The downstream demand structure is diversified, and the update cycle has reached its bottom. Requirement: The traditional sources of demand for construction machinery are real estate, infrastructure, and mining demand. On the whole, the traditional demand is expected to stabilize in the future, benefiting from the issuance of trillions of treasury bond, ultra long term special treasury bond and other related policies. The construction of high-quality farmland contributes to the increase in new demand, and relevant policies propose to renovate and improve 35 million mu of high standard farmland annually nationwide from 23 to 30 years, with an average investment of around 3000 yuan per mu and an average annual project investment of 105 billion yuan. Cycle: From the update cycle perspective, the current excavator is in a relatively bottom range, and is expected to enter an upward range in 27 years. Considering the policy of large-scale equipment updates accelerating the elimination of old equipment, it will stimulate the demand for some new machine updates, and the update cycle is expected to be advanced. According to the company announcement, the company's small digging products have achieved continuous growth for 6 months in the past 24 years, and the growth rate has accelerated month by month. The products of medium and large digging have also stabilized and rebounded. From the perspective of revenue, the company's domestic revenue decline has also significantly narrowed. The domestic revenue of 24H1 company reached 14.29 billion yuan, a year-on-year decrease of -11.6%, with a decrease of 20.3 percentage points narrower than in 2023.
The global market exceeds trillions, and internationalization endows the company with growth attributes. According to the Yellow Table 2024 ranking, the total sales revenue of the top 50 global construction machinery companies is 241.9 billion US dollars, of which Chinese construction machinery enterprises account for about 17.2% of the sales revenue. At present, the majority of China's construction machinery market share has been occupied by domestic brands. Assuming that the global sales ratio of construction machinery is equal to the sales ratio, it can be roughly estimated that the overseas market share of domestic brands is only about 8%. The company has been established in multiple countries around the world since 2006. By the end of 2023, the company has established an overseas market channel system covering more than 400 overseas subsidiaries, joint ventures, and excellent agents. Overseas product sales have covered more than 180 countries and regions. In 2023, the company will further upgrade its "internationalization" strategy to a "globalization" strategy, shifting from product exports to industrial exports. From the perspective of revenue, since 2019, the company's overseas revenue has maintained a growth trend, except for a slight decline in 2020. In the first half of 2024, the company achieved overseas revenue of 23.54 billion yuan, a year-on-year increase of 4.8%. However, from a global perspective, the company's global market share in 2023 was only 4.2%, which still has significant growth potential compared to Carter's 16.8%.
The electrification of construction machinery has accelerated, and the company's products have fully bloomed. Benefiting from various influences, the electrification speed of construction machinery has been accelerated. Electric equipment products have broken through first, with industry penetration rates above 5% in 2024, with a high of 15.7% in July. Since 2021, the company has elevated electrification to a strategic level, and the range of electrified products has continued to improve. In just 24 hours, more than 80 new energy products have been launched. In terms of revenue, from 2021 to 2023, the company's revenue from electrification products increased from nearly 1 billion yuan to 3.146 billion yuan, with a CAGR of over 77%.
Investment advice: Considering that the domestic construction machinery industry will bottom out and move upwards this year, the industry's valuation center is expected to move upward. From the perspective of terminal sales, domestic excavators have taken the lead in recovery, and the company's mining machinery has been the sales champion in the domestic market for 13 consecutive years, accounting for nearly 40% of the revenue, and is expected to receive a valuation premium. At the same time, the company's overseas revenue scale, revenue proportion, profitability, and production capacity layout are all in a leading position in the industry, and it is also expected to receive a valuation premium. We expect the company's attributable profits for 2024-2026 to be RMB 65.9/80.7/101.3 billion, corresponding to valuations of 24x/20x/16x, and maintain a "recommended" rating.
Risk Warning: There is a risk of lower than expected industry demand, a risk of slower than expected increase in overseas penetration rate, a risk of slower than expected policy implementation, and a risk of accounts receivable collection.
01. Leading in the construction machinery industry, with a clear focus on domestic cyclical attributes
Step by step, has become a leading domestic construction machinery company
In 1994, with the support of the group's "dual entry" strategy, Sany Heavy Industry was established. Starting from the production and manufacturing of concrete pumping products, we entered the construction machinery manufacturing industry. In 1998, the company established a firm foothold in the construction machinery industry with an annual revenue of over 200 million yuan from its drag pump products. In 2003, Sany was listed on the Shanghai Stock Exchange and decided to enter the excavator field, which has the highest market demand, technical difficulty, and competitive difficulty in the construction machinery industry. In 2011, the company's excavator sales exceeded 20000 units, establishing its position as the top brand in the Chinese market. In 2012, the company acquired Putzmeister, the world's leading concrete brand, further strengthening its competitive advantage in the field of concrete machinery. In 2019, according to Nikkei Business Herald, Sany Heavy Industry ranked among the top three global construction machinery companies. In 2021, Sany Beijing Factory was successfully selected as a "lighthouse factory" in the global manufacturing industry, becoming the first certified "lighthouse factory" in the global heavy industry. As of the end of 2023, the company has built 33 lighthouse factories and achieved production capacity, and the company's intelligent manufacturing level continues to improve.
Starting with concrete machinery and expanding horizontally, the proportion of revenue from mining machinery is currently the highest. From the perspective of the company's historical revenue composition, it can be roughly divided into three stages: 1) From 2003 to 2007, the company's main source of revenue was concrete machinery, accounting for over 70% of the total revenue; 2) From 2008 to 2014, the company expanded its business horizontally, with revenue from piling, pavement, lifting, and excavation machinery continuously expanding. However, the concrete machinery business remained the company's main source of income, accounting for over 50% of the total revenue; 3) From 2015 to 2023, the revenue scale of mining machinery and lifting machinery will rapidly expand, and the company will form a revenue structure that emphasizes mining, concrete, and lifting machinery equally. In 2023, the revenue from excavation, concrete, and lifting machinery accounted for 37.3%, 20.7%, and 17.6% respectively.
There is still a gap in the research and development of domestic construction machinery compared to overseas. After more than 30 years of development, the domestic construction machinery industry has formed a certain scale, and China has entered the ranks of a major producer and consumer of construction machinery. However, the three core components of high-end hydraulic parts, high-end engines, and electronic control systems are still constrained by foreign countries, and the software and hardware facilities required for research and development are highly dependent on foreign countries, especially in the field of digital simulation software, which currently lacks domestic alternative solutions.
The company continues to maintain high R&D investment, with the total number of R&D personnel reaching new highs. In 23 years, the R&D investment reached 6.101 billion yuan. The R&D capability largely determines the core competitiveness of construction machinery products. Sany Heavy Industry has invested up to 6.101 billion yuan in R&D over 23 years to develop new products, new technologies, low-carbon, digitalized, and globalized products. In addition, the company ensures the continuous promotion of research and development innovation, and puts great effort into attracting and cultivating talents. The company has established a sound incentive mechanism and multi-channel cooperation model, successfully attracting a large number of outstanding talents to join. As of the end of 2023, the total number of R&D personnel in the company has reached 8057, of which 42.52% have a postgraduate degree or above, providing strong talent support for the company's R&D innovation.
Breakthroughs have been made in the digitization of research and development, and the trial production cycle has been significantly shortened. The company has successfully independently developed research and development management systems such as RPM (Research and Development Planning Management), RD (Research and Development Project Management), and RDPM (Research and Development Performance Management), achieving standardized management and high-quality completion of research and development projects. The newly completed TPM (Trial Production Management System) and TOS (Test Online System) R&D business systems have reduced the trial production cycle by an average of 36% and the trial cycle by an average of 27.6%.
The performance of Sany has approached that of foreign leading companies, but there is still a gap in product coverage breadth. Excavators generally focus on performance such as mass to bucket ratio, engine power, maximum torque, walking speed, turning speed, and excavation force. From the perspective of product performance, domestic manufacturers are close to foreign leaders, and some parameters have surpassed them. However, compared to the excavator products available on the official websites of Caterpillar and Sany Heavy Industry, Caterpillar has a total of 57 types of excavator products, covering a tonnage range of 0.93-660 tons; However, Sany excavator products only have 47 types, with tonnage coverage ranging from 1.95 to 120 tons. Whether in the field of micro excavators or large mining excavators, Sany's product tonnage coverage still lags behind that of global leader Caterpillar.
The agency model is the main sales method for construction machinery and has high requirements for distributors. Domestic sales of construction machinery include direct sales, agency, and financial leasing, among which the agency model dominates. Unlike other consumer goods, the capital goods characteristics of construction machinery result in direct losses and delays in project progress if it fails and cannot be repaired in a timely manner. Therefore. The construction machinery agency model requires higher specialization from dealers, as well as higher requirements for their capital stock, capital turnover ability, risk management ability, and service level.
Caterpillar, the global leader in construction machinery, is undoubtedly the culmination of the agency model. During difficult times, Caterpillar persisted in reducing profits to maintain the survival and profitability of its agents, building a solid and highly loyal agent network. At present, Carter agents have nearly 170000 employees, covering more than 190 regions and countries worldwide. Moreover, Carter's agents are all independent enterprises with an average cooperation time of over 50 years.
Sany has invested in high-quality distributors, forming interest binding to enhance distributor loyalty. Although domestic construction machinery manufacturers mostly refer to the dealer management models of foreign-funded enterprises such as Caterpillar and Komatsu in establishing their dealer management models, there are still some slight differences among them. Due to the reintroduction of the agency system by Sany in 2006, the cooperation time with distributors was relatively short. It bound high-quality distributors through equity participation, increased its voice over distributors, and formed interest binding to improve distributor loyalty.
The company is continuously committed to technological innovation and industrial upgrading, focusing on transforming and enhancing traditional industries. With the continuous advancement and evolution of digital and intelligent technologies, the evaluation standards and requirements for intelligent manufacturing have become increasingly strict. As a concrete manifestation of highly integrated intelligent manufacturing technology, Lighthouse Factory has emerged. Taking the No. 18 Lighthouse Factory of Sany as an example, its overall automation rate has reached 76%, and the human-machine ratio has increased from 157:1 to 3:1. Compared with before the renovation, within the same production area, the production capacity of the 18th Lighthouse Factory has increased by 123%, personnel efficiency has increased by 98%, and unit manufacturing costs have decreased by 29%. At present, Sany is planning to build 46 lighthouse factories worldwide, with a total investment of over 14 billion yuan in intelligent manufacturing upgrades. Focus on the construction of new quality productivity.
The per capita income is showing an upward trend, while the cost of personnel per unit is showing a downward trend. From the perspective of per capita revenue and labor costs of the company, with the continuous improvement of the company's intelligent manufacturing level, the overall per capita revenue shows an upward trend, while the labor cost of a single product shows a downward trend. From 2019 to 2021, the per capita income of Sany exceeded 4 million yuan, higher than global leaders Carter and Komatsu. Since the second half of 2021, the company has experienced a decline in per capita revenue and an increase in labor costs per product due to the impact of the domestic cycle downturn.
Profit increased year-on-year in 2023, with both gross profit margin and net profit margin recovering. From a historical perspective, the domestic construction machinery industry has obvious cyclicality. As the industry leader, the company's own situation is similar to that of the industry, and its profitability also shows obvious cyclicality. Since the second half of 2021, the domestic construction machinery industry has entered a downward cycle, with companies experiencing a decline in gross profit margin, net profit margin, and net profit. Although the industry is still in a downward cycle in 2023, the company's gross profit margin, net profit margin, and net profit have all been repaired. The company's net profit in 2023 was about 4.53 billion yuan, a year-on-year increase of 6.0%. The sales gross profit margin and net profit margin were 27.7% and 6.3%, respectively, an increase of 3.7 and 0.8 pct year-on-year. We believe that this is mainly due to the continuous improvement of the company's automation level and the increase in the proportion of overseas high gross profit businesses.
1.2 Diversified downstream structure, overall demand is expected to return to positive growth
Traditional demand is expected to stabilize. The traditional sources of demand for domestic construction machinery are real estate, infrastructure, and mining demand. Over the past 23 years, benefiting from the issuance of trillions of treasury bond, ultra long term special treasury bond and other relevant policies, the accumulated investment in fixed assets of 24M1-M7 infrastructure, real estate and mining industry was 12.9 trillion, 8.3 trillion and 0.8 trillion respectively, with year-on-year growth of 8.14%, -9.8% and 19.30%, and the growth rate was+0.44pct, -0.30pct and+2.30pct. Apart from the widening decline in real estate prices, the year-on-year growth rates of infrastructure and mining industries have both increased. Recently, favorable policies related to real estate continued to be introduced, and the situation of land auction has shown signs of improvement since the end of 23. Although the decline of fixed assets investment in real estate has still expanded, the demand for real estate is expected to stabilize in the future. Overall, the traditional demand for construction machinery has benefited from the implementation of various relevant policies and is expected to stabilize in the future.
Rural revitalization is the only way to achieve Chinese path to modernization. In recent years, rural revitalization has become one of the important strategic guidelines for China's socio-economic development. Relevant policies have been introduced one after another, and the construction of high-quality farmland and the improvement of rural construction level are important components of rural revitalization. In 2024, the Central Committee of the Communist Party of China and the State Council issued the No.1 document "Opinions of the Central Committee of the Communist Party of China and the State Council on Learning and Applying the Experience of the 'Thousand Village Demonstration and Ten Thousand Village Rectification' Project to Effectively Promote the Comprehensive Revitalization of Rural Areas" to promote high-quality development in rural areas, which mentioned using high standard farmland construction as the key to improve the quality of arable land.
The construction of high-quality farmland contributes to the increase in new demand. In 2022, the Ministry of Agriculture and Rural Affairs issued the "Guiding Opinions on Promoting the Renovation and Upgrading of High Standard Farmland", proposing that from 2023 to 2030, an average of 35 million mu of high standard farmland will be renovated and upgraded nationwide. At the same time, the opinions point out that the average investment per mu of high standard farmland should strive to reach around 3000 yuan, and based on this, it is estimated that the average annual amount of high standard farmland renovation projects will reach 105 billion yuan. Generally speaking, high standard farmland construction includes: 1) land leveling projects; 2) Irrigation and drainage engineering; 3) Field road engineering; 4) Farmland power transmission and distribution project.
Taking the construction project of 18000 acres of high standard farmland in Xintai City as an example, its main construction content includes (1) land leveling: detailed leveling of 931.6 acres. (2) Irrigation and drainage: 88 agricultural wells, 5 small rainwater collection facilities, 13 pump stations, 11.54 kilometers of dredged ditches, 5.81 kilometers of lined open channels, 0.3 kilometers of drainage culverts, 188 canal system buildings (9 agricultural bridges, 178 culverts), and 3 signboards. (3) Field roads: 15.84 kilometers of machine plowing roads and 4.3 kilometers of production roads. (4) Farmland protection and ecological environment protection: Planting farmland forest net project 4101m. (5) Farmland power transmission and distribution: Construct 8.25 kilometers of high-voltage transmission lines below 10kV, 24.6 kilometers of low-voltage transmission lines, and install 24 transformers.
1.3 Update cycle at the bottom, 24H1 sales have turned positive year-on-year
The domestic construction machinery cycle is obvious. The development of the construction machinery industry has a typical periodicity. Taking excavators as an example, since the industry began a new cycle of economic growth in 2016, after six consecutive years of rapid development, domestic sales reached a historical high of 293000 units in 2020. However, starting from the second half of 2021, the industry has shown a downward trend, with domestic market sales of only 90000 units in 2023, a decrease of 69.3% from the 20-year high.
The incremental market is gradually shifting towards the stock market. For over a decade, despite experiencing cyclical fluctuations, the construction machinery industry as a whole has been in an incremental market. But with the restructuring of global supply chain value and changes in the supply-demand relationship between domestic and foreign demand, China's construction machinery market is transforming into a stock market. The phasing out and updating of old equipment has gradually become the main source of market demand, and the update demand cycle will also be more in line with the domestic construction machinery cycle.
Considering that excavators are the most valuable product in construction machinery, we calculate the natural renewal volume of excavators in this article. Assuming an average service life of 10 years (which is basically consistent with the actual usage of most construction machinery in China), the calculation method is as follows:
Firstly, the actual domestic sales volume for the current year is determined by combining the statistical data from the Construction Machinery Association, the import volume of similar products in the same year, and the export volume of similar products in the same year.
Secondly, referring to the inventory curve of construction machinery in the United States, calculate the annual scrap rate of equipment under a ten-year average lifespan.
Thirdly, based on the scrap ratio and the actual domestic sales mentioned earlier, calculate the scrap amount of excavators in each year from 2020 to 2024.
Finally, by calculating the average proportion of scrapped excavators sold within the past three years, the number of scrapped units in 2027 can be calculated.
At present, domestic excavators are at the bottom of the update cycle and are expected to enter the upward range of phased out updates again in 27 years. According to our calculations, the high point of the previous round of domestic excavator replacement occurred in 2021, with approximately 159000 units. After that, the replacement cycle entered a downward range, with 135000 and 129000 units being replaced in 2023 and 2024, respectively. However, from the trend of scrap volume changes, the current replacement volume of excavators is already in a relatively bottom range, and it is expected to enter an upward range again in the 27th year. The domestic replacement volume of excavators is expected to reach 139000 units in the 27th year.
The equipment renewal policy is expected to accelerate the elimination and renewal of old construction machinery and equipment. After the State Council recently issued the "Action Plan for Promoting Large scale Equipment Renewal and Consumer Goods Trade in", the Ministry of Housing and Urban Rural Development quickly responded and released the "Implementation Plan for Promoting Construction and Municipal Infrastructure Equipment Renewal". Among them, it involves construction equipment. According to the Technical Specification for Inspection of Construction Site Mechanical Equipment (JGJ 160) and other requirements, update and eliminate construction machinery and equipment that have been in use for more than 10 years, high pollution, high energy consumption, severe aging and wear, and outdated technology, including excavation, lifting, loading, concrete mixing, elevators, bulldozers and other equipment (vehicles). Benefiting from this, the clearance of old construction machinery in China is expected to accelerate, while also stimulating potential demand for equipment updates.
The update cycle of domestic construction machinery is expected to be advanced. Since the beginning of 2024, benefiting from the trillions of additional treasury bond issuance projects, the market demand side has stabilized. At the same time, the policy of large-scale equipment updates is accelerating the elimination of old "National One" and "National Two" equipment, stimulating the demand for some new machine updates. The overall domestic sales of excavators are showing a trend of bottom recovery, and the update cycle is expected to be advanced. Except for February, when most construction sites in China were shut down due to factors such as the Spring Festival holiday and rain and snow, resulting in a nearly 50% year-on-year decline in sales, domestic sales of excavators in 24M1-M8 achieved year-on-year growth in all other months.
The company's domestic sales situation has also continued to improve, and the decline in domestic business revenue has significantly narrowed. According to the company announcement, the company's small digging products have achieved continuous growth for 6 months in the past 24 years, and the growth rate has accelerated month by month. The products of medium and large digging have also stabilized and rebounded. From the perspective of revenue, the company's domestic revenue decline has also significantly narrowed. The domestic revenue of 24H1 company reached 14.29 billion yuan, a year-on-year decrease of -11.6%, with a decrease of 20.3 percentage points narrower than in 2023.
02. The global market exceeds one trillion yuan, and internationalization endows the company with growth attributes
2.1 The global construction machinery market exceeds one trillion yuan, but the overseas market share of domestic enterprises is still low
The market is still expanding, and the global scale of construction machinery exceeds one trillion yuan. According to the Yellow Table 2024 ranking, the total sales revenue of the top 50 global construction machinery companies in the 2023 fiscal year was 241.922 billion US dollars, a year-on-year increase of 8.09%, setting a record high in history. Reviewing the total sales history of the top 50 global construction machinery companies, this data shows an oscillating upward trend. We believe that this is mainly due to the booming development of industries such as real estate, infrastructure, and mining in emerging countries, which has driven the continuous expansion of the global construction machinery market.
Carter and Komatsu are global leaders in construction machinery, accounting for a total of 27.2%. From the perspective of manufacturers, Caterpillar and Komatsu are global leaders in construction machinery, with market shares of 16.8% and 10.4% respectively in 2023, a year-on-year increase of+0.5pct and -0.3pct. In addition, the top 10 companies include John Deere, XCMG, Liebherr, Sany Heavy Industries, Volvo Construction, Hitachi Construction Machinery, Jiexibo, and Doosan Bobcats.
Europe, the United States, Japan, China, and South Korea are the main gathering places for global construction machinery enterprises. From a regional distribution perspective, Europe, the United States, Japan, China, and South Korea are the main gathering places for construction machinery enterprises, accounting for 99.0% of total sales. Among them, American construction machinery companies accounted for 28.6% of total sales, with a year-on-year increase of 1.8pct, still the country with the highest proportion; The Japanese construction machinery market accounted for 19.9% of total sales, a year-on-year decrease of -1.3 pct; The sales revenue of Chinese construction machinery enterprises accounted for 17.2% of the total sales revenue, with a year-on-year increase of -1.0pct; European construction machinery companies accounted for 27.6% of total sales, a year-on-year increase of+0.1 pct; Korean construction machinery companies accounted for 5.7% of total sales, a year-on-year increase of+0.1 pct.
The domestic market for construction machinery accounts for only 13%, while the overseas market is dominated by stars and seas. According to off highway data, global construction machinery market sales have been declining for two consecutive years, mainly due to the downward impact of the domestic construction machinery industry cycle. In 22-23, the sales volume of China's construction machinery market decreased by 39% and 38% year-on-year, respectively. From the perspective of regional sales in 2023, North America has the highest sales volume, accounting for over 30% of the total, while China only accounts for 13% of global sales. The overseas market space is more than six times that of China.
The overseas market share of domestic brands is still low. At present, the majority of China's construction machinery market share has been occupied by domestic brands. Assuming that the global sales ratio of construction machinery is equal to the sales ratio, it can be roughly estimated that the overseas market share of domestic brands is only about 8%, which still has significant room for improvement compared to foreign leaders.
2.2 International contribution to incremental revenue, highlighting the company's growth attributes
Internationalization is Sany's third entrepreneurship, and its global layout has been basically completed. In 2002, the company sold its graders to Morocco. In the following years, the company mainly focused on exporting to overseas markets. Since 2006, the company has successively established branches in multiple countries around the world: in November 2006, it built a factory in India and took the first step in its overseas base strategy; In September 2007, invested in the United States and built a factory for the first time in a developed country in the construction machinery manufacturing industry; In May 2009, the Beiderberg Industrial Park held a groundbreaking ceremony for its entry into Germany; In February 2010, Sany settled in Brazil, targeting the entire South American market; In April 2011, signed with Indonesia, radiating the entire ASEAN market; In 2012, we successfully acquired the German company Putzmeister, achieving a strong alliance in the concrete business. Afterwards, the company's global layout was basically completed and entered the stage of regional system. By the end of 2023, in addition to Putzmeister's overseas channels, the company has established an overseas market channel system covering more than 400 overseas subsidiaries, joint ventures, and excellent agents. Overseas product sales have covered more than 180 countries and regions.
Internationalization contributes incremental revenue, and the company's growth attributes are expected to emerge. Since 2019, the company's overseas revenue has maintained a sustained growth trend, with a CAGR of 32.3% from 2019 to 2023, except for a slight decline in 2020 due to the impact of the epidemic. In the first half of 2024, the company achieved overseas revenue of 23.54 billion yuan, a year-on-year increase of 4.8%. From the perspective of revenue proportion, the proportion of overseas business to the company's revenue is also continuously increasing, rising from 18.7% in 2019 to 60.3% in H1 2024. However, globally, the company's market share in 2023 was only 4.2%, which is still significantly lower than Carter's market share of 16.8%. Taking Africa as an example, although the company has entered the African market since 2002 and ranks first among Chinese construction machinery enterprises in exporting products to Africa, its sales in Africa still increased by over 60% year-on-year from January to August 2024.
Upgrading internationalization to a global strategy, promoting mutual benefit and win-win cooperation in overseas markets. In 2023, the company will upgrade its "internationalization" strategy to a "globalization" strategy, shifting from product exports to industrial exports. The advantages of globalization strategy compared to internationalization strategy are obvious: 1) it improves the response speed to market changes and consumer demands, accelerates the application and transformation of research and development achievements; 2) Improved the efficiency and level of after-sales service, and enhanced the competitiveness of products in the local market; 3) It can to some extent reduce the impact of trade disputes and trade protectionism; 4) It can promote the development of the host country's manufacturing industry and effectively drive local employment and economic growth.
Globalization of Manufacturing: The company's three major overseas intelligent manufacturing factories in Indonesia, India, and the United States have been put into operation, with manufacturing bases in Brazil and Germany. The expansion of the second phase of the Indonesian factory has been completed, and the construction of the second phase of the Indian factory and the South African factory is underway in an orderly manner. The globalization of manufacturing continues to advance.
Globalization of R&D: In addition to establishing R&D centers in Changsha, Beijing, Shanghai, Kunshan, and other places, the company has also set up overseas R&D centers in the United States, India, Germany, Indonesia, and other countries. It has established a "1+5+N" global R&D system and is developing products directly for localized scenarios and customer needs. In 2023, 35 new products will be launched in Europe and America, and 15 new large equipment will be launched overseas.
Asia, Australia, and Europe are the main sources of overseas revenue for the company. From a regional perspective, the 24H1 company's Asia Australia region reached 9.17 billion yuan, an increase of 2.55%, accounting for approximately 39.0% of the company's overseas revenue; The European region generated 8.27 billion yuan, an increase of 1.08%, accounting for approximately 35.1% of the company's overseas revenue; The Americas region amounted to 3.79 billion yuan, a decrease of 4.19%, accounting for approximately 16.1% of the company's overseas revenue; The African region reached 2.31 billion yuan, an increase of 66.71%, accounting for approximately 9.8% of the company's overseas revenue.
03. The electrification of construction machinery has accelerated, and the company's products have fully bloomed
3.1 Electrification of construction machinery is a global trend
Under the influence of multiple policies, the electrification of construction machinery has become a global trend. Against the backdrop of global energy transition and low-carbon living, governments and regulatory agencies around the world have established stricter emission standards for construction machinery. For example, Euro V and Country IV emission standards both require reducing emissions from non road mobile machinery, while European countries such as the UK, Norway, Denmark, Finland, the Netherlands, and Austria have piloted or planned to promote zero emission construction site projects. In addition, many governments are introducing noise restrictions for construction sites, especially in residential areas.
Continuous working conditions, fixed enclosed areas, and strict environmental policies are expected to be the first to penetrate. The cost of use and working environment are the main bottlenecks in the electrification of construction machinery. Compared with fuel products, electric products generally have higher prices, but lower maintenance and operating costs, and the impact of product working time on the recycling cycle is greater. In addition, the convenience of charging needs to be considered during the use of electric factory machinery products. Therefore, we believe that electric products are the first to penetrate in continuous operating conditions, fixed enclosed areas, and strict environmental policies, such as steel mills, mixing plants, ports, mines, etc.
Tire based products have strong maneuverability and are expected to be the first to achieve electrification. Construction machinery can be divided into tire type and track type according to their walking mode. Crawler products have strong off-road capabilities, high climbing ability, are not easy to sink or slip on wet, muddy or soft soil, are less affected by terrain, have good passability, and can face more complex working conditions. Compared with tracked construction machinery, tire type products have strong maneuverability, flexible steering, and are commonly used for hard ground work, making it convenient for the layout and use of charging facilities.
The rise in diesel costs further accelerates the electrification process of construction machinery. Fuel is often one of the biggest operating expenses for building equipment owners, and in recent years, diesel prices have been increasing, further driving up the full lifecycle costs of fuel engineering machinery. However, electric construction machinery has significantly lower energy consumption, so with the rise in diesel costs, the cost-effectiveness of electric construction machinery is expected to become more prominent.
Mainstream construction machinery manufacturers are laying out in the field of electrification. Caterpillar announces investment in Lithos Energy battery technology company in 2023; Komatsu announced the acquisition of American battery solutions company ABS in 2023, and signed a strategic cooperation agreement with ABB the following year to jointly develop electrified mining machinery; Volvo Construction also announced the acquisition of Proterra's battery business for $210 million in 2023; John Deere acquired Austrian battery manufacturer KreiseI Electric in 2022. Domestic manufacturers have also set up their own layouts. Sany Heavy Industry reached a cooperation agreement with battery leader Ningde Times in 2020, and Sany Lithium Energy Co., Ltd. was established in 2022; XCMG and BYD jointly established a battery cell joint venture factory, and in October 2023, XCMG Group produced its first power battery; Zoomlion has laid out two key technology chains for the new energy transformation of construction machinery, namely lithium batteries and hydrogen fuel, and created a key technology and component industry channel from components to complete machines, hardware to software.
According to Off Highway Research, which focuses on six types of construction machinery including compact track loaders, track excavators, small excavators, telescopic forklifts, wheel excavators, and wheel loaders, a total of 7283 electric construction machinery were sold worldwide in 2023, with a market penetration rate of approximately 0.8% and a total value of $894 million. It is expected that global sales of electric construction equipment will increase to 33130 machines by 2028, with a market penetration rate of 3.1% and a value exceeding $4 billion.
China and Europe are the main regions for the use of electric construction machinery. In terms of sales volume, China sold 67% of the world's electric construction machinery in 2023, second only to China in Europe, which sold 27% of electric construction machinery. In terms of sales revenue, China's share in 2023 is 52%, Europe's is only 39%, and North America's is only 6%.
3.2 Domestic Denso breaks through first, penetration rate rapidly increases
To calculate the operating costs of electric and fuel loaders, the average wholesale price of oil is 8283.6 yuan/ton;
2) Electricity Price: Using the 2023 average commercial electricity price of 0.09 USD/kWh disclosed by Global Petroleum Price, the exchange rate is based on the 2023 average midpoint price of 7.05 USD/RMB, which means the average commercial electricity price in China is 0.63 RMB/kWh;
3) Duration of use: According to data from Zhijia Network, assuming that the loader operates for 10 hours per day and 300 days per year;
4) Maintenance costs: According to data from Zhijia Network, assuming a fuel loader costs 30400 yuan per year and a pure electric loader costs 15300 yuan per year
5) Service life: According to the data from Tiejia'er Mobile Network, assuming a service life of 5 years;
6) Purchase price: According to data from Zhijia Network, the price of a fuel loader is 350000 yuan, and the price of an electric loader is 800000 yuan;
7) Residual value: According to the data from Tiejia Second Mobile Network, assuming a 5-year residual value rate of 50% for fuel loaders and 10% for electric loaders;
From a 5-year lifecycle perspective, Denso has a significant cost advantage. Although electrified products have higher prices, considering factors such as loader maintenance costs, energy costs, and residual value, the cost of an electric loader over a 5-year lifecycle is approximately 1.1385 million yuan, while the cost of a fuel loader will reach 2.327 million yuan. Electric loaders have a clear cost advantage.
The price decline of lithium iron phosphate is expected to further reduce the purchase cost of electric engineering machinery. On the cost side, batteries account for 40% to 50% of the total cost of electric construction machinery, and currently most construction machinery enterprises in China use lithium iron phosphate batteries. From the price perspective, since 2023, the price of power type lithium iron phosphate has shown a rapid downward trend, and the purchase cost of electric machinery engineering is expected to further decrease.
A series of policies such as equipment updates have helped increase the penetration rate of electric engineering machinery. In March 2024, the State Council issued the "Action Plan for Promoting Large scale Equipment Renewal and Consumer Goods Trade in", and various regions have introduced relevant policies to promote the upgrading of old equipment. Taking Shanghai as an example, the "Management Measures for Subsidies for Encouraging the Renewal of National II Non Road Mobile Machinery in Shanghai" proposes to provide renewal subsidies to all owners of National II non road machinery other than scrapped agricultural machinery in the city who purchase new energy machinery and complete the application and registration of new energy machinery in the city.
Denso took the lead in breaking through, with the highest monthly penetration rate exceeding 15.7%. As the product with the highest penetration rate of electrification in the field of earthmoving machinery, electric loaders sold a total of 3595 units in 2023, increasing the industry penetration rate to 3.48%. In 2022, only 1110 units were sold, with an industry penetration rate of only 0.90%. From a monthly perspective, the industry penetration rate in 2024 is expected to be above 5%, with a peak of 15.7% in July.
3.3 The company is deeply involved in the field of electrification, and its products are fully developed
Electrification has been elevated to the strategic level of the company. As early as the 2010 Shanghai BMW Exhibition, Sany showcased a 7.5-ton pure electric micro excavator. In 2013, it once again launched the concept product STC75EV for a 75 ton electric vehicle crane, accumulating rich experience in electric research and development. In 2021, the company will elevate electrification to the strategic level of the company, focusing on five major directions: battery cells, electric drive bridge technology, VCU centralized control platform, charging and swapping stations, fuel cell systems, and control technology. The company will develop 24 electrification technologies, including multi in one integrated controllers for electric excavators, electric drive control strategies, and power battery technology.
The spectrum continues to expand, and products are fully blooming. Since proposing the electrification strategy, the company has continued to promote the electrification of its main products and the development of related core components and technologies. In 2023, the company will launch over 130 new products, including the world's first fully electronically controlled rotary excavator, pure electric telescopic arm crawler crane, and hydrogen energy mixer truck equipped with self-developed fuel cell system. Among them, the sales market share of electric mixer truck and electric crane ranks first in the industry. In H1 2024, the company's product coverage will be further improved, and more than 80 new energy products will be launched.
The revenue from electrified products has rapidly increased, exceeding 3 billion in 23 years. Benefiting from the enhancement of strategic position and the increase in the coverage of the company's electrification product spectrum, the revenue of the company's electrification products has rapidly increased. From 2021 to 2023, the company's revenue from electrification products increased from nearly 1 billion yuan to 3.146 billion yuan, with a CAGR of over 77%.
04
Profit forecast and investment advice
4.1 Profit forecast assumptions and business segmentation
The company's main business includes excavation machinery, concrete machinery, lifting machinery, pile driving machinery, road machinery, and other engineering machinery. We expect the company to achieve revenue of 79.2.5/891.1/1028.1 billion yuan from 2024 to 2026, yoy+7.1%/+12.4%/+15.4%， Based on the following assumptions:
Mining Machinery: As of H1 2024, the company's mining machinery has won the sales championship in the domestic market for 13 consecutive years, and its global market share has steadily increased. On the one hand, the domestic construction machinery industry has been bottoming out and the sales of excavators have been increasing for several consecutive months. On the other hand, the company continues to expand its overseas market share. In August, overseas excavator sales returned to positive growth year-on-year. We expect to achieve steady revenue growth, and we give the revenue growth rates for this business from 2024 to 2026 as+11%/+18%/+18% respectively;
Concrete Machinery: As of H1 2024, the company's concrete machinery remains the world's top brand. On the one hand, the effect of equipment update policies is gradually becoming apparent, and the domestic construction machinery industry has bottomed out and rebounded. The decline in related products narrowed in August. On the other hand, the overseas market is steadily expanding, continuing the high growth rate of the first half of the year in August. We provide revenue growth rates of+3%/+8%/+14% for 2024-2026;
Crane machinery: As of H1 2024, the company's overall market share of crawler cranes in China exceeds 40%, and its market share of large and medium-sized crawler cranes ranks first in the country; The overseas market share of automobile cranes, all terrain cranes, and off-road cranes has significantly increased. On the one hand, the effect of equipment update policies is gradually becoming apparent, and the domestic construction machinery industry has bottomed out and rebounded. The decline in related products narrowed in August. On the other hand, the overseas market is steadily expanding, continuing the high growth rate of the first half of the year in August. We provide revenue growth rates of+1%/+5%/+13% for 2024-2026;
The assumptions regarding gross profit margin are as follows:
Mining Machinery: This business is expected to remain stable in H1 2024. Considering the increasing proportion of overseas business revenue in the future, the company will continue to implement cost reduction and efficiency improvement measures. We expect gross profit margins of 34.2%, 34.3%, and 34.4% for the years 24-26;
Concrete Machinery: The revenue of this business has slightly declined in the first half of 2024. Considering that the domestic decline will narrow in the second half of this year, the proportion of overseas business revenue will continue to increase, and the company's cost reduction and efficiency improvement measures will continue to be promoted, we expect the gross profit margin of this business to be 22.6%, 22.8%, and 23.0% in 24-26;
Crane Machinery: The revenue of this business has slightly declined in H1 2024. Considering that the domestic decline will narrow in the second half of this year, the proportion of overseas business revenue will continue to increase, and the company's cost reduction and efficiency improvement measures will continue to be promoted, we expect the gross profit margin of this business to be 27.0%, 24.5%, and 24.7% in 24-26;
The assumed cost rate during the period is as follows:
R&D expense ratio: Electrification and intelligentization of construction machinery are the future directions, and the company needs to continuously invest funds. However, with the increase in revenue scale and the promotion of cost reduction and efficiency improvement measures, it is expected that the R&D expense ratios for 2024-2026 will be 7.1%, 7.1%, and 6.9%, respectively;
Management expense ratio: This indicator has a certain scale effect. As the domestic cycle bottoms out and overseas revenue continues to grow, this indicator will continue to decline. We expect this indicator to be 3.2%/3.1%/3.0% respectively from 2024 to 2026;
Sales expense ratio: This indicator is similar to the management expense ratio, but considering the company's continued expansion into overseas markets, we expect it to be 7.9%/7.9%/7.9% in 2024-2026.
4.2 Valuation Analysis
Based on factors such as the industry characteristics and business situation of the company, we choose the relative valuation method to analyze the company's valuation situation. We selected Xugong Machinery, Zoomlion Heavy Industry Science and Technology Co., Ltd., and Liugong, which belong to the same engineering machinery industry and have comparable competitiveness, as comparison companies. The average PE of the three comparable companies from 2024 to 2026 is 15, 12, and 9 times, respectively. We expect the company's net profit attributable to the parent company for 2024-2026 to be RMB 6.59 billion, RMB 8.07 billion, and RMB 10.13 billion, corresponding to PE of 24, 20, and 16 times the closing price on October 10th. Considering the bottoming out and upward trend of the domestic construction machinery industry this year, the industry's valuation center is expected to move upward. From the perspective of terminal sales, domestic excavators have taken the lead in recovery, and the company's mining machinery has been the sales champion in the domestic market for 13 consecutive years, accounting for nearly 40% of the revenue, and is expected to receive a valuation premium. At the same time, the company's overseas revenue scale, revenue proportion, profitability, and production capacity layout are all in a leading position in the industry, and it is also expected to receive a valuation premium.
4.3 Investment advice
Considering the bottoming out and upward trend of the domestic construction machinery industry this year, the industry's valuation center is expected to move upward. From the perspective of terminal sales, domestic excavators have taken the lead in recovery, and the company's mining machinery has been the sales champion in the domestic market for 13 consecutive years, accounting for nearly 40% of the revenue, and is expected to receive a valuation premium. At the same time, the company's overseas revenue scale, revenue proportion, profitability, and production capacity layout are all in a leading position in the industry, and it is also expected to receive a valuation premium. We expect the company's attributable profits for 2024-2026 to be RMB 65.9/80.7/101.3 billion, corresponding to valuations of 24x/20x/16x, and maintain a "recommended" rating.
