Dingli’s net profit in 3Q20 grew 16% YoY RMB212mn. While the ramp-up of new capacity, higher spending on R&D and FX loss partially offset the strong revenue growth of 63%, we believe Dingli’s growth trajectory remains solid. We expect production efficiency will be enhanced along with the rising output from the new production line. On the other hand, we understand that Dingli’s overseas sales at present is not disrupted by the latest city lockdown measures introduced in Europe. We continue to like Dingli as rising penetration of aerial working platform (AWP) in China remains a structural growth story. We left our earnings forecast unchanged. 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 and 1.9ppt QoQ to 35.5%, due to the ramp-up of new capacity of boom lift. Selling and distribution expense ratio was maintained at 3.5%. While R&D expense surged 107% YoY to RMB28mn, we believe R&D spending is essential for the continuous launch of new products in future. Finance expense of RMB13mn was reported in 3Q20, versus finance income over the past few quarters, due to the depreciation of US$ against RMB. In 9M20, net profit grew 40% YoY to RMB620mn, representing 64.6% of our full year estimates (run rate in 9M19: 63.9%).
- Potential improvement of gross margin. Dingli’s new production line for boom lift (monthly capacity: 250 units) is currently at the ramp-up stage. We expect the operating leverage will be achieved with the gradual ramp-up of production. We see potential improvement in gross margin over the coming quarters.
- Fast-growing AWP fleet size by Far East Horizon (3360 HK, NR). Far East Horizon, the major customer of Dingli, owned a total of 50k units of AWP as at end-Sep 2020. The fleet size significantly increased from only 19k units in 2019. We expect Far East Horizon’s AWP fleet size will continue to expand in the foreseeable future, which will provide Dingli with consistent growth opportunity.
- Major risk factors: (1) Potential 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.
