三一重工：3Q20Net profit +57%YoY;Promising outlook

SANY Heavy’s net profit in 3Q20 grew 57% YoY to RMB3.86bn, in line with ourexpectation. We feel comfortable with our full year estimate and we are stayingpositive on SANY Heavy due to the high visibility of machinery demand,continuous market share gain and on-track cost reduction driven by automationof production. We left our earnings forecast unchanged. Reiterate BUY with TPof RMB34.6 (based on 17x 2021E P/E).

Key highlights on 3Q20 results. Revenue grew 55% YoY to RMB23.9bn in3Q20. Gross margin narrowed by 2.8ppt YoY to 30.4% but was more thanoffset by good expense control and operating leverage. Selling anddistribution expense ratio reduced 1.7ppt YoY to 5.1%. SANY boosted theR&D spending by 51% YoY to RMB1.28bn in 3Q and we believe thecontinuous spending growth will continue to help SANY widen its advantageover its competitors. Net profit margin slightly expanded 0.3ppt to 16.6%. In9M20, net profit grew 35% YoY to RMB12.4bn, accounting for 83% of our fullyear estimates (run rate in 9M19: 82%). Operating cash inflow increased by33% YoY to RMB11bn, largely in line with the net profit growth.

Auto financing business consolidated in 3Q20 results. In Dec 2019,SANY announced to acquire 91.4% interest in SANY Capital (the autofinancing business) for a consideration of RMB3.38bn. The transaction wascompleted earlier and the auto financing business started consolidated inSANY’s financial statement in 3Q20. In 3Q20, the net interest income grew20% YoY to RMB104mn. We calculate that the net interest margin in 3Q20was 8.9% (annualized). That said, we do not expect the auto financingbusiness to be a profit driver as it serves the purpose of driving the machinerysales.

Key risks: (1) Risk of overseas business due to pandemic; (2) Slowdown ofconstruction activities; (3) Risk of expanding to financing business.