浙江鼎力：Net profit in 3Q20+16%YoY;Growth trajectory remains solid

Dingli’s net profit in 3Q20 grew 16% YoY RMB212mn. While the ramp-up of newcapacity, higher spending on R&D and FX loss partially offset the strong revenuegrowth of 63%, we believe Dingli’s growth trajectory remains solid. We expectproduction efficiency will be enhanced along with the rising output from the newproduction line. On the other hand, we understand that Dingli’s overseas sales atpresent is not disrupted by the latest city lockdown measures introduced inEurope. We continue to like Dingli as rising penetration of aerial working platform(AWP) in China remains a structural growth story. We left our earnings forecastunchanged. Maintain BUY with TP of RMB117 (42x 2021E P/E multiple).

3Q20 results highlight: Revenue surged 63% YoY to RMB212mn in 3Q20,suggesting strong demand for AWP. Gross margin contracted 4.1ppt YoY and1.9ppt QoQ to 35.5%, due to the ramp-up of new capacity of boom lift. Sellingand distribution expense ratio was maintained at 3.5%. While R&D expensesurged 107% YoY to RMB28mn, we believe R&D spending is essential for thecontinuous launch of new products in future. Finance expense of RMB13mnwas reported in 3Q20, versus finance income over the past few quarters, dueto the depreciation of US$ against RMB. In 9M20, net profit grew 40% YoY toRMB620mn, representing 64.6% of our full year estimates (run rate in 9M19:63.9%).

Potential improvement of gross margin. Dingli’s new production line forboom lift (monthly capacity: 250 units) is currently at the ramp-up stage. Weexpect the operating leverage will be achieved with the gradual ramp-up ofproduction. We see potential improvement in gross margin over the comingquarters.

Fast-growing AWP fleet size by Far East Horizon (3360 HK, NR). Far EastHorizon, the major customer of Dingli, owned a total of 50k units of AWP asat end-Sep 2020. The fleet size significantly increased from only 19k units in2019. We expect Far East Horizon’s AWP fleet size will continue to expand inthe foreseeable future, which will provide Dingli with consistent growthopportunity.

Major risk factors: (1) Potential price competition due to more new entrants inthe AWP market; (2) prolonged impact of COVID-19 in overseas; (3) unexpectedslowdown of construction activities in China.