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Morningstar | Sany’s 1Q19 Exceeds Expectations; FVE Raised but Shares Overvalued on Bearish Long-term Outlook

Following a strong first-quarter 2019 performance, we raised Sany’s fair value estimate to CNY 7.80 from CNY 7.00 driven by higher growth assumptions mainly in 2019 and 2020. Our no-moat and stable moat trend ratings on the firm remain intact. Sany announced first-quarter 2019 results with net profit increased by 118% year over year to CNY 3.2 billion from CNY 1.5 billion during the same period last year, exceeding our expectations. Management attributed the solid performance to robust demand for its machinery, especially its excavator, concrete, crane and pile construction machinery which is underpinned by strong end demand from the infrastructure industry, replacement cycle, an increase in mechanization trend and stricter environmental regulation. This led to an increase in the company’s market share both in domestic China and globally. According to the latest Yellow Table which compiles the market share on the top 50 construction equipment companies globally, Sany’s global construction equipment market share increased to 4.6% in 2018 from 3.7% in 2017. Management managed to keep cost under control with improved production efficiency, resulting in higher profit margin for the company. Nonetheless, we think that Sany is currently overvalued, given our expectation of a slowdown in China’s infrastructure and construction activities in the long run.

Demand for construction equipment in China was off to a strong start at the beginning of 2019, with both crane and excavator shipments increased by 52% and 24%, respectively year over year for the first quarter of 2019, based on data by China Construction Machinery Association. It is worth pointing out that growth in excavator shipments slowed down in March 2019, only increasing by 16% year over year partly due to the high base achieved in March 2018. We continue to expect the government to take a more accommodating stance on infrastructure spending in the near term to support the economy due to trade war concerns. However, growth momentum may lose steam going forward as part of the spending came from front-loading of local bond issuances. Our long-term view on a gradual slowdown on China’s infrastructure spending remains intact given China’s already high debt load.