Dingli’s net profit in 2020 unexpectedly dropped 4% YoY to RMB664mn, 31%/27% below our/consensus estimates, as Dingli generated only RMB44mn net profit in 4Q20 (-83% YoY). In 1Q21, while net profit grew 40% YoY to RMB170mn, gross margin sharply narrowed 10ppt YoY to 30%. We are concerned about the pricing power erosion due to the raw material cost hike and threat from the fast-growing aerial working platform (AWP) players in the domestic market. We slash our earnings forecast in 2021E/22E by 30%/27%. Our TP is lowered to RMB82 from RMB117, based on unchanged 42x 2021E target P/E (on the back of ~42% earnings growth in 2021E). Downgrade to HOLD from Buy.
- 2020 earnings miss: Revenue grew 27% YoY to RMB2.96bn in 2020 while gross margin narrowed 5ppt YoY to 34.9%. This, together with a FX loss of RMB57mn, resulted a 4% YoY decline in net profit. In 4Q20, revenue dropped 49% YoY to RMB483mn, which we believe was due to a temporary slowdown of domestic customer’s orders.
- 1Q21 beat on revenue but miss on gross margin and cash flow. Revenue surged 105% YoY to RMB841mn in 1Q21. In spite of the strong revenue growth, gross margin narrowed 10ppt YoY to 30% which is weaker than expected. Besides, Dingli reported net operating cash outflow of RMB350mn in 1Q21, versus inflow of RMB79mn in 1Q20.
- What will make us more constructive on the stock? We continue to like Dingli as rising penetration of AWP in China remains a structural growth trend due to the shortage of construction workers. In the near term, however, we are waiting for (1) further ramp-up of Dingli’s new production line of boom lift that will potentially improve gross margin; (2) the speed-up of AWP fleet expansion by Far East Horizon (3360 HK, BUY) which will provide Dingli with potential earnings growth recovery; (3) more attractive valuation after consensus earnings cut in the near future.
- Upside risks: (1) Significant decline in raw material price; (2) Stronger-than-expected order intakes; Downside risks: (1) Further price competition due to more new entrants in the AWP market; (2) unexpected slowdown of construction activities in China.
