The impressive earnings growth in 4Q19 and 1Q20 enhanced our confidence on Dingli’s outstanding management capability, which prompted us to revise up our 2020E/21E earnings forecast by 9%/13% to RMB905mn/RMB1.2bn, making us 14%/15% above consensus. We lifted our TP from RMB72 to RMB94, based on 36x 2020E P/E, on the back of 30%/36% earnings growth in 2020E/21E. Near term, we expect the demand for aerial working platforms (AWP) will be strongly driven by infrastructure spending in China. In the medium term, rising labor cost will remain the underlying driver for the application of AWP. Reiterate BUY.
- 2019 earnings far above expectations. Net profit in 2019 grew 45% YoY to RMB694mn, 16%/21% above CMBIS/market expectation, due to a surprising 198% YoY increase in net profit in 4Q. Revenue grew 40%% YoY to RMB2.4bn in 2019, driven by 40%/43% increase in boom lifts / scissor lifts revenue. We note that ASP of scissor lift increased by 19% YoY, due to more delivery of large/medium size models in China. Gross margin contracted by 1.7ppt YoY to 39.9%, due to lower margin of boom lift (27.7%) as Dingli delivered more standardized products than specialized models. Selling expense ratio reduced 1ppt YoY to 4.4%, while administrative expense ratio reduced 1.2ppt YoY to 5.7%, suggesting a stringent cost control. Operating cash inflow grew 67% YoY to RMB696mn, largely in line with the net profit.
- Resilient earnings in 1Q20 despite impact of COVID-19. Net profit increased by 24% YoY to RMB125mn, driven by revenue growth of 7%, increase in finance income, other gains and associate income, which offset a 2.9ppt gross margin contraction. Operating cash flow significantly improved to RMB80mn in 1Q20, versus an outflow of RMB34mn in 1Q19.
- Change in key assumptions. Dingli expects the new capacity for 3,200 units of boom lifts will start operation in Aug 2020, a slight delay from Jun due to COVID-19 impact. We fine-tuned our sales volume forecast by -6% in 2020E/21E after incorporating the new commencement date and the potential weak sales in overseas. Meanwhile, we raised our ASP assumptions on scissor lifts by 20% due to more large-size product sales in China.
- Major risk factors: (1) more new entrants in the AWP market; (2) impact of COVID-19 in overseas; (3) weaker-than-expected construction activities in China.
