【Company Research】SANY Heavy Industry – A (600031 CH) – 3Q20 Net profit +57% YoY; Promising outlook

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

 

  • Key highlights on 3Q20 results. Revenue grew 55% YoY to RMB23.9bn in 3Q20. Gross margin narrowed by 2.8ppt YoY to 30.4% but was more than offset by good expense control and operating leverage. Selling and distribution expense ratio reduced 1.7ppt YoY to 5.1%. SANY boosted the R&D spending by 51% YoY to RMB1.28bn in 3Q and we believe the continuous spending growth will continue to help SANY widen its advantage over its competitors. Net profit margin slightly expanded 0.3ppt to 16.6%. In 9M20, net profit grew 35% YoY to RMB12.4bn, accounting for 83% of our full year estimates (run rate in 9M19: 82%). Operating cash inflow increased by 33% 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 auto financing business) for a consideration of RMB3.38bn. The transaction was completed earlier and the auto financing business started consolidated in SANY’s financial statement in 3Q20. In 3Q20, the net interest income grew 20% YoY to RMB104mn. We calculate that the net interest margin in 3Q20 was 8.9% (annualized). That said, we do not expect the auto financing business to be a profit driver as it serves the purpose of driving the machinery sales.

 

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