SANYI issued a positive profit alert revealing that its net profit in 2019E will increase significantly YoY. While the profit growth rate was not disclosed, we forecast the growth to reach 51% YoY. SANYI’s backlog remains solid at present and management is well-prepared to ensure a smooth operation. We maintain our TP of HK$5.6, based on 2x 2020E P/B multiple, on the back of 15-17% ROE in 2020E-21E. Reiterate BUY.
- The +ve profit alert is within our expectation. The earnings growth was driven by (1) strong revenue growth on both the mining and port equipment revenue, (2) gross margin expansion on products such as combined coal mining units (CCMU) and reach stackers, (3) reduction on SG&A expense ratio (excluding R&D expense) due to good cost control.
- No production capacity in Hubei Province. SANYI’s production bases are located in Shenyang, Zhuhai and Changsha. Shenyang production base is mainly for the production of mining machinery, while Zhuhai base is mainly for the large-size port machinery. For Changsha base (with a focus on small-size port machinery), the production lines have been gradually shifting to Zhuhai base.
- The outbreak of nCoV should not have material impact on SANYI. Based on our understanding, SANYI’s customers are less affected by the nCoV outbreak and there is no order cancellation at present. Similar to other production plants in China, SANYI will resume its production on 10 Feb and the Company is well-prepared to raise its capacity utilization rate.
- Positive stance unchanged. We continue to like SANYI’s on track new product development and diversification. We expect pure-water hydraulic support and off-highway wide body mining trucks will see meaningful delivery in 2020E. Besides, solid backlog of large-size port equipment will continue to offer earnings visibility in 2020E.
- Major risk factors: (1) failure to contain nCoV; (2) decline in coal mining activities; (3) increase in component cost; (4) weaker-than-expected international trade.
