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Morningstar | Sany’s Robust Fiscal-Year 2018 Beats Our Expectations; Shares Remain Overvalued

Sany announced that preliminary full-year 2018 net profit is expected to increase by 182%-202% year over year to CNY 5.90 billion to CNY 6.32 billion from CNY 2.09 billion in 2017. The results were above our expectations and imply that Sany’s net profit for fourth-quarter 2018 was around CNY 1.02 billion to CNY 1.44 billion, a sharp increase from CNY 290 million during the same period last year. Management attributed the strong full-year 2018 performance to robust demand for its machinery, especially its excavator, concrete, crane, and pile construction machinery that is underpinned by strong end demand from the infrastructure industry, replacement cycle, an increase in mechanization trend, and stricter environmental regulation. Management kept costs under control with higher production efficiency, resulting in higher profit margin for the company. Management also stated that the firm grew its market share in 2018. We expect to raise our fair value estimate for Sany by less than 10% on this better-than-expected performance pending further clarity on its full-year results that are expected to be announced in early April. Our no-moat and stable moat trend ratings on the firm remain intact. We think that Sany is currently overvalued, as we expect a gradual slowdown in China’s infrastructure and construction activities in the long run.

Demand has been strong for construction equipment in China in 2018, with both crane and excavator shipments increased by 48% (year-to-date until November 2018) and 45%, respectively, year over year, based on data by China Construction Machinery Association, or CCMA. However, we noticed that the growth rates decelerated toward the end of the year, which could be due to a slowdown in demand for crane and a high base in fourth-quarter 2017 for excavator. That said, we acknowledge that the government might take a more accommodating stance on infrastructure spending in the near term to support the economy due to trade war concerns. Nonetheless, our long-term view on a gradual slowdown on China’s infrastructure spending remains intact given China’s already high debt load.