20220419-招银国际-China_Construction_Machinery_Consensus_yet_to_reflect_the_earnings_downside__D_G_SANY_Heavy___Zoomlion-A_8页_1mb

China Construction Machinery Sector Analysis

Core Content Summary

This report analyzes the performance and outlook for the China construction machinery sector, focusing on two key companies: SANY Heavy (600031 CH) and Zoomlion (000157 CH / 1157 HK). The report highlights the sector's challenges and provides updated financial forecasts, valuation adjustments, and investment recommendations.

Main Points and Key Information

Sector Overview

• Machinery Demand Weakness: Despite some signs of recovery at the macro level, the construction machinery sector has not yet reflected this in demand. Excavator sales are expected to drop by 15% YoY in 2022.
• Mining Machinery Robust: Mining machinery demand remains strong, offering upside potential for SANY International (631 HK), which is rated BUY.
• Special Bonds Issuance: In 1Q22, local government special bonds issued ~RMB1.4tn, a +2.8x YoY increase, indicating potential for project investment.
• Contract Intake Growth: CRG (390 HK / 601390 CH) reported an 84% YoY increase in contract intakes, suggesting some positive momentum.

Earnings and Valuation Adjustments

• SANY Heavy (600031 CH):
  • Downgraded to HOLD due to earnings expectations below consensus.
  • Earnings forecast reduced by 9% / 27% / 25% for 2021E / 2022E / 2023E.
  • Earnings are now 9% / 20% / 21% below consensus.
  • Target price trimmed from RMB30 to RMB19.5, based on 12.7x 2022E P/E.
• Zoomlion (000157 CH):
  • Zoomlion-A downgraded to HOLD with earnings forecast slashed by 32% / 34% for 2022E / 2023E.
  • Earnings are 8% / 15% below consensus.
  • Target price cut from RMB9.3 to RMB6.7, based on 10x 2022E P/E.
• Zoomlion-H:
  • Maintained BUY due to attractive valuation.
  • Trading at 6.5x 2022E P/E and 0.6x P/B, which are in line with historical trough levels.
  • Target price revised down to HK$6.14, based on 7.5x 2022E P/E.
  • >7% dividend yield suggests limited downside risk.

Key Challenges

• Downstream Weakness: Jiangsu Hengli's planned production of hydraulic components for excavators dropped 42% YoY in April, indicating no recovery in the downstream demand.
• Supply Chain Disruption: City lockdowns may disrupt the supply chain, further affecting the sector.
• Infrastructure Spending: While infrastructure spending may improve, it will be partially offset by weak property investment.
• Replacement Demand: A key growth driver before 2021, replacement demand is expected to decline.

Sales and Earnings Forecast Adjustments

• Excavator Sales: Trimmed from 291k / 277k units to 291k / 277k units, with -15% / -5% YoY growth.
• Wheel Loader Sales: Revised down by 14% in both 2022E and 2023E.
• Crane Sales: Trimmed by -12% in 2022E and -25% in 2023E, especially for tower cranes.
• Concrete Machinery Sales: Revised down by -10% / -12% for 2022E / 2023E, with concrete mixer trucks showing -1% / -2% growth.
• Net Profit Forecasts:
  • SANY Heavy: Reduced by -9% / -27.3% / -25.1% for 2021E / 2022E / 2023E.
  • Zoomlion-A: Reduced by -32% / -34% for 2022E / 2023E.
  • Zoomlion-H: Reduced by -12.1% / -15.0% for 2022E / 2023E.

Financial Highlights (SANY Heavy)

• Revenue: Expected to decline by -8% in 2022E and -5.8% in 2023E.
• Gross Margin: Expected to decrease from 27.3% in 2021E to 26.6% in 2022E and 27.0% in 2023E.
• Net Profit: Expected to decrease by -7.1% in 2022E and -5.0% in 2023E.
• P/E Ratio: Reduced to 11.7x in 2022E and 10.9x in 2023E.
• P/B Ratio: Reduced to 2.1x in 2022E and 1.8x in 2023E.
• Dividend Yield: Stabilized around 2.7% in 2022E and 2.9% in 2023E.
• ROE: Expected to decline from 29.8% in 2020A to 17.7% in 2023E.

Financial Highlights (Zoomlion-H)

• Revenue: Expected to decline by -3.9% in 2022E and grow by 7.3% in 2023E.
• Core Net Profit: Expected to decrease by -12.1% in 2022E and increase by 5.5% in 2023E.
• Core EPS: Expected to decrease by -12.1% in 2022E and increase by 9.4% in 2023E.
• P/E Ratio: Trading at 6.5x for 2022E.
• P/B Ratio: Trading at 0.6x, which is at the historical average for the trough cycle.
• Dividend Yield: Over 7%, indicating a strong dividend payout.

Investment Recommendations

• SANY Heavy (600031 CH): Downgraded to HOLD due to earnings underperformance and lower growth expectations.
• Zoomlion-A (000157 CH): Downgraded to HOLD with similar reasons.
• Zoomlion-H (1157 HK): Maintained as BUY due to attractive valuation and strong dividend yield.

Supporting Figures and Data

• Figure 1: Excavator sales in China dropped 54% YoY in 1Q22.
• Figure 2: Excavator exports surged 89% YoY in 1Q22.
• Figure 3: Construction FAI per unit of excavator remained stable at RMB21mn in 2021.
• Figure 4: CMBIGM excavator sales projection.
• Figure 5: Change in construction machinery industry sales assumptions.
• Figure 8: Jiangsu Hengli's hydraulic cylinder production dropped 42% YoY in April.
• Figure 9: CRG's contract intake increased 84% YoY in 1Q22.
• Figure 10 & 11: Local government special bond issuance data.
• Figure 12: Use of proceeds from local government bonds.
• Figure 13 & 14: Infrastructure and local government expenditure growth.
• Figure 15 & 16: Coal mining and ferrous metal FAI data.

Conclusion

The China construction machinery sector faces ongoing challenges, with weak demand and earnings pressures. While some positive signs are present, such as increased special bond issuance and contract intakes, the overall demand for construction machinery is expected to remain subdued. SANY Heavy and Zoomlion-A are downgraded to HOLD due to earnings underperformance and reduced growth expectations. However, Zoomlion-H is maintained as a BUY due to its attractive valuation and strong dividend yield. The report emphasizes the importance of monitoring macroeconomic indicators and supply chain dynamics for future outlook.