Action

    The digital transformation of the manufacturing industry is deepening in China thanks to the development of the digital economy. Sany Heavy Industry (Sany) has taken the lead in digital transformation and large-scale construction of smart factories. We believe that digital transformation will become an important means for Sany to smooth cyclical fluctuations and generate long-term growth. The company has upgraded its business structure through cost reduction and efficiency enhancement on the production and intelligent products and services sales side, driving medium- to long-term growth of profitability.

    Reasoning Digital transformation of the manufacturing sector has become the trend. In the next 10 years, we believe that the digital economy will drive China's manufacturing sector to upgrade to intelligent manufacturing. In 2020, the digital economy accounted for 21% of value added of the industrial sector, an increase of 4.2ppt from 2016. The computer numerical control (CNC) rate of key processes reached about 52%. China continues to narrow its gap with the advanced economies in digital production. The empowerment of the digital economy to the manufacturing industry is manifested in many aspects such as intelligence of products and digitalization of production processes. The digital economy can facilitate the transformation of traditional manufacturing to service manufacturing.

    The business model that combines products and services will drive the flattening of the manufacturing industry’s smile curve, i.e., moving up the value chain of the manufacturing sector.

    Sany implements digital transformation to lower cost and increase efficiency. Sany launched its digital construction strategy in 2008. As of end-1H21, the company has built 11 digital factories, effectively increasing production capacity and shortening delivery cycle. Sany’s pile machine factory in Beijing was selected as the world’s first Lighthouse factory by the World Economic Forum in September 2021 due to its high digitization rate. This factory generated revenue of Rmb16mn per employee in 2020, much higher than the average level of the manufacturing sector.

    Development of intelligent products and services to expand the firm’s growth potential. Based on sufficient application scenarios and strong technologies, the company has stepped up efforts to develop intelligent products such as industrial vision, intelligent security, and intelligent in-vehicle products. We believe that Sany will provide integrated solutions for intelligent transformation and high value-added services such as remote operation and maintenance. The smart terminals market is vast, with industrial vision and smart on-board monitoring market size to reach Rmb10bn and the smart security market size to reach Rmb100bn. At present, the company is independently developing machine tools, AGVs, vision sensors and industrial software, laying the foundation for its transformation into a supplier of intelligent manufacturing solutions.

    Digital transformation is an important move for construction machinery companies to smooth cyclical fluctuations. Demand for earthmoving machinery and road machinery has been weakening since 2Q21. Fixed-asset investments in the real estate industry are being constrained. We believe that demand growth will be under pressure in 2022.

    In the medium term, market share expansion and overseas market exploration may serve as the major earnings growth drivers. In the long term, we believe that the digital transformation will serve as driver for more sustainable growth.

    Earnings forecast and valuation

    We keep our 2021 and 2022 EPS forecasts unchanged at Rmb1.83 and Rmb2.01. The stock is trading at 13.3x 2021e and 12.0x 2022e P/E. We maintain OUTPERFORM rating, and TP of Rmb28.23 (14.0x 2022e P/E), offering 16% upside.

    Risks

    Disappointing digitalization of lower-than-expected demand from infrastructure and real estate sectors; disappointing development of overseas markets.

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