Key points:

Deeply involved in the construction machinery industry, the leading global and domestic product company was established in 1996 in Xuzhou, Jiangsu. It has been deeply involved in the industry for many years and has gradually grown into a leading enterprise in China's construction machinery industry. The company has a rich product range, and many types of products are in a leading position globally and domestically. According to the company's 2023 annual report, the company's truck cranes, truck-mounted cranes, and road rollers rank first in the domestic industry; the company's lifting machinery, mobile cranes, and horizontal directional drills continue to be number one in the world; road machinery, truck-mounted cranes, and tower cranes remain third in the world; aerial work platforms rank third in the world; and mining surface excavation equipment remains fifth in the world. Excavators rank sixth in the world, and loaders rise to second in the world and number one in the country.

Domestic demand in the construction machinery industry bottomed out and stabilized in 2024, and the overseas market continued to grow, and the construction machinery industry entered this downward cycle since 2021. Combining macro-level infrastructure, real estate, and industry-level equipment renewal and environmental emission reduction trends, we believe that the construction machinery industry is expected to recover steadily in 2024. Let's take a closer look:

In terms of domestic demand, data on domestic demand for excavators continues to grow. Domestic excavator sales grew at a positive year-on-year rate from March to August 2024, and began to show an accelerated improvement trend in April. With the further development of downstream infrastructure projects, the industry is expected to stabilize and gradually pick up during the year.

In terms of export sales, from the demand side, the overseas market space is wider, and it has become the main growth engine for the development of domestic industry manufacturers. From the supply side, domestic construction machinery manufacturers have accelerated their overseas layout and actively promoted internationalization strategies in recent years, and their share of overseas revenue has increased markedly. Monthly excavator export data has declined year-on-year since June 2023 due to the early high base combined with the recovery of the epidemic and the recovery of overseas supply chains. However, in August 2024, domestic excavator exports turned positive year on year, increasing by 6.95%. Through years of continuous international layout, domestic construction machinery has shown a high growth rate in overseas revenue and orders, and continues to gain overseas market share with product advantages.

Emerging businesses are developing at an accelerated pace, and overseas markets have great potential

The company's traditional construction machinery products business is expected to develop at an accelerated pace with the recovery of the industry, and there is also plenty of room for development in emerging businesses and overseas markets. Let's take a closer look:

1. Mining machine. The mining machine market space is large, and the growth trend is obvious. Thanks to the continuous advancement of domestic infrastructure construction and mineral resource development, as well as government policy support for the mining machinery industry, the scale of the domestic mining machinery market has grown steadily. The company's mining machinery business layout is perfect. In 2019-2023, XCMG's mining revenue increased from 1.543 billion yuan to 5.861 billion yuan, CAGR reached 39.61%, and 2024H1 revenue was 3.54 billion yuan, accounting for 7.13%, which is expected to become a new growth point for XCMG's revenue.

2. Aerial work machinery. As the economy develops and the urbanization process progresses, demand for aerial work platforms will gradually be released. Compared to the per capita ownership of aerial work equipment in the US market, there is still plenty of room for growth in the Chinese market. According to 2023 data from “Access International” magazine, XCMG Machinery ranked third with sales of 1.502 billion US dollars. From 3.73 billion in 2020 to 8.883 billion in 2023, the company's revenue share increased from 5.04% to 9.57%. In 2024, H1 revenue was about 4.527 billion yuan, accounting for 9.12% of revenue. The high machine business is expected to achieve new revenue growth as the industry cycle picks up.

3. Overseas. The company's overseas market layout has been around for many years. In 2023, the company achieved overseas revenue of 37.22 billion, an increase of 33.7% over the previous year, accounting for 40.1%. According to the company's 2024 semi-annual report, the company has more than 40 overseas subsidiaries, more than 300 overseas distributors, more than 2,000 overseas service parts outlets, and a marketing network covering more than 190 countries and regions around the world. In 2024, the company established trading subsidiaries in Japan, Malaysia and other countries.

Investment advice

We are optimistic about the continued development of various products of Xugong Machinery in domestic and overseas markets. We expect the company to achieve revenue of 98.97/111.713/126.989 billion yuan in 2024-2026, up 6.6%/12.9%/13.7% year on year; achieve net profit of 6.47/8.318/10.526 billion yuan, up 22%/29%/27% year on year; the corresponding EPS for 2024-2026 is 0.55/0.70/0.89 yuan. The PE corresponding to the company's current stock price is 14/11/9 times. First coverage, giving a “buy” rating.

Risk warning

1) Domestic industry demand falls short of expectations; 2) Overseas market expansion falls short of expectations; 3) Accounts receivable recovery risk; 4) Industry competition intensifies.