Dingli’s net profit in 1H20 grew 57% YoY RMB409mn, in line with the profit alert released in Jul. This implies a 78% YoY increase in 2Q20 net profit to RMB284mn. Most notable is that the operating cash inflow in 1H20 surged 12x YoY to RMB756mn, suggesting high earnings quality. We expect rising penetration of aerial working platform (AWP) in China remains a structural growth story. We slightly revised up our 2020E-22E earnings forecast by 1-3%. We lifted our TP from RMB81 to RMB117, after rolling over our valuation base to 2021E (42x P/E multiple unchanged). Reiterate BUY.
- 2Q20 results highlight: Revenue grew 135% YoY to RMB1.09bn in 2Q20, driven by strong demand for AWP in China. Gross margin contracted 3.3ppt YoY to 37.4% which was due to more new competitors in the market. Selling expense and administrative expense ratio dropped 1.4ppt and 1.9ppt YoY, respectively, to 4.5% and 4.6%, helped by operating leverage. Operating cash inflow surged 6.4x YoY to RMB677mn, much higher than the net profit.
- Strong demand in China to continue. In 1H20, the total revenue growth of 77% YoY was driven mainly by China market, where revenue surged 172% YoY to RMB1.09bn, accounting for 76% of Dingli’s total revenue. Such growth was stronger than the industry average of 54% YoY growth (in terms of volume, according to the figures from CCMA). Going forward, the construction of new production line for 3.2k units of boom lift with a focus on China market is about to complete. We expect a gradual capacity ramp-up in 4Q20E and the new production line will serve as a key growth driver for Dingli in 2021E.
- Recovery in the overseas market will offer additional upside. Dingli’s overseas revenue (focus mainly on the US and Europe) dropped 9% YoY to RMB350mn (accounted for 24% of total revenue), largely due to the COVID-related shutdown. That said, such decline was less than the industry average decline of 19%. Indeed, improvement in overseas market has been seen as Dingli received orders early this month for 300 units of boom lifts from Collé, an equipment leasing company in Europe. Going forward, we expect the gradual re-opening of the overseas economies will offer upside to the AWP sales.
- Major risk factors: (1) Price competition due to more new entrants in the AWP market; (2) prolonged impact of COVID-19 in overseas; (3) Unexpected slowdown of construction activities in China.
