Incident: Xugong Machinery released its 2023 annual report and 2024 quarterly report. In 2023, it achieved revenue of 92,848 billion yuan, -1.03% year-on-year, and net profit to mother of 5.326 billion yuan, +23.51% year-on-year. The first quarter of 2024 achieved revenue of 24.174 billion yuan, +1.18% year-on-year, and net profit to mother of 1,600 billion yuan, +5.06% year-on-year.

Revenue fluctuations have gradually narrowed, and the expansion of emerging industries and internationalization has achieved remarkable results. Since 2023, the construction machinery industry has gradually entered a downward bottoming stage. According to the China Construction Machinery Industry Association, the excavator industry sold about 196,000 units and 49,000 units in Q1 of 2023 and 2024, respectively, with growth rates of about -25.0% and -13.1% respectively. Looking at the company's quarterly revenue, the revenue growth rates from Q1 to 2024 were -9.8%, +0.1%, -4.1%, +13.21%, and +1.18%, respectively, showing a gradual stabilization and return to a positive trend. Among these, while the company's traditional industrial position is stable, strategic emerging industries and international business contributed strongly to growth.

By product: ① Traditional business sector: In 2023, the company's lifting machinery, earthmoving machinery, and concrete machinery achieved revenue of 211.87, 225.60, and 10.425 billion yuan respectively, with the three traditional business segments accounting for a total of about 58%; ② Strategic emerging industries: revenue growth of nearly 30% in 2023, with a contribution of more than 20%. Among them, aerial work machinery and mining machinery achieved revenue of 88.83 billion yuan and 5.861 billion yuan respectively, up 35.62% year-on-year. 14.17%, accounting for a total of about 16%. Revenue from other emerging businesses such as forklifts and agricultural machinery has increased significantly. Revenue from new energy products has doubled for two consecutive years, contributing close to 10%.

By market: In 2023, the company's domestic sales and overseas sales achieved revenue of 556.28 billion yuan and 37.220 billion yuan respectively, -15.69% and +33.70% year-on-year, accounting for 59.91% and 40.09% respectively.

The share of international business contributions increased by more than 10 pcts. The company has now formed a “four-in-one” international development model for export trade, overseas green space construction, multinational mergers and acquisitions, and global R&D. It has 39 overseas subsidiaries, 40 large-scale overseas service parts centers, and a marketing network covering 193 countries and regions around the world, and its global competitiveness is expected to increase steadily.

The national reform led the “intellectual transformation and digital transformation”, and profitability improved steadily: after the national reform, the company restructured its headquarters organizational structure, achieved a transformation from a strategic holding type to a platform enabling type, and established a “headquarter+platform+frontline” management and control enabling model. Among these, capacity building such as building digital R&D and global procurement centers was effectively reflected in the increase in the company's profitability. In terms of profit level, in 2023 and 2024 Q1, the company's gross margins were 22.38% and 22.89%, respectively, +2.17pct and +0.26pct; net interest rates were 5.64% and 6.63%, respectively, +1.06% and +0.11% year-on-year. On the cost side, the company's expense ratio for the 2023 period was 15.22%, +1.45pct year on year. Among them, sales, management, finance, and R&D expenses rates were +0.01pct, +0.47pct, +1.00pct, and -0.04pct, respectively. The company's expense ratio for the first quarter of 2024 was 15.21%, +0.27pct year-on-year. Cost control is the main driving force for the company's profit increase, and the cost aspect has remained stable.

Improve asset quality, continue to focus on the “three projects” to ensure high-quality development, and release repurchase plans to improve investor returns: in 2023, the company achieved certain results. The asset accounts receivable and inventory pressure drop were about 40 billion and 32.4 billion, respectively, with a pressure drop of 500 million and 2.7 billion dollars compared to the end of 2022. The company will continue to focus on the “three projects” in 2024 to implement the new connotation of high-quality development. In terms of return to investors, the company issued a repurchase announcement. It plans to use 300 to 600 million yuan of its own capital to repurchase the company's shares and cancel them to reduce the company's registered capital, safeguard the interests of investors, and enhance investor confidence.

Investment advice: We expect the company's revenue for 2024-2026 to be 986.2, 1078.1 billion yuan and 121.15 billion yuan respectively, with growth rates of 6.2%, 9.3% and 12.4%, respectively, and net profit of 66.0, 79.8 billion yuan, and 10.21 billion yuan respectively, with growth rates of 23.9%, 20.8% and 28.0% respectively. As a typical target of state-owned enterprise reform, Xugong Machinery is expected to release its profit elasticity steadily. The valuation level is relatively low. It maintains a buy-A investment rating. The target price for 6 months is 8.4 yuan, which is equivalent to a dynamic price-earnings ratio of 15X in 2024.

Risk warning: The risk of global macroeconomic fluctuations, trade frictions increase the risk, overseas expansion falls short of expectations, and market competition increases the risk.