Morningstar | Sany’s Second-Quarter 2018 in Line With Preliminary; Shares Overvalued on Long-Term Uncertainties
Sany’s first-half 2018 net profit increased by 192% to CNY 3.39 billion from CNY 1.16 billion during the same period last year and is in line with the preliminary results announced at the end of July, where Sany guided for an increase of around 180% to 210% year over year. This implies that net profit for second-quarter 2018 increased by 356% year over year to CNY 1.89 billion. With more clarity on its strong performance, we raised Sany’s fair value estimate to CNY 7.30 (from CNY 7.00) following a revision to our valuation model. Our no-moat and stable moat trend ratings on the firm remains intact. Management attributed the strong first half performance to robust demand for its machineries, especially its excavator, concrete machinery, and crane machinery. This is driven by strong end demand from the infrastructure industry, replacement cycle, increase in mechanization, and stricter environmental regulation. Sany also managed to gain market share in the excavator market in China, to 21.3% in first-half 2018 from 20.9% in 2017. Management managed to keep cost under control with higher production utilization rates, resulting in higher profit margin for the company. Nonetheless, we think that Sany’s current share price is overvalued as long-term uncertainties remain as we expect a slowdown in China’s infrastructure spending.Demand has been strong for construction equipment in first-half 2018, with excavator sales in China increased by 57% year over year. Latest data for July 2018 shows that the growth in excavator sales slowed down to 33% year-over-year growth. For the rest of the year, we expect the growth rate in excavator sales to slow due to a high base in second-half 2017. We also acknowledge that the government might take a more accommodative stance on infrastructure spending in the near term to support the economy due to trade war concerns. However, our long-term view on a slowdown on infrastructure spending in China remains intact as the central government continues to scale back on fiscal policy to rein in local government debt.
SANY HEAVY INDUSTRY CO.,LTD is a China-based company principally engaged in the research and development, manufacture, distribution and provision of services of engineering machinery. The Company's major products are categorized into five types, which are concrete machinery, excavating machinery, hoisting machinery, pile driving machinery and road construction machinery, including truck-mounted concrete pumps, trailer concrete pumps, excavators, truck cranes, rotary drilling rigs and sets of road equipment, among others. The Company distributes its products in both domestic and to overseas markets.
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