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1、 August 17, 2010 China: Machinery: Construction Research Report An emerging leader at a discounted price: Upgrading Sany Heavy to CL Buy Growth to decelerate but remain positive While we expect construction machinery sales volume growth to decelerate in 2H 2010 and 2011 because of a slowdown in cons
2、truction activity induced by policy tightening, we think fears of a major dip in this sector are overplayed. This is because we think: (1) construction machinery demand should continue to benefit from ongoing railway infrastructure investment in the next few years; (2) policy easing is likely to occ
3、ur in the next several months when evidence of the slowdown becomes clearer; and (3) the most likely area of loosening is infrastructure investments/local government investment vehicles. Director s Cut valuation methodology We transfer coverage of the China construction machinery stocks to Tian Lu f
4、rom Tommy Wong. We continue to use a Directors Cut cash returns- based valuation framework and revise our 12- month target prices from Rmb14.6 to Rmb29.8 for Sany, from Rmb16.4 to Rmb21.6 for Liugong, and from HK$5.7 to HK$5.4 for Lonking. Upgrade Sany Heavy to Buy, Conviction List We upgrade Sany H
5、eavy to Buy from Neutral and add it to the Conviction List, with 35% upside potential to our Rmb29.8 target price. The target price is derived by applying a 20% premium to Sany in our Directors Cut framework; historically, the company has traded at a 42% premium. We view Sany as an emerging industry
6、 leader because: (1) it continues to deliver sustainable superior returns; and (2) it continues to gain market share in multiple core machinery categories, and we see no sign that this strong momentum is fading. Despite signs of its sustainable leadership, we think Sanys valuation is undemanding: (1
7、) it is the only construction machinery company that trades below trough P/E and 2008 trough P/B, and has the highest upside to mid-cycle P/E; and (2) its valuation premium relative to its peers is falling towards the lowest level in its recent history. Lonking down to Neutral, remove from CL We dow
8、ngrade Lonking from Buy, Conviction List to Neutral on the back of less attractive valuation relative to industry peers than previously. COVERAGE SUMMARY CHINA CONSTRUCTION MACHINERY SECTOR Source: Datastream, Gao Hua Securities Research. Tian Lu, CFA SAC License No. S1420210060003 +86(10)6637-3036
9、 Beijing Gao Hua Securities Company Limited Beijing Gao Hua Securities Company Limited and its affiliates do and seek to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity
10、of this report. Investors should consider this report as only a single factor in making their investment decision. For analyst certification, see the end of the text. Other important disclosures follow the Reg AC certification, or contact your investment representative. Beijing Gao Hua Securities Co
11、mpany Limited Investment Research TickerCompany Market cap ($ mn) Rating 12-m Target price Upside to TP 600031.SSSany Heavy8,010 * BuyRmb 29.835% 000528.SZGuangxi Liugong2,131 NeutralRmb 21.6-2% 3339.HKLonking Holdings1,582 NeutralHK$ 5.4-5% * On our regional Conviction List - 200 400 600 800 1,000
12、1,200 1,400 1,600 1,800 2,000 2,200 2,400 SanyLiugongLonking August 17, 2010 China: Machinery: Construction Gao Hua Securities Investment Research 2 Table of contents Our investment ideas: Buy Sany Heavy, an emerging leader at a discounted price 3 We use Director s Cut (EV/GCI-basis) to derive our t
13、arget prices 11 Cross-checking company valuations: Sany Heavy appears most attractive 15 Sany Heavy: Adding to Conviction List; an emerging leader at a discounted price 20 Liugong (Neutral): Market share erosion concerns offset gross margin improvement 28 Lonking: Downgrade to Neutral from CL Buy; S
14、trong momentum in the excavator market 32 Appendix 37 The prices in the body of this report are based on the market close of August 12, 2010, unless otherwise mentioned. We would like to thank Jack Tang for his valuable contribution to this report. August 17, 2010 China: Machinery: Construction Gao
15、Hua Securities Investment Research 3 Our investment ideas: Buy Sany Heavy, an emerging leader at a discounted price We upgrade Sany Heavy to Buy and add it to our Conviction List and remove Lonking from our Conviction List and downgrade the stock to Neutral. We view Sany as the emerging industry lea
16、der because: (1) it continues to deliver sustainable superior returns; and (2) it continues to gain market share in multiple core machinery categories, and we see no sign of that strong momentum fading. Despite a sustainable leadership Sany s valuation is undemanding: (1) it is the only construction
17、 machinery company that trades below trough P/E and its 2008 trough P/B, and has the highest upside to mid cycle P/E; and (2) its valuation premium relative to its peers is falling towards the lowest level in recent history. We transfer coverage of the China construction machinery stocks to Tian Lu
18、from Tommy Wong and consequently shift the stocks to the China Capital Goods coverage group from the Asia Pacific Infrastructure coverage group. Our coverage view remains Neutral. Add Sany Heavy to our regional Conviction List and remove Lonking from the list We revise our 12-month target price for
19、Sany Heavy from Rmb14.6 to Rmb29.8, implying 35% upside, the highest among the three construction machinery companies we cover. Sany Heavy is currently trading at what we view as an attractive valuation of 2.3X EV/GCI relative to its 2011E CROCI of 30.4%. Risks to our view: Earlier-/later-than-expec
20、ted policy easing which leads to higher-/lower-than-expected machinery demand growth. Lower-/higher-than-expected steel price and import price for engines, hydraulics and transmissions etc. A longer/harsher than expected policy tightening on the property sector may hurt the concrete machinery demand
21、 particularly hard. Exhibit 1: Adding Sany Heavy to our regional Conviction List China construction machinery: Rating, target price, and upside to TP For important disclosures, please go to http:/ Source: Gao Hua Securities Research estimates. TickerCompany Market cap ($ mn) 12-m Target price new Ta
22、rget price old Change Rating new Rating old Latest price Upside to TP 600031.SSSany Heavy8,010 Rmb 29.8Rmb 14.6104%* BuyNeutral22.035% 000528.SZGuangxi Liugong2,131 Rmb 21.6Rmb 16.432%NeutralNeutral22.0-2% 3339.HKLonking Holdings1,582 HK$ 5.4HK$ 5.7-5%Neutral* Buy5.7-5% * On our regional Conviction
23、List August 17, 2010 China: Machinery: Construction Gao Hua Securities Investment Research 4 Exhibit 2: We update our earnings on latest volume assumptions, and incorporate Sany s recently announced acquisitions China construction machinery: Earnings revisions Source: Bloomberg, Gao Hua Securities R
24、esearch estimates. Strong construction machinery sales growth year-to-date but valuations still attractive There has been an exceptionally strong growth in construction machinery unit volume sales year to date on a 12-month rolling basis loader shipments have grown by 40% and excavators by c.90%, bo
25、th historical highs (Exhibits 3 and 4). The China Construction Machinery Association reported an average 78.4% increase in sales and 157.3% increase in earnings for the 9 companies that submitted numbers to the association. However despite significant growth in unit and RMB volume sales, and the rec
26、ent share price rally, China construction machinery company valuations still look attractive both vs. history and vs. global peers. The sector median P/E and P/B for Sany, Liugong and Lonking are at the low end of the historical range (Exhibit 5), and their P/Es are also below the median of major gl
27、obal construction machinery companies (Exhibit 6). Exhibit 3: Loader unit volume sales have grown 40% in the last 12 months Loader monthly unit volume sales, yoy growth and 12-month rolling growth Exhibit 4: Excavator unit volume sales have grown c.90% in the last 12 months Excavator monthly unit vo
28、lume sales, yoy growth and 12-month rolling growth Source: China Construction Machinery Association Source: China Construction Machinery Association . 2010E2011E2012E2010E2011E2012E2010E2011E2012E2010E2011E2012E2010E2011E2012E 600031.SSSany HeavyCNY1.71 2.20 2.66 1.29 1.31 1.55 32%68%72%1.47 1.81 2.
29、20 17%22%21% 000528.SZGuangxi LiugongCNY2.15 2.24 2.40 1.98 2.11 2.30 8%6%5%1.72 1.96 2.22 25%14%8% 3339.HKLonking HoldingsCNY0.52 0.55 0.62 0.51 0.57 0.58 1%-4%7%0.47 0.53 0.59 10%3%4% % above (below) consensus TickerCompany EPS - newEPS - oldEPS - changeEPS - Bloomberg EPS currency -100% -50% 0% 5
30、0% 100% 150% 200% 250% - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10 Total loader sales volume Total loader sales volume yoy (monthly) Total loader sales volume yoy (12-month rolling average) Unit volume YOY growth -100% -50% 0%
31、50% 100% 150% 200% 250% 300% - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10 Total excavator sales volume (units) Total excavator sales volume yoy (monthly) Total excavator sales volume yoy (12-month rolling average) Unit volume YO
32、Y growth August 17, 2010 China: Machinery: Construction Gao Hua Securities Investment Research 5 Exhibit 5: The sector trades close to historical trough on both P/E and P/B Sector median P/E and P/B, since 2005 Exhibit 6: China construction machinery stocks trade on lower multiples than their global
33、 peers P/E, P/B and ROE for China and global construction machinery stocks we cover Source: Gao Hua Securities Research estimates. Source: Gao Hua Securities Research estimates. We believe at current valuation levels, the market is anticipating growth slowing in 2H 2010 and 2011 We believe current v
34、aluations are anticipating a slowdown in construction machinery sales growth in the second half of 2010 and 2011. Infrastructure fixed asset investment growth, albeit at still very high levels, started to fall from Q4 2009 (Exhibit 7). With property fixed asset investment still growing at around 30%
35、 yoy, our economists and real estate analysts expect the impact of policy tightening on the property sector to come through towards the end of this year (Exhibit 8). We have noted a historical correlation between share price and forward loader/excavator volume growth. We believe Liugongs and Lonking
36、s share price movements in the last few months are anticipating lower loader/excavator volume growth towards the end of the year (Exhibit 9 and 10). 0.0X 1.0X 2.0X 3.0X 4.0X 5.0X 6.0X 7.0X 8.0X 9.0X 0.0X 5.0X 10.0X 15.0X 20.0X 25.0X 30.0X 200520062007200820092010E2011E2012E Sector median P/E (LHS) S
37、ector median P/B (RHS) 2010E 2011E 2010E 2011E 2010E 2011E China construction machinery Sany Heavy8,010 13.1X10.2X4.1X3.1X36.0%30.8% Guangxi Liugong2,131 10.3X9.9X2.7X2.1X29.4%24.0% Lonking Holdings1,5829.5X9.1X2.4X2.0X26.8%24.0% Median10.3X9.9X2.7X2.1X29.4% 24.0% Global construction machinery Komat
38、su20,253 18.7X11.7X1.9X1.7X10.3%14.7% Hitachi Construction Machinery4,340 44.2X12.8X1.2X1.1X2.4%7.6% Doosan Infracore3,080 29.8X9.3X2.5X1.9X8.8%23.3% Deere an emerging leader at a discounted price Source of opportunity We upgrade Sany Heavy to Buy and add the stock to our Conviction List. Our revise
39、d 12-month target price of Rmb29.8 (from Rmb14.6) implies 35% potential upsidethe highest among the China construction machinery stocks under our coverage. We view Sany as the industry leader because: 1) it continues to deliver sustainable superior returns; and 2) it continues to gain market share i
40、n multiple core machinery categories, and we see no sign that this strong momentum is fading. Despite a sustainable leadership Sanys valuation is undemanding: 1) it is the only construction machinery company that trades below both trough P/E and 2008 trough P/B, and has the highest upside to mid P/E
41、; and 2) its valuation premium relative to its peers is at the low end of the historical range. Accretive acquisitions We estimate an Rmb0.28/ Rmb0.34 EPS accretion in 2011E/ 2012E Strongest execution capability Sany has consistently shown the ability to mobilize resources to offer new product range
42、 and gain market share in multiple core machinery categories. An emerging winner in the excavator market Sany has successfully penetrated into the highly competitive, but ultimately important, excavator market, and increased its domestic market share from 2% in 2006 to 6.9% in 2010 ytd. The company
43、is now the largest domestic excavator maker. Well-incentivized senior management and workforce - With the chairman holding 37% and senior management 24% of shares, Sanys managements incentives are more aligned with shareholders than peers. In addition, the “100bn special bonus” scheme also incentivi
44、zes middle management and all other employees. Catalyst (1) 1H 2010 half-year report on August 23, 2010. (2) the announcement of new infrastructure investment projects by the government Valuation Our 12-month target price of Rmb29.8 is based on our Directors Cut (EV/GCI vs CROCI/WACC) methodology. T
45、his implies a 2011E price/book of 4.2X and P/E of 13.8X (2005-9 average P/B multiple of 6.0X and P/E multiple of 19.7X). Key risks Key downside risks are: (1) later-than-expected policy easing; (2) market share loss in the concrete machinery/excavator/crane market; (3) steel price increase; and (4)
46、a longer/harsher-than-expected policy tightening on the property sector INVESTMENT LIST MEMBERSHIP Asia Pacific Buy list Asia Pacific Conviction Buy list Coverage View: Neutral China: Machinery Growth Returns * Multiple VolatilityVolatility Multiple Returns * Growth Investment Profile LowHigh Percen
47、tile20th40th60th80th100th * Returns = Return on CapitalFor a complete description of the investment profile measures please refer to the disclosure section of this document. Sany Heavy (600031.SS) Asia Pacific Industrials Peer Group Average Key dataCurrent Price (Rmb)22.03 12 month price target (Rmb
48、)29.80 Market cap (Rmb mn / US$ mn)53,107.7 / 7,838.8 Foreign ownership (%)- 12/0912/10E12/11E12/12E EPS (Rmb)0.881.712.202.66 EPS growth (%)59.394.828.520.7 EPS (diluted) (Rmb)0.881.712.202.66 EPS (basic pre-ex) (Rmb)0.881.712.202.66 P/E (X)25.112.910.08.3 P/B (X)6.54.03.02.3 EV/EBITDA (X)14.99.37.
49、25.7 Dividend yield (%)0.51.11.62.4 ROE (%)29.439.934.531.7 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000 4,200 4,400 16 17 18 19 20 21 22 23 24 25 26 Aug-09Nov-09Feb-10May-10 Price performance chart Sany Heavy (L)Shanghai - Shenzhen 300 (R) Share price performance (%)3 month6 month12 month Absolute27.53.70.7 Rel. to Shanghai - Shenzhen 30027.619.721.5 Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/12/2010 close. August 17