SANY’s net profit in 1H20 came in at RMB8.5bn, up 25.5% YoY. Net profit in 2Q20 surged 78% YoY to RMB6.3bn. In particular, operating cash inflow significantly rebounded to RMB9.4bn in 2Q, versus an outflow of RMB895mn in 1Q. While we fine-tuned our 2020E earnings forecast by -5% due mainly to lower assumption on the concrete machinery sales and the blended gross margin, we slightly raised our 2021E-22E earnings forecast by 1%, as we expect further operating cost reduction. We raised our TP from RMB24.7 to RMB26.4, based on 16x 2020E P/E (up from 14.3x), on the back of 16% estimated earnings growth in 2021E. SANY remains the key beneficiary of strong infrastructure spending growth and strict emission control policies. Reiterate BUY.
- Key highlights on 1H20 results. Revenue grew 13% YoY to RMB49bn, driven mainly by a 17% YoY increase in excavator revenue. Revenue from concrete machinery sales only increased by 5% YoY, slightly below our expectation. Gross margin narrowed by 2ppt YoY to 30.3%, which was largely due to the impact of COVID-19 in 1Q. SANY maintained a stringent expense control in 1H20, with S&D expense ratio reduced by 1.8ppt YoY. SANY maintained its R&D spending growth which we believe is essential for enhancing its long-term competitiveness. Net profit grew 25.5% YoY to RMB8.5bn.
- Sharp recovery in 2Q20. Revenue grew 45% YoY to RMB32bn in 2Q, a significant improvement from a decline of 19% in 1Q. While the gross margin was down 2.4ppt YoY to 31.5%, it improved 3.3ppt QoQ. All these, together with the increase in other gains and finance income, boosted net profit growth of 78% YoY (to RMB6.3bn) in 2Q compared with a decline of 32% YoY in 1Q. In particular, the operating cash inflow reached RMB9.4bn, suggesting excellent cash flow management.
- High visibility on the 2H20E outlook. According to CCMA, excavator sales volume (for the industry as a whole) grew 55% YoY in Jul. In addition, based on Jiangsu Hengli’s (601100 CH, BUY) latest order intakes of hydraulic cylinders, we expect the momentum of excavator demand to continue over the coming months. Besides, we expect the concrete machinery sales growth to accelerate in 2H20E on the back of the recovery of property construction.
- Key risks: (1) Risk of overseas business due to pandemic; (2) Slowdown of construction activities; (3) Risk of expanding to financing business.
