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Morningstar | Sany’s Prelim 2Q19 Above Expectations; Shares Remain Overvalued on Long-Term Uncertainties

Despite Sany’s stronger than expected preliminary first-half 2019 results, we think the firm remains overvalued, as we expect a gradual slowdown in China’s infrastructure and construction activities in the long run. Sany guided that first-half 2019 net profit is expected to increase by 92%-107% year over year to CNY 6.5 billion to CNY 7.0 billion from CNY 3.4 billion during the same period last year, above our expectations. This implies that for second-quarter 2019, net profit will increase by 74%-100% year over year to CNY 3.3 billion to CNY 3.8 billion from CNY 1.9 billion during the same period last year. Management attributed the strong first-half 2019 performance to continuous strong demand for its machinery, which includes excavator, concrete, crane and pile construction machinery, that is underpinned by robust 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 China and globally. Management managed to keep costs under control with higher production efficiency, resulting in higher profit margin for the company. We plan to raise our fair value estimate for Sany by around 5% to 15% on this better than expected performance pending further clarity on its first-half 2019 results, to be announced in late August. Our no-moat and stable moat trend ratings on the firm remain intact.

Demand for excavator in China was off to a strong start in first-quarter 2019 before decelerating in second-quarter 2019, based on data by China Construction Machinery Association. Excavator shipments in China only grew by 0.4% in second-quarter 2019, compared with an increase of 24% year over year in first-quarter 2019. This results in an increase of 12% year over year for the first half of 2019, versus 57% during the same period last year. As for crane shipments in China, its growth in April was still strong at 52% year over year. However, growth in May slowed to an increase of 31% year over year, resulting in an increase of 47% year over year for the first five months of 2019, versus 62% during the same period last year. 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 on a gradual slowdown on China’s infrastructure spending remains intact as the central government continue to scale back on fiscal policy to rein in local government debt.