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Morningstar | Sany's 2018 in Line With Prelim; FVE Raised but Shares Remain Overvalued on Long-Term Uncertainties. See Updated Analyst Note from 01 Apr 2019

We raise our Sany fair value estimate to CNY 7 per share from CNY 6.40 following minor adjustments to our valuation model and rolling forward our estimates. The lower net debt due to stronger-than-expected cash flow generation in 2018 and slightly higher growth assumptions resulted in an increase in our fair value estimate. We have also adjusted for the enlarged share count from the conversion of convertible loans. Our no-moat and stable moat trend ratings are intact.

Sany announced full-year results with net profit nearly tripling year over year to CNY 6.11 billion from CNY 2.09 billion in 2017, in line with its preliminary announcement of net profit of CNY 5.90 billion-6.32 billion. For the fourth quarter, Sany’s net profit increased significantly to CNY 1.23 billion from CNY 290 million during the same period last year. Management attributed the strong full-year 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. Demand has been strong for construction equipment in China in 2018, with crane and excavator shipments increasing 47% and 45%, respectively, year over year based on data by the China Construction Machinery Association. Management managed to keep costs under control with higher production efficiency, resulting in higher profit margin for the company. A dividend per share of CNY 0.26 has been proposed, representing a 44% year-over-year increase from CNY 0.18 declared in 2017, in line with the improvement in its profitability. Nonetheless, we think Sany is currently overvalued as long-term uncertainties remain as we expect 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 crane and excavator shipments increasing 42% and 40%, respectively, year over year for the first two months of 2019, based on data by the CCMA. 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, our long-term view of a gradual slowdown on China’s infrastructure spending is intact, given China’s already high debt load.