The company is the founder, pioneer and leader of China's construction machinery industry. The main business covers 11 categories such as earthmoving machinery, lifting machinery, pile construction machinery, and concrete machinery. In addition to maintaining an absolute advantage, the scale of the company's other products continues to expand. In May 2022, the company absorbed and merged the controlling shareholder Xugong Limited. The industry generally believes that this is currently the largest absorption and merger transaction in the domestic equipment manufacturing industry. This merger has further expanded the volume of the company's excavators, loaders, concrete machinery and other businesses.

High-frequency data shows that the general logic of industry cycle recovery and overseas expansion has not changed during this phase. Komatsu's newly released construction hours showed that the number of hours started in May in China was 101.1, up 1.0% year on year, up 4.7% month on month, the first correction since January 2024. In overseas markets, the number of hours Komatsu excavators started in Indonesia in May was 210.7 hours, down 0.5% year on year and 28.2% month on month. This means that while signs of domestic demand bottoming out are being released frequently, the boom in the Belt and Road countries during this period supports the overall high growth in external demand, and demand in overseas markets in the sector is still on an upward trend.

Overview of domestic construction machinery leaders. In the context of the current domestic demand expected to bottom out+high structural demand in overseas markets, there was a clear turning point in the market share of various companies in 2020. The market capacity ceiling of the “Belt and Road” countries is far from being reached in the short term. In the medium to long term, despite certain brand and national barriers, the company's comprehensive product recognition and after-sales service capabilities are constantly improving. The product structure and profit level are continuously optimized. Regardless of the short-term dimension or long-term, overseas market companies continue to move forward.

In 2023, the company's product matrix was further optimized: (1) Aerial work platform: the position was further stabilized. According to the “Top 20 Global Aerial Work Machinery Manufacturers” list released by KHL, the company ranked first in the country and third in the world for 22 and 23 consecutive years, with revenue increases of 40.4% and 41.9%, respectively; (2) Forklifts: Xugong established a forklift division to strengthen internal collaboration to achieve revenue growth of nearly 30%; (3) New energy products: revenue doubled and increased revenue share by 5 pcts.

We give the company high growth expectations for mining machinery products: the global mining machinery market is about 468.4 billion yuan in 2023, and it is expected that it will continue to maintain a steady growth trend in the future. By 2030, the market size will be close to 714.9 billion yuan, and the CAGR for the next six years will be 5.7%. In 2023, the company's mining machine revenue was about 5.861 billion yuan, accounting for 6.31% of the total revenue. It is expected that there will be plenty of room for expansion in the future, and the company's business progress is expected to accelerate further.

The company's net profit for 2024-2026 is expected to reach 7.45/9.12/12.04 billion yuan, corresponding to the closing price of July 19, PE is 10.39, 8.49, and 6.43 times. Compared with competing companies, XCMG has a high margin of safety, and there is still plenty of room for appreciation in valuation, maintaining a “recommended” rating for the company.

Risk warning: Domestic construction machinery industry bottoming out of expectations; export demand and business development falling short of expectations; declining profitability due to increased competition in the industry, etc.