SANY Heavy’s net profit in 2019 surged 83% YoY to RMB 11.2bn, in line with our estimate of RMB11.1bn and within the range of RMB10.8-11.8bn released by SANY’s profit alert statement in Jan. Operating cash inflow in 2019 increased 26% YoY to RMB13.3bn, above the net profit, helped by good working capital management. Proposed DPS of RMB0.42 implied 31.4% payout ratio, with the absolute payout reaching a record high. SANY targets to achieve RMB85bn revenue in 2020E, implying 12% YoY growth. We maintain our bullish stance on SANY as our check suggested that demand for excavators will likely exceed expectations in 2Q, which will serve as a key share price catalyst. We have left our earnings forecast unchanged. Reiterate BUY with unchanged TP of RMB23.5 (based on 14.3x 2020E P/E).
- Key highlights on 2019 results. Revenue grew 36% YoY to RMB75.7bn in 2019. Revenue of concrete machinery /excavator /crane machinery grew 37%/44%/50% YoY. Gross margin expanded 2.1ppt YoY to 32.7%, driven mainly by 4.6ppt margin expansion on concrete machinery. Administrative expense remained stable at RMB2bn despite the strong revenue growth, indicating stringent cost control. R&D expense increased by 108% YoY to RMB3.6bn as SANY continued to invest in intelligent production and products development. Net profit surged 83% YoY to RMB11.2bn, a historical high.
- Off balance sheet liabilities increased but acceptable. As at end-2019, the financial guarantee exposure increased by 49% YoY to RMB23bn. The growth was broadly in line with the revenue growth. Besides, such amount remained far below the peak level of RMB36.7bn reported in 2012. We believe the overall risk is acceptable at present.
- Key risks: (1) Failure to contain COVID-19; (2) Risk of overseas business; (3) Increase in raw material cost; (4) Risk of expanding to financing business.
