三一重工:2Q20net profit +78%in line;Strong rebound in cash flow

SANY’s net profit in 1H20came in at RMB8.5bn, up 25.5% YoY. Net profit in2Q20surged 78% YoY to RMB6.3bn. In particular, operating cash inflowsignificantly rebounded to RMB9.4bn in 2Q, versus an outflow of RMB895mn in1Q. While we fine-tuned our 2020E earnings forecast by -5% due mainly to lowerassumption on the concrete machinery sales and the blended gross margin, weslightly raised our 2021E-22E earnings forecast by 1%, as we expect furtheroperating cost reduction. We raised our TP from RMB24.7to RMB26.4, basedon 16x 2020E P/E (up from 14.3x), on the back of 16% estimated earnings growthin 2021E. SANY remains the key beneficiary of strong infrastructure spendinggrowth and strict emission control policies. Reiterate BUY.

Key highlights on 1H20results. Revenue grew 13% YoY to RMB49bn,driven mainly by a 17% YoY increase in excavator revenue. Revenue fromconcrete machinery sales only increased by 5% YoY, slightly below ourexpectation. Gross margin narrowed by 2ppt YoY to 30.3%, which was largelydue to the impact of COVID-19in 1Q. SANY maintained a stringent expensecontrol in 1H20, with S&D expense ratio reduced by 1.8ppt YoY. SANYmaintained its R&D spending growth which we believe is essential forenhancing its long-term competitiveness. Net profit grew 25.5% YoY toRMB8.5bn.

Sharp recovery in 2Q20. Revenue grew 45% YoY to RMB32bn in 2Q, asignificant improvement from a decline of 19% in 1Q. While the gross marginwas down 2.4ppt YoY to 31.5%, it improved 3.3ppt QoQ. All these, togetherwith the increase in other gains and finance income, boosted net profit growthof 78% YoY (to RMB6.3bn) in 2Q compared with a decline of 32% YoY in 1Q.In particular, the operating cash inflow reached RMB9.4bn, suggestingexcellent cash flow management.

High visibility on the 2H20E outlook. According to CCMA, excavator salesvolume (for the industry as a whole) grew 55% YoY in Jul. In addition, basedon Jiangsu Hengli’s (601100CH, BUY) latest order intakes of hydrauliccylinders, we expect the momentum of excavator demand to continue overthe coming months. Besides, we expect the concrete machinery sales growthto accelerate in 2H20E on the back of the recovery of property construction.

Key risks:

(1) Risk of overseas business due to pandemic;

(2) Slowdown ofconstruction activities;

(3) Risk of expanding to financing business.