Dingli’s net profit in 3Q19 dropped 3.9% to RMB183mn, largely due to the lack of profit contribution from associate companies (versus a high base in 3Q18). While the 3Q19 result is slightly below our expectation, we are encouraged to see a 10% YoY growth of revenue in 3Q19, an improvement from a decline of 2% in 2Q19, which we believe is an early sign of recovery. We maintain our positive stance on Dingli, as rising labor cost remains the key driver for the application of the aerial working platform (AWP) in China. We maintain our BUY rating and TP of RMB72 (30x 2020E EPS).
- Key highlights on 3Q19 results. Revenue grew 10.4% YoY to RMB597mn in 3Q19. While gross margin narrowed 4ppt YoY and 1.2ppt QoQ to 39.6%, we believe it’s still a comfortable level. Selling expense decreased 29% YoY, suggesting a stringent cost control. Profit from associate companies (mainly for overseas business) was only RMB0.2mn in 3Q19, representing a 99% YoY decline. However, it’s worth noting that profit from associates in 3Q18 was unusually high, which was one-off in nature. The net profit growth excluding the associate profit would be 18% (YoY) in 3Q19.
- 9M19 net profit accounted for 74% of our full year estimate. Net profit in 9M19 grew 12% YoY RMB444mn. Operating cash inflow dropped 26% YoY to RMB329mn, largely due to an increase in inventory for upcoming sales. We have left our earnings forecast unchanged as we expect earnings improvement in 4Q19E.
- Share disposal plan to have limit impact. Meanwhile, Dingli announced that Deqing Zhongding Equity Investment Management has planned to offload 2.5mn shares within six months. That said, we believe the impact to the market will be limited as the potential share sales account for only 0.72% of the total o/s shares. Deqing Zhongding is an investment company which XU Shugen owns 39.69% stake at present. In 2018, Deqing Zhongding disposed 3.67mn shares in the market with a price range of RMB46.0-50.7 per share, much lower than the current share price.
- Major risk factors: (1) more new entrants in the AWP market; (2) uncertainty on China-US trade disputes; (3) weaker-than-expected construction activities in China.
