Sany Heavy Industry: A Strong Contender for Global Leadership in the Construction Machinery Industry

On April 16, Sany Heavy Industry released its performance forecast for the first quarter of 2021, revealing a significant increase in net profit. The company's net profit attributable to its parent is expected to reach 5.2 billion to 5.8 billion yuan, marking a year-on-year growth of 137% to 164%. The non-net profit is anticipated to be between 4.98 billion and 5.48 billion yuan, reflecting a year-on-year increase of 156% to 181%. These impressive figures indicate a rapidly growing net profit for Sany Heavy Industry.

Despite experiencing a maximum drawdown of nearly 40% in the last two months, the company's net profit has shown a remarkable upward trend. This raises the question: What does the future hold for Sany Heavy Industry with its rapidly growing net profit?

Cyclic Stocks vs. Growth Stocks: The Controversy

The question of whether Sany Heavy Industry is a cyclical stock or a growth stock has sparked ongoing debate. Let's explore both viewpoints.

The Cyclical Stock View: Sany Heavy Industry heavily relies on national investments in fixed assets, particularly infrastructure and real estate. During the "4 trillion" investment and construction plan in 2008, the demand for construction machinery and equipment, including Sany's products such as excavators, concrete machines, and cranes, experienced rapid growth. However, after 2012, the construction machinery industry cooled down due to market demand exhaustion. The decline in SANY's net profit during that period supports the argument that the company is cyclical in nature, with a replacement cycle of 7-9 years.

The Growth Stock View: Despite the cyclical nature of the industry, there are reasons to believe that the demand for construction machinery and equipment will gradually stabilize rather than sharply decline. The global demand for construction machinery remains stable as labor costs increase, leading to a greater market demand for labor-replacing mini excavators. Additionally, the industry is transitioning from B2B (business-to-business) to B2C (business-to-consumer) as the focus shifts towards intelligence, electrification, and unmanned technologies. These factors suggest a potential for sustained growth in the industry, positioning Sany Heavy Industry as a growth stock.

Three Positive Factors

Looking at the future growth prospects of Sany Heavy Industry, three positive factors emerge:

1. Industry Boom and Market Demand: The construction machinery industry is experiencing strong growth, with the demand for construction machinery and equipment far from reaching its ceiling. The urbanization rate in China is still below the average level of developed countries, indicating a substantial demand for urban transformation and rural construction. Additionally, the construction of urban agglomerations, infrastructure projects, and transportation networks further contributes to the high demand for construction machinery.
2. Increased Market Share and Global Expansion: Sany Heavy Industry has witnessed an increase in market share, especially in excavators, concrete machinery, hoisting machinery, motor graders, and road rollers. The company's market share in both domestic and international markets has been steadily growing, with a strong presence in countries along the "Belt and Road" and in Africa. The company's focus on globalization and expanding its product portfolio has been a driving force behind its increasing market share.
3. Opportunities in Intelligence and Electrification: With the government's emphasis on carbon neutrality, Sany Heavy Industry has seized the opportunities presented by intelligence and electrification. The company has launched numerous electrified products, incorporating unmanned driving, remote control, intelligent operation, and big data analysis. As the industry embraces intelligence and electrification, there is a significant demand for equipment replacement and greater commercial value to be gained.

Conclusion: A Strong Contender for Global Leadership

Considering Sany Heavy Industry's R&D investments, market position, and financial performance, the company demonstrates favorable growth potential. Despite Caterpillar's longstanding dominance in the global construction machinery industry, Sany Heavy Industry surpasses Caterpillar in terms of gross profit margin and net profit margin. Sany's revenue and net profit have experienced substantial growth, while Caterpillar's revenue has remained stagnant for over a decade.

With Sany Heavy Industry's three positive factors and its strong foothold in the Chinese market, there is a possibility that the company could replace Caterpillar as the new leader in the global construction machinery industry. However, it is important to note that this analysis does not constitute investment advice.