advantages of Shandong Heavy Industries Group, the company's excavator business is expected to rise rapidly.

6. Profit forecast and valuation

The company's net profit for 2024-2026 is expected to be 1.025 billion, 1.329 billion yuan, and 1.656 billion yuan respectively, up 34%, 30%, and 25% year on year (2024-2026 CAGR is 27%). The closing price on November 19 corresponds to PE 14, 11, and 9 times, respectively, below the industry average, and the 2025 PE valuation is relatively low. Maintain a “buy” rating.

7. Risk Reminder

Excavator business development falls short of expectations; risk of overseas trade friction.