EUR 850.00 For Business Accounts Only

Morningstar | Sany’s Strong 3Q18 in Line With Preliminary; Shares Slightly Overvalued on Long-Term Uncertainties

As China’s dominant construction machinery producer, Sany has benefited tremendously from two drivers of China’s economic growth: the construction boom and the colossal credit expansion. Sany saw its operating profit increase 360% between 2009 and 2012. However, in our view, Sany and its peers largely overlooked the risks associated with the national investment in infrastructure and the concurrent credit binge, selling aggressively on loose credit terms. This led to extreme hardship amid structural overcapacity and slowing economic growth. The worst is probably behind us, though, with noticeable improvement in construction machinery demand on the back of infrastructure ramp-up and inventory restocking in 2016 and 2017.We assign the company a no-moat rating, given the low switching costs among brands, shrinking competitive advantages, and low return on invested capital. Despite its market positioning and responsive aftersales services, Sany remains exposed to the booms and busts of the construction cycle. Despite the improvement in demand that started in late 2016, there is little chance that the company will ever revisit the levels of the boom years of 2009-12. Still, we anticipate solid top-line growth of 7%-8% per year until 2021. The margin gradually improves to 29% by the end of our explicit forecast period, but this is well below the historical highs of 30%-35% achieved in the early 2010s.