EUR 850.00 For Business Accounts Only

Morningstar | Sany’s Strong 3Q in Line With Preliminary; Shares Slightly Overvalued on Long-Term Uncertainties

Sany’s third-quarter 2018 operating income increased by 63% year over year to CNY 2.21 billion from CNY 1.35 billion during the same period last year. Management attributed the strong third-quarter performance to robust demand for its machinery, especially its excavator, concrete machinery, and crane machinery as well as its ability to increase market share. The strong demand is driven by strong end demand from the infrastructure industry, replacement cycle, increase in mechanization and stricter environmental regulation. Based on the year-to-date data from the China Construction Machinery Association, CCMA, Sany managed to gain market share in the excavator market in China, to 21.7% in the first eight months of 2018 from 20.9% in 2017. Management also managed to keep costs under control with higher production efficiency, resulting in higher profit margin for the company. Meanwhile, its net profit jumped by 133% to CNY 1.5 billion from CNY 0.64 billion during the same period last year and is in line with the preliminary results announced last week, where Sany guided for an increase of around 102% to 158% year over year. The higher growth in net income is mainly due to lower finance charges as it realized foreign exchange gains. Our fair value estimate of CNY 7.30, no-moat and stable moat trend ratings remain intact. Nonetheless, we think that Sany’s current share price is slightly overvalued as long-term uncertainties remain as we expect a slowdown in China’s infrastructure spending.

Demand has been strong for construction equipment in the first three quarters in 2018, with excavator sales in China (including exports) increased by 53% year over year to 156 thousand units. The latest data for September 2018 shows that the growth in excavator sales continue to slow down to 28% 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 fourth quarter 2017. We also 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. 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.