20200828-招银国际-三一重工-600031.SH-2Q20_net_profit_+78__in_line__Strong_rebound_in_cash_flow_6页_937kb

SANY Heavy Industry – Company Update Summary

Core Content

This report provides an equity research update on SANY Heavy Industry (600031 CH), focusing on its financial performance in 1H20, outlook for 2H20E, and revised earnings forecasts for 2021E-2022E. The report highlights strong performance in the second quarter of 2020, driven by increased revenue and improved cash flow, and reiterates a "BUY" recommendation with an updated target price.

Key Financial Performance in 1H20

• Revenue: Increased by 13% YoY to RMB49.188 billion, with excavator revenue rising 17% YoY.
• Net Profit: Grew by 25.5% YoY to RMB8.5 billion.
• Operating Cash Flow: Surged to RMB9.4 billion in 2Q20, compared to an outflow of RMB895 million in 1Q20.
• Gross Margin: Narrowed to 30.3% in 1H20, down 2ppt YoY, primarily due to the impact of the pandemic in the first quarter.
• S&D Expense Ratio: Reduced by 1.8ppt YoY to 5.2%.
• Administrative Expenses: Increased by 23.1% YoY to RMB2.582 billion.
• Net Profit Margin: Improved to 17.6% in 1H20, up 1.6ppt YoY.

Strong Recovery in 2Q20

• Revenue: Rose by 45% YoY to RMB32 billion, reflecting a significant rebound from a 19% decline in 1Q20.
• Net Profit: Surged by 78% YoY to RMB6.3 billion.
• Gross Margin: Declined by 2.4ppt YoY to 31.5%, but improved by 3.3ppt QoQ.
• Operating Cash Inflow: Reached RMB9.4 billion, indicating improved cash flow management.

Earnings Forecast and Target Price

• Earnings Forecast: Revised for 2020E due to lower assumptions on concrete machinery sales and blended gross margin. However, 2021E-22E forecasts were slightly raised by 1% due to expected further cost reductions.
• Target Price (TP): Raised from RMB24.7 to RMB26.4, based on a 16x 2020E P/E.
• Current Price: RMB22.68, implying a +16% upside.

Key Drivers and Outlook

• Infrastructure Spending: Expected to continue growing, benefiting SANY.
• Emission Control Policies: Enhancing demand for environmentally friendly machinery.
• Excavator Demand: Strong momentum, with industry sales up 55% YoY in July, and continued growth expected in 2H20E.
• Concrete Machinery Sales: Projected to accelerate in 2H20E due to recovery in property construction.
• R&D Investment: Maintained, supporting long-term competitiveness.

Key Risks

1. Overseas Business: Risk due to the ongoing pandemic.
2. Construction Activity Slowdown: Potential impact on demand.
3. Expansion into Financing: Risk associated with new business ventures.

Financial Summary

Revenue Trends

Net Profit Trends

EBITDA Trends

Key Ratios

Shareholding and Performance

• Shareholding Structure:

  • SANY Group: 29.9%
  • Hong Kong CCASS: 9.6%
  • Liang Wengen: 3.4%
  • Others: 57.1%

• Share Performance:

  • 1-month: +5.5% (Absolute), +1.0% (Relative)
  • 3-months: +16.5% (Absolute), -4.1% (Relative)
  • 6-months: +31.7% (Absolute), +13.9% (Relative)

• 12-month Price Performance: Chart included (source: Bloomberg)

Analyst Certification

• The analyst certifies that the views expressed in the report reflect personal opinions and are not influenced by compensation.
• Confirms no trading in the stock covered in the 30 days prior to the report and no trading planned within 3 business days after the report.

CMBIS Ratings

• BUY: Stock with potential return of over 15% over next 12 months.
• HOLD: Stock with potential return of +15% to -10% over next 12 months.
• SELL: Stock with potential loss of over 10% over next 12 months.
• NOT RATED: Stock not rated by CMBIS.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark.
• MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark.
• UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark.

Conclusion

SANY Heavy Industry demonstrates strong financial performance and resilience, with a significant rebound in 2Q20. The firm is positioned to benefit from strong infrastructure spending and emission control policies. While there are risks associated with overseas operations and construction activity, the company's strategic focus on R&D and cost management supports its long-term growth. The "BUY" recommendation remains in place with an updated target price.