Report name:Hangcha Group (603298)—Revenue growth surpassed industry levels, and net interest rate increased slightly above expectations

Researchers: Liu Rong, Wu Dan, Shi Wenbo, Chen Ming

Report Type: Company Research*Review Report

Report Date: 20200811

Industry/Subsector: Special Purpose Equipment

Company name and code: Hangcha Group (603298)

Investment advice: Highly recommended - A

[Summary of contents]

The forklift industry was affected by the epidemic in the first half of the year and experienced a clear process of “impact of the epidemic - demand recovery - accelerated increase in demand”. Industry sales fell 16.5% in the first quarter, and the monthly growth rate picked up rapidly in the second quarter. In May, the industry's sales growth rate reached 33%. The cumulative year-on-year increase of 1.7% was on par with last year. In June, industry sales further accelerated to 57%, reaching a cumulative year-on-year increase of 10.0%.

The company's forklift sales growth rate exceeds the industry level, and the market share and industry concentration have increased. Steel prices weakened in the first half of the year. In order to seize the market against the trend, leading companies lowered prices slightly, and increased their market share while guaranteeing profits. The company's total sales volume in the first quarter was 33,400 units, down 7.2% year on year, while the industry fell 16.6% during the same period. In the first half of the year, Hangcha, Heli, and Nuoli are all expected to perform better than the 10% industry growth rate.

The gross profit ratio remained stable at 20.75%, and the cost ratio was well controlled during the period. The comprehensive gross profit margin for the first half of the year was 21.75%, a slight decrease of 0.18 percentage points over the same period. In the case of terminal price adjustments, gross margin remained stable due to weakening steel costs. During the epidemic, changes in the cost rate were well controlled during the period. The sales expense ratio was 5.57%, an increase of 0.17 pct; the management expense ratio was 2.60%, a decrease of 0.17 pct; continuous investment in R&D expenses, the cost rate was 4.03%, an increase of 0.22 pct; and the financial cost ratio was -0.27%, a decrease of 0.15 pct.

The net interest rate increased from 7.55% to 8.01%, and the increase in income from Zhongce Haichao's investment had a great impact on the marginal change in net interest rate. The investment income confirmed under the Equity Law in the first half of the year was 68.84 million yuan, compared to 5.78 million yuan in the same period last year, mainly 56.95 million yuan of investment income brought by Zhongce Haichao.

H1's operating cash flow was 841 million, and operating cash flow for the second quarter was the highest level in history in a single quarter. H1's net operating cash flow reached $841 million, a significant increase of 82% over the previous year. The cash flow for the second quarter was 856 million yuan, far exceeding the historical single-quarter level. Operating cash flow is excellent, mainly due to upstream procurement and excellent control of expenses, so while revenue increased, the amount of cash to buy goods and receive labor payments decreased by even 8.6% compared to the same period.

During the pandemic, the company achieved growth that surpassed the industry due to its leading position in upstream bargaining power and strong cost control capabilities. Looking ahead to the second half of the year, orders in July continued to grow at a high rate, and export demand also entered a phase of rapid recovery. Considering that the industry's Q2 itself has a high base and the Q3-4 off-season base is low, we believe that the company's annual performance growth rate is expected to continue to exceed expectations. Revenue is expected to increase by 15-20% in 2020, and the performance is raised to 770 million, corresponding to a 20% increase, giving it a “Highly Recommended -A” rating.

Risk warning: Trade frictions have repeatedly affected exports, domestic manufacturing investment has declined sharply, and raw material prices have increased dramatically.

[End of summary]