Visit to Sany Heavy excavator plant reinforces our bullish viewWe visited Sany Heavy’s excavator plant in Kunshan last week. Based onour communication with the company, demand post Chinese New Year isstronger than the company had expected.
1. Volume: The company expects over 100% yoy growth in excavatorshipments in 1Q17 (vs. +72% in Jan), based on the current order bookfrom dealers. This implies strong delivery in Feb/Mar, with salesvolume growing 285%/60% yoy (Feb. yoy growth is particularly strongdue to more working days in Feb. 2017). This eliminates investorconcerns on post Chinese New Year demand as March is the keydemand bellwether for excavators (on average, March has accountedfor 20% of the annual sales volume over the past 5 years).
2. Inventory: Sany’s current inventory is very low at roughly onemonth’s sales, while the industry norm is to have two months’inventory to ensure timely delivery. Sany’s new machine inventory isc. 2,200 units (including inventory at dealers), while its used machineinventory is c. 1,000 units (vs. 2,000 units a year ago).
3. ASP: Sany has not raised its ex-factory price yet as it intends to1) expand its market share, and 2) share the profit with its dealersinstead of squeezing them.
4. Production: The factory now operates at max utilization (based oncurrent employee level) and Sany is hiring more workers. The bottleneckpreventing Sany from ramping up its capacity quickly is not people,but rather the limited supply of imported parts (foreign suppliers arenot very flexible in accommodating order changes).
Channel checks with supplier/dealer support strong growthWe also cross-checked with major hydraulic parts supplier Hengli Hydraulics(601100.SS, Not Covered; 50% of excavator cylinder market share in China).
Data appears consistent – its Jan. excavator cylinder order doubled (a leadingindicator for excavator production) and its current production plan is fullybooked until May. Also, Shanghai’s largest used machine dealer currently hastight inventory – at the current run rate, their inventory would sell out in onemonth assuming no restocking. Overall, we remain positive on excavatorsales and stay CL-Buy on Sany Heavy, with a 12m TP of Rmb9.1 (still basedon 2018E EV/GCI vs. CROCI/WACC, sector cash return multiple of 1.07X). Keyrisks include: lower-than-expected infrastructure/ property FAI growth;slower-than-expected market share gain; weaker-than-expected cost control.