Summary. SANYI reported a strong set of 1H19 results with net profit surging 54% YoY to RMB552mn, driven by revenue growth across all major segments. Most importantly, we are surprised that the operating cash flow surged 6.7x YoY to RMB516mn, which we believe should ease market concerns regarding the Company’s cash collection policy. We maintain our positive stance on SANYI as we believe the product upgrade and replacement cycle will continue to boost earnings growth over the coming years. Reiterate BUY with TP of HK$4.72 (based on 1.8x 2019E P/B, on the back of 13-15% ROE in 2019E-20E).
- Key highlights on 1H19 results. Revenue grew 39% YoY to RMB3.04bn, driven by 46%/29% increase in mining/port equipment sales. The strong growth of mining equipment revenue was driven by 50% YoY increase in combined coal mining units (CCMU) and ~270% YoY increase in mining trucks which is a positive surprise. Blended gross margin was 30.5% in 1H19, up from 27.4% in 1H18 (after adjusting for the accounting policy change that reclassified transportation cost from S&D expense to COGS). The administrative expense ratio (excluding R&D) reduced by 1.3ppt to 4.2%. Besides, the effective tax rate reduced by 5.7ppt YoY to 13.7%. All these contributed to a 54% YoY increase in net profit. The results implied 48% YoY increase in 2Q19 net profit.
- Significant improvement in operating cash flow. The operating cash inflow in 1H19 jumped 6.7x YoY to RMB516mn. The improvement was due to the improvement in inventory management, the use of bills and more efforts in cash collection. We see this as positive surprise as market had been concerned about the Company’s cash collection policy given the long credit period for large size port machinery.
- Analyst briefing today (9:30 a.m.). Venue: Harbour View Ballroom II and III, 4/F, Four Seasons Hotel Hong Kong.
- Major risk factors: (1) decline in coal mining activities; (2) increase in component cost; (3) weaker-than-expected international trade.
