BUY on weakness. SANYI’s share price dropped 9% over the past two days after the release of 1H20 results, due to lower-than-expected core net profit and concerns over the slow recovery of gross margin in 2Q. We argue that the slow recovery of margin is a result of the Company’s new product initiatives to drive growth, instead of a weakening pricing power. We forecast SANYI to deliver earnings CAGR of 24% in 2020E-22E, driven by fast-growing wide-body mining truck, solid backlog of large-size port machinery and clear plans to reduce cost. We slightly trimmed our earnings forecast in 2020E-22E by 1-4%, and revised our TP to HK$5.89 (based on unchanged 2020E earnings multiple of 15x). Valuation is attractive at 9.6x 2020E P/E after the share price pullback.
Key takeaways from post-result NDR:
- Latest backlog: SANYI’s total backlog stood at RMB3.2bn. Backlog for mining equipment amounted to RMB1.4-1.5bn (Road header: RMB180mn; CCMU: RMB1.1bn; Mining truck: RMB110mn). Backlog for logistic equipment amounted to RMB1.8bn (Large-size: RMB1.56bn; Small-size: RMB250mn).
- Revenue growth to accelerate in 2H20E. Management is confident of achieving 30% YoY revenue growth in 2H20E (versus 25% in 1H), helped by the re-opening of economies in overseas, as well as solid demand for road header and CCMU in China. Besides, wide-body mining truck will continue to see strong sales growth after growing 1.8x YoY in 1H20. Management targets to achieve total revenue growth of ~25% for the full year.
- Measures to improve margin. Gross margin of wide-body truck in 1H20 was only 11% but has been on a rising trend. Further increase in sales volume, coupled with the launch of electric models, will continue to drive margin expansion. On the other hand, SANYI is upgrading certain production plants to “light tower plants”, which will be the key to enhance production efficiency. In particular, the capacity expansion of phase two in Zhuhai will help improve the gross margin of large-size port machinery over the medium term (only ~8% in 1H20). SANYI expects to maintain a blended gross margin of 29% for the Company as whole.
- Major risk factors: (1) failure to contain COVID-19 in overseas; (2) decline in coal mining activities; (3) weaker-than-expected international trade.
