Incident: On the evening of December 2, the company issued an announcement on the share repurchase plan (second phase) and a special loan commitment letter to obtain repurchase of shares from financial institutions.

Key investment points

The proposed secondary repurchase of shares of 0.3-0.6 billion yuan shows the company's long-term development confidence. On the evening of December 2, the company announced that it plans to repurchase shares no less than RMB 300 million (inclusive) and no more than RMB 600 million (inclusive), to be used for equity incentives or employee stock ownership plans, and the repurchase price of shares shall not exceed 18.20 yuan/share. The repurchase period is 12 months from the date the board of directors reviews and approves the share repurchase plan. The sources of repurchase funds are the company's own funds and special loan funds for stock repurchases. As of the disclosure date of the announcement, the company has obtained a “Loan Commitment Letter” issued by the Guangxi Branch of the Industrial and Commercial Bank of China, promising to provide special loan support for the company's current repurchase of A-shares. The loan amount is no more than RMB 420 million (no more than 70% of the maximum share repurchase amount), and the loan interest rate is 1.96%, and the term is 1 year. The estimated number of repurchasable shares is about 16.48 million to 32.97 million shares, accounting for about 0.82% to 1.64% of the company's current total share capital. The company plans to repurchase shares for equity incentives or employee stock ownership plans, demonstrating the company's confidence in long-term development.

Flexible targets for mixed reform+earthmoving machinery+electric loaders, excavator product structure optimization 1) Mixed reform unleashed performance flexibility: The company's execution improved dramatically after mixed reform, and actively promoted cost reduction and efficiency throughout the value chain around the main business line of “profit growth, business growth, and capacity growth”. The company's net profit for the first three quarters of 2024 was 1.32 billion yuan, up 60% year on year; gross profit margin was 23.5%, up 2.8 pct year on year; net profit margin was 5.9%, up 2.0 pct year on year; ROE (average) reached 7.8%, up 2.6 pct year on year.

2) Earthmoving machinery took the lead in bottom building and recovery: Currently, earthmoving machinery in the construction machinery sector is leading the recovery. The 2024H1 earthmoving machinery business segment (excavators, loaders, etc.) accounts for 62% of revenue, and revenue has increased 16% year on year.

3) One of the companies with the greatest upward flexibility of electric loaders: Currently, electric loader sales are growing rapidly. In November, the sales volume of electric loaders was 1005 units in a single month, an increase of 85% over the previous year, and the penetration rate reached 12%. The company is the leading loader in China. 2024H1's electric loader sales increased 159% year on year.

4) Excavator product structure optimization. The domestic sales volume of 2024H1's excavators increased 29.5% year on year, and its market share increased by about 3 pct year on year. Mining machinery continues to promote large-scale R&D, and 2024H1 mining machinery revenue increased 71% year on year.

Construction machinery industry reversal logic strengthened: export market share increased, domestic demand improved, renewal cycle started 1) Exports: Excavator export sales inflection point or looming, and overseas market share is expected to increase. The export sales volume of excavators in November was 8,570 units, up 15% year on year. From August to November, there is a possibility that the export sales of excavators will continue to grow positively. In November, the export sales volume of loaders was 4,263 units, an increase of 16% over the previous year.

2) Domestic: Domestic sales of excavators may have reached an inflection point, and we look forward to the launch of the domestic renewal cycle. Domestic excavator sales in November were 9020 units, up 21% year on year. From March to November, it was growing for 9 consecutive months. We expect the positive trend of domestic excavator sales to continue. Real estate policies have continued to be favorable recently; high investment in the mining industry and water conservancy construction are expected to provide momentum for domestic demand growth. According to the 8-10 year renewal cycle, demand for excavator renewal is expected to bottom out in 2024.

Profit forecast and valuation: Net profit for 2024-2026 is expected to be 1.58 billion, 2.2 billion, and 2.82 billion yuan, up 82%, 39%, and 28% year-on-year (2024-2026 CAGR is 34%), and PE corresponding to the closing price on December 10, 2024 is 14, 10, and 8 times. Maintain a “buy” rating.

Risk warning: Investment in infrastructure and real estate falls short of expectations; risk of overseas trade friction.