SANYI’s net profit in 1Q20 came in at RMB257mn, down only 7% YoY despite the impact of COVID-19, which is resilient in our view. Management maintains its revenue growth target of at least 20% YoY this year, with potential to reach >25%. We remain confident of SANYI’s growth story, given solid backlog and the continuous launch of new product across different segments. Maintain BUY with TP of HK$5.92, based on 15x 2020E P/E, on the back of forecasted earnings growth of 20%/33% in 2020E/21E.
- Key highlights on 1Q20 results. Revenue increased 1% YoY to RMB1.55bn, driven by a 12% increase in mining equipment sales (to RMB980mn) but offset by a 13% decrease in logistic equipment sales (to RMB570mn). Gross margin was 26.2%, down from 30.6% in 1Q19 but improved from 25.9% in 4Q19, due mainly to change in product mix. Thanks to the effective cost control measures and other income, net profit only dropped 7% YoY to RMB257mn. Operating cash inflow was RMB330mn, higher than the net profit.
- Strong growth of mining truck sales in 1Q20. Mining truck sales surged 1.6x YoY to RMB190mn, driven by strong shipment of 260 units (on track to reach full year target of 1,000 units). While the gross margin of mining truck was only 8-9% in 1Q20 (lower than the Company’s blended margin), rising sales volume and further cost reduction measures will likely drive margin expansion from such a low base.
- Expect more contracts of pure water hydraulic support. After winning a tender from Shenhua in Mar (contract value: RMB275mn), SANYI is confident of winning another tender in the near term. While the ASP of pure water hydraulic support (~RMB90mn) is higher than that of the traditional one (RMB80mn), SANYI believes lower maintenance and operating cost (water vs chemicals) make pure water support more attractive to customers.
- Higher domestic demand for small-size port machinery to offset the weakness in overseas. Small-size port machinery was hit by the weak overseas demand due to the pandemic and lockdown, with orders in Mar dropped 15-20%. That said, SANYI started to see more opportunities in domestic market. For instance, China State Railway Group is expected to start equipment procurement, SANYI is confident of winning contracts on empty container handlers. It targets to achieve 10-15% revenue growth in small-size port machinery segment this year.
- 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.
