Deeply involved in the industry for more than 30 years, ranking third in the global construction machinery industry and number one for Chinese enterprises. The predecessor of XCMG Group began with the Eighth Arsenal of the Eighth Route Army Lunan, founded in 1943. Xugong Machinery was formally established in 1993, listed on the Shenzhen Stock Exchange in 1996. In September 2020, XCMG's mixed reform plan was implemented, institutional investors were introduced, and employee shareholding was implemented. In 2022, XCMG Machinery absorbed and merged all assets of XCMG Co., Ltd. successfully completed the overall listing, forming a “pillar industry” of earthmoving machinery, lifting machinery, piling machinery, concrete machinery, pavement machinery, and “strategic new industries” mining machinery, aerial work platforms, environmental industries, agriculture Business layout of machinery, port machinery, rescue and support equipment, etc. In the 2024 ranking of the top 50 global construction machinery manufacturers led by the British KHL Group, XCMG Group occupied 5.3% of the global market share, and Chinese enterprises ranked first.
Domestic demand for construction machinery has rebounded steadily. As the domestic construction machinery group with the most complete range of products, traditional products are expected to benefit from this upward cycle. The current construction machinery cycle declined after peaking in April 2021. Domestic sales of excavators were 0.0152 million units in March '24, with +9% over the same period, achieving the first peak season correction in nearly 3 years. According to our estimates, the theoretical natural renewal requirement for excavators in 23-25 is 0.086/0.103/0.146 million units, and 24-25 is expected to enter a new renewal cycle. The gradual implementation of the modernization policy will lead to the release of demand for renewal.
Construction machinery has plenty of space to go overseas, and the company's global layout is perfect, accounting for 40% of overseas revenue in 2023. The company has a wide range of overseas locations, with 40 overseas offices, more than 150 overseas spare parts centers, and more than 300 overseas distributors, covering more than 190 countries and regions around the world. Overseas sales revenue from the main business increased by 33.7% year-on-year to 37.22 billion yuan in 2023, accounting for about 40% of total revenue. In 2023, the company's gross export margin was 24.2%, which is 3 pcts higher than the domestic gross margin. The increase in export share is expected to increase the company's overall gross margin level.
The mining machinery and aerial work machinery market space is sufficient, and the company's emerging products are growing rapidly. Rising metal prices have led to an increase in fixed asset investment, and global and Chinese demand for mining machinery has steadily increased. Global mining machinery market sales reached 468.4 billion yuan in 2023, expected to reach 714.9 billion yuan in 2030, and a CAGR of 5.7% from 2024-2030. China's mining machinery market size is 13.77 billion US dollars in 2021, and the CAGR for 2021-2028 is expected to be 6.96%. In 2023, the company's strategic emerging industry revenue increased by nearly 30%, accounting for more than 20% of revenue.
The results of state-owned enterprise reform are gradually being released, and profit margins are expected to gradually increase. The company began mixed reform in 2018 and achieved overall listing in 2022. The mixed reform has established a modern system. A professional manager system has been implemented. In 2023, a restricted stock incentive plan was implemented, equity incentives were provided to a total of 1,732 people, including middle and senior managers and technical leaders, and performance assessment targets were set. The net profit target for 2023 was 5.3 billion yuan. The net profit assessment target for 2024-2025 is 5.8 and 6.5 billion yuan, which is expected to increase the motivation of management and employees, and reduce the level of gross margin and profit margin through purchasing+R&D+management.
Profit forecast: We expect the company's revenue for 2024-2026 to be 102.7/115.4/129.6 billion yuan; 10.6%/12.3%/12.4%, respectively; net profit to mother is 6.82/8.82/10.94 billion yuan, respectively, 28.0%/+29.3%/+24.1%, respectively. The stock price on August 16, 2024 corresponding to 2024-2026 PE was 11.3/8.8/7.1 times, respectively. Domestic and external demand in the construction machinery industry is improving marginally. As a domestic construction machinery leader with a full range of categories, it is expected to resonate with industry beta and individual stock performance. At the same time, as a state-owned enterprise, the company gradually released the results of reforms and quality and efficiency improvements, leading to increased profitability. Compared with comparable companies, it was covered for the first time and gave a “buy” rating.
Risk warning: risk of macroeconomic policy adjustments and instability in the international situation, exchange rate risk, risk of fluctuations in raw material prices, risk of inconsistent estimates with actual conditions, risk of untimely updating of information and data used in research reports