【Company Research】SANY International (631 HK) – Better visibility on policy support; Lifted earnings forecast and TP

The latest government policy regarding the support of intelligent coal mining development reaffirms that SANYI’s strategy on the development of intelligent mining equipment is a right direction, which further enhances our confidence on SANYI’s growth potential. We expect more local governments to offer policy support going forward, which will drive the demand for equipment upgrade. In view of better visibility, we raise our earnings forecast in 2021E by 12% after revising up our assumptions on coal mining equipment, and we lift our TP from HK$5.60 to HK6.24, based on 15x 2020E P/E, on the back of strong earnings growth of 28%/34% in 2020E/21E. Reiterate BUY. 

 

• Policy support on intelligent coal mining development. NDRC, together with seven authorities, released a circular early this week regarding "The guiding opinions on the acceleration of intelligent coal mining development" (关于加快煤矿智能化发展的指导意见) (link). The circular provides guidelines on intelligent mine development covering the period until 2035. Local governments are encouraged to formulate the action plans and policies going forward.   

 

• Shanxi Province already proposed pilot projects. Shanxi is the largest coal producing province, with output from major coal mines (460mn tonnes) accounting for ~12% of the total output in China in 2019 (3.72bn tonnes). Shanxi authorities recently released a development plan on intelligent mining by identifying 10 coal mines as pilot projects (figure 1). The total annual capacity of the pilot projects is ~56mn tonnes, accounting for 12% of the annual production in Shanxi. Some of the mines are SANYI’s customers and we expect the Company to benefit from that.     

 

• Raise TP to HK$6.24. We switch our valuation methodology from P/B (previously 2x) to P/E, as applying earnings multiple looks better to capture earnings upcycle. Our target P/E is set at 15x, based on the peak valuation during the earnings recovery trend starting from 2017. We believe our target valuation is justified given our earnings growth forecast of 27%/34% in 2020E/21E.

 

• Major risk factors: (1) failure to contain COVID-19; (2) decline in coal mining activities; (3) increase in component cost; (4) weaker-than-expected international trade.