We see potential re-rating opportunity on SANY given that: (1) excavator demand will continue to be driven by structural drivers, making the upcoming sales more sustainable; (2) SANY’s digital transformation strategy will help widen its competitive edge over competitors; (3) Overseas expansion will offer huge opportunity. As such, we believe market will gradually price SANY as a growth stock instead of a cyclical growth. We revised up our earnings forecast in 2020E-22E by 6-14%. Our new TP of RMB49.5 is based on 22x 2021E PE (up from 17x), on the back of 22% earnings growth in 2021E. We believe surprise on excavator demand in 1Q21E will serve as a strong near-term catalyst. Reiterate BUY.
- Digital transformation to enhance global competitiveness. SANY started the digital transformation of intelligent manufacturing years ago, which has enabled SANY to gradually achieve higher production efficiency. In 2019, SANY’s revenue per employee reached US$590k, surpassing that of Caterpillar (CAT US) (US$530k). Going forward, with the commencement of more light tower plants and further digital transformation, we expect SANY’s global competitiveness will be further enhanced.
- Overseas opportunity. Caterpillar generated ~60% of revenue outside the US, while Komatsu (6301 JP) generated >70% of revenue outside Japan for years. We see huge potential for SANY to expand outside China given that oversea accounted for <20% of total revenue between 2019 and 1H20. With enhancing products quality and the continuous sales network construction, we believe overseas markets will become an important revenue driver over the coming years. We believe the increase in overseas exposure will smooth the earnings trend of SANY going forward, which will help boost the valuation.
- Higher industry forecast on excavator. According to CCMA, excavator sales by major producers in China increased 39% YoY to 328k units in 2020, a record high. Going forward, we see the continuous replacement of labour, substitution of wheel loader and tightening emission standard as structural growth drivers. We revise up our excavator demand growth forecast in 2021E to 10% from 3%. Based on the feedback from the upstream supply chain, we expect the excavator demand growth will remain strong in 1H21E. We expect excavator sales growth of >70% YoY in 2M21E, which should surprise the market on the upside.
- Key risks: (1) Risk of overseas business due to pandemic; (2) Slowdown of construction activities; (3) Risk of expanding to financing business.
