SANYI’s net profit in 3Q20 grew only 11% YoY to RMB264mn, due to higher spending on R&D, selling and distribution expense. That said, we see these the essential measures to drive the launch of new products. On the positive side, strong revenue growth and gross margin expansion in 3Q20 are encouraging. We believe the growth story driven by new and intelligent products remains solid. We trimmed our earnings forecast in 2020E-22E by 4-5%, mainly due to higher expense assumptions. Accordingly, we fine-tuned our TP from HK$5.89 to HK$5.66, based on unchanged 2020E P/E multiple of 15x. Maintain BUY.
Key highlight on 3Q20 results: SANYI’s revenue grew 29% YoY to RMB1.69bn, driven by 31% growth of mining equipment and 15% growth of port equipment. Gross margin significantly rebounded 2ppt QoQ to 29.5%, which should ease concerns on the margin side. Net profit increased 11% YoY to RMB264mn. In 9M20, revenue and net profit grew 26% and 14%, respectively, to RMB5.5bn and RMB902mn.
Reasons for higher expense. Management explained in the post-results call that R&D expense increased 68% YoY in 3Q, due to the spending on the research of electronic control unit and driverless system. Besides, the number of R&D staff increased by 30%. R&D expense accounted for 5.6% of revenue in 3Q and the ratio is expected to increase to 6-7% in future. On the other hand, higher selling and distribution expenses were incurred due to the fast-growing wide-body trucks in both China and overseas.
Explosive growth of wide-body trucks. Sales volume of wide-body truck reached 1k units in 9M20 and SANYI expects 1.3k units for the full year. SANYI expected the sales to grow 60-100% YoY in 2021E and a further 50% YoY in 2022E. Besides, large-size trucks (rated load: 70 tonnes) will be launched in the near future. Research and development on other large-size models (80t-100t) is on a good track.
New product development underway. SANYI is expanding in the electronic control unit segment. The Company won six sets of electronic control unit in a tender and targets to deliver 30 sets (value at RMB200) in 2021E (including in-house application). On the other hand, SANYI has initiated research on the breaker machinery. The product will be launched in 2021E with a focus on mid-to-high end segment.
Road header. SANYI’s market share in roader header increased to 60% in 9M20 from 53% in 2019. According to SANYI, the intelligent road header products are well received in the market. SANYI targets to deliver a total of 40 units this year. Sales of road headers in 2021E will be driven by these intelligent products.
Pure water hydraulic support. For the contract awarded early this year (value: RMB275), SANYI expects the delivery time will be in Nov. Besides, SANYI was awarded another contract (value: RMB173mn), which is expected to be delivery in Mar 2021E.
Large-size port machinery. Latest backlog stood at RMB1.5bn (China: RMB800-900mn; Overseas: RMB700mn). SANYI will continue to focus on intelligent products that carry higher margins. SANYI expects the gross margin to expand to 20% in 2021E, driven by more high margin overseas orders.
Light tower plant construction. SANYI expects light tower plants will drive down the production cost significantly and improve product quality in the long-run. The average payback period of the construction projects is around two years. Tenders for the plant construction will be completed by the year end.
Major risk factors: (1) failure to contain COVID-19 in overseas; (2) decline in mining activities; (3) higher-than-expected expense to drive the introduction of new products.
