While the slowdown of revenue in 3Q19 raised concerns regarding the growth sustainability, the weakness came from the port equipment sales that was more a result of a postponed product delivery. On the positive side, significant margin expansion on coal mining equipment in 3Q19 suggested that SANYI has continued to successfully market its high valued added road header products. We maintain our positive view on SANYI as continuous product upgrade and replacement demand will lend strong support on growth over the coming years. We are raising our earnings forecast in 2019E-20E by 4-7% due largely to higher margin despite lower revenue assumptions. Besides, potential M&A will offer additional upside to our estimates. Our TP is revised up from HK$4.72 (1.8x 2019E P/B) to HK$5.0 (based on 2x 2019E P/B, on the back of 14-15% ROE in 2019E-20E). Reiterate BUY.
- Net profit +55% YoY to RMB237mn in 3Q19. Revenue grew only 13% YoY to RMB1.3bn in 3Q19, due to a delay of the delivery of some large-size port machineries arising from production bottleneck and the weaker-than-expected sales of small-size port equipment. Blended gross margin expanded by 5.1 ppt YoY to 29.6%, helped by low base effect and the higher revenue contribution of coal mining equipment (higher margin than port machinery). We estimate an increase in other income also helped drive the 55% net profit growth in 3Q19. In 9M19, net profit increased 54% YoY to RMB790mn.
- Appointment of LIANG Zaizhong as new chairman a long term positive. SANYI announced that LIANG Zaizhong (梁在中) has been appointed as an executive director, the chairman of the Board, the chairman of the nomination committee and strategic investment committee with effect from 21 Oct. QI Jian was re-designated as the vice chairman and remained as the CEO. LIANG Zaizhong joined SANY Group in 2006 and held various key positions in SANY Group. We believe the appointment of LIANG Zaizhong suggests that SANY Group gives SANY Int’l a high priority in terms of expansion and acquisition.
- Major risk factors: (1) decline in coal mining activities; (2) increase in component cost; (3) weaker-than-expected international trade.
