SANYI held a conference call last Friday to update the latest development of power suspension: (1) The Company has already shifted more than half of the production process to nighttime which is free from power outage; (2) The switch to suppliers outside Liaoning will help secure component supplies; (3) The Company saw good order intakes of road headers and other coal mining machines. We believe SANYI demonstrates good crisis management to mitigate the impact and put the capacity utilization rate back to normal within a short period of time. We maintain our TP of HK$14.3 (based on 23x P/E, on the back of 23% earnings CAGR in 2021E-23E). Reiterate BUY.
What’s the latest situation? SANYI suffered from an unscheduled power outage on 23 Sep in Liaoning production base. However, situation improved starting 24 Sep, as staggering power usage (错峰用电) is applied while unscheduled outage will not happen again according to Liaoning government. SANYI has shifted more than half of the production process to the nighttime, for both Liaoning and Guangdong factories. In Changsha factory (mainly small-size port machinery), power consumption is not high, and the power supply is secured by the local government.
What will be the change in expense? The shift of production work to the night time will increase the labour cost but such increase will be offset by the lower power expense due to the lower tariff at night time. SANYI estimates the annual electricity expense to be ~RMB50mn.
Impact on the supply chain? SANYI has visited 76 suppliers for mining equipment components in Liaoning, among which 11 suppliers are affected by the power outage (in particular, the cast metals manufacturers). In response to such situation, SANYI has helped some of the suppliers to install independent power generation sets. Besides, SANYI has expanded the procurement from the suppliers located in Dalian and the surrounding regions.
Strong order intakes. The monthly order of road header is ~60 sets this year, compared with ~40 sets last year. Besides, ~30% of the orders are for intelligent models. For the entire coal mining equipment segment, orders have already covered the capacity in 1Q22E. For port machinery, SANYI saw 60% YoY sales growth of large-size port machinery over the past couple of months.
Major risk factors: (1) weakness in mining activities; (2) higher-than-expected expense to drive the introduction of new products; (3) unexpected power outage.
