Boom lift exports and a breakthrough in North America become Zhejiang Dingli's new growth drivers

Overview

This report assesses Zhejiang Dingli's 1H23 results, product-mix adjustments, progress in the North American market, and the impact of new capacity on future growth. HSBC Qianhai Securities believes boom lifts will become the core growth driver. Despite lowering its overall revenue and EPS forecasts, it still considers the post-results share-price decline excessive and maintains its Buy rating.

Core views

Zhejiang Dingli's 1H23 net profit was RMB832 million, up 45% year over year, corresponding to 35% year-over-year earnings growth in 2Q23, with overall results broadly in line with the report's expectations. Earnings growth was supported by easing cost pressures and higher foreign-exchange gains: 1H23 foreign-exchange gains were RMB156 million, up from RMB80 million in 1H22. 1H23 boom lift export revenue grew 89% year over year, indicating strong overseas demand. The consolidated gross margin in 2Q23 was 34%, up 6 percentage points year over year but down 3 percentage points quarter over quarter, mainly because of a higher proportion of domestic shipments. The report expects the gross margin to improve quarter over quarter in 3Q23 as export shipments recover. Meanwhile, increased business travel drove a 24% year-over-year increase in selling and administrative expenses in 1H23. The report views boom lifts as a key future growth engine. According to the earnings call, the company plans to ship hundreds of boom lifts to the North American market in 2H23; HSBC Qianhai Securities believes this represents a significant breakthrough in North America following the 2021 trade investigation. The company's new factory is about to enter trial production and, according to company disclosures, can add capacity for 4,000 aerial work platforms, further strengthening boom lift supply capacity. Boom lifts' share of export revenue rose from 28% in 1H22 to 37% in 1H23. Together with sales breakthroughs in developed markets, this underpins the report's upward revisions to boom lift revenue and gross margin forecasts. Overseas markets already accounted for 60% of the company's revenue in 1H23, significantly increasing the importance of overseas demand, execution capabilities, and changes in market share to growth. After incorporating the 1H23 results, the report reassessed the product mix. Considering the ramp-up of new capacity and accelerating overseas growth, it raised its 2023-2025 boom lift revenue forecasts by 1%-19% and its gross margin forecasts by 4.3-4.6 percentage points. By contrast, given the high capacity utilization at existing factories and limited room for subsequent expansion, it lowered its scissor lift revenue forecasts by 13%-17% and its vertical mast lift revenue forecasts by 17%-37%. The report also raised its selling and administrative expense ratio forecasts to reflect increased post-pandemic business travel. Combining these adjustments, it lowered its 2023-2025 total revenue forecasts by 6.5%-9.6% from previous estimates and reduced its EPS forecasts by 2.7%, 2.9%, and 3.5%, respectively, to RMB3.10, RMB3.58, and RMB4.21. The revised revenue forecasts for 2023-2025 are RMB6.513 billion, RMB8.121 billion, and RMB9.639 billion, respectively, while the net profit forecasts are RMB1.571 billion, RMB1.811 billion, and RMB2.131 billion, respectively. The company's share price fell 10% after the results announcement, compared with a 3% decline in the CSI 300 Index over the same period. The report believes the market may be concerned about lower-than-expected revenue growth and the impact of substantial foreign-exchange gains on earnings quality, but views the reaction as excessive because strong overseas demand, gains in overseas market share, and North American sales prospects have not yet been fully reflected. Potential catalysts identified in the report include stronger North American sales from 2H23 through 2024 and a faster ramp-up of incremental capacity. On valuation, the report continues to apply a target P/E multiple of 22x, 20% below the 2018-2022 historical average of 28x. This multiple reflects the reduction in projected 2023-2025 EPS CAGR from 17% to 16%, compared with a historical EPS CAGR of 27% in 2018-2022. Applying the 22x P/E multiple to average 2023-2024 EPS of RMB3.34, previously RMB3.44, yields a target price of RMB73.50, down from RMB75.60 but still implying approximately 40%, or precisely 39.7%, upside from the then-current share price of RMB52.60. At the time, the company traded at approximately 17x forecast 2023 P/E and 15x forecast 2024 P/E, around one standard deviation below its 2018-2021 average valuation. On this basis, the report believes the shares are undervalued given 2023-2024 growth visibility and gains in overseas market share, and maintains its Buy rating.

Analysis framework

The report first analyzes 1H23 profit growth, foreign-exchange gains, product exports, and changes in gross margins. It then adjusts segment revenue, gross margin, and expense ratio forecasts based on planned North American shipments, the commissioning of the new factory, and capacity constraints across different products. These adjustments are subsequently consolidated into revenue, net profit, and EPS forecasts, while the target price and rating are derived by considering post-results share-price performance, historical valuation ranges, and the target P/E multiple.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  Target P/E Valuation

  The report applies a target P/E multiple of 22x to average 2023-2024 EPS of RMB3.34 to derive a target price of RMB73.50; the 22x multiple is 20% below the 2018-2022 historical average P/E of 28x.

• Company Fundamentals and Financial Framework

  Revenue, Gross Margin, and Expense Ratio Forecasts by Product

  The report separately adjusts revenue forecasts for boom lifts, scissor lifts, and vertical mast lifts, and updates gross margin, expense ratio, and overall EPS forecasts based on the export mix, capacity utilization, the ramp-up of new capacity, and changes in business travel.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Distinguishing Operating Improvements from the Contribution of Foreign-Exchange Gains

  The report separately examines easing cost pressures and improved boom lift gross margins alongside RMB156 million in foreign-exchange gains to explain the sources of profit growth and the market's concerns about earnings quality.

• Event Strategy and Behavioral FinanceEvent-driven analysis

  Catalysts from a North American Sales Breakthrough and New Capacity Ramp-up

  The report identifies stronger North American sales from 2H23 through 2024 and a faster ramp-up of the new factory as event catalysts that could drive earnings expectations and a valuation re-rating.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Zhejiang Dingli Machinery (603338.SS; 603338CH)

  Boom lift export growth, a breakthrough in the North American market, and incremental capacity constitute the main growth drivers. The report maintains its Buy rating and assigns a target price of RMB73.50.

  Strengths

  Overseas demand is strong, with 1H23 boom lift export revenue up 89%; boom lift gross margins have improved, overseas market share has increased, and the new factory is expected to strengthen supply capacity.

  Weaknesses

  Scissor lifts and vertical mast lifts are constrained by high capacity utilization and limited room for expansion; selling and administrative expenses have increased, while 1H23 profit included substantial foreign-exchange gains.

  Comparison

  The share price fell 10% after the results, compared with a 3% decline in the CSI 300; forecast P/E multiples of approximately 17x for 2023 and 15x for 2024 are around one standard deviation below the 2018-2021 average.

  Risks

  Higher raw-material and labor costs, intensified domestic competition, overseas market execution risks, and a slower-than-expected ramp-up of new capacity could all reduce revenue growth or margins.

Key data

• 1H23 Net ProfitRMB832 millionUp 45% year over year, corresponding to 35% year-over-year earnings growth in 2Q23.
• 1H23 Foreign-Exchange GainsRMB156 millionCompared with RMB80 million in 1H22, representing one of the key contributors to first-half profit growth.
• 1H23 Boom Lift Export Revenue Growth+89%Year-over-year growth driven by strong overseas demand.
• 2Q23 Consolidated Gross Margin34%Up 6 percentage points year over year and down 3 percentage points quarter over quarter; the sequential decline was mainly due to a higher proportion of domestic shipments.
• 1H23 Selling and Administrative Expense Growth+24%A year-over-year increase, mainly reflecting increased business travel.
• Overseas Revenue Contribution60%The proportion of the company's 1H23 revenue generated by overseas markets.
• Boom Lifts' Share of Export Revenue37%The 1H23 level, compared with 28% in 1H22.
• Planned North American ShipmentsHundreds of boom liftsThe company plans to ship them in 2H23, which the report views as a significant breakthrough following the 2021 trade investigation.
• Designed Incremental Capacity of the New Factory4,000 aerial work platformsThe new factory is about to begin trial production, and the pace of its ramp-up will affect revenue and gross margins.
• Adjustment to Boom Lift Revenue ForecastsRaised by 1%-19%Covering 2023-2025, based on the ramp-up of new capacity and accelerating overseas growth.
• Adjustments to Scissor Lift and Vertical Mast Lift Revenue ForecastsLowered by 13%-17% and 17%-37%, respectivelyCovering 2023-2025, due to high capacity utilization and limited future expansion.
• Adjustment to Boom Lift Gross Margin ForecastsRaised by 4.3-4.6 percentage pointsCovering 2023-2025, based on an improved export mix and sales breakthroughs in developed markets.
• Adjustment to Overall Revenue ForecastsLowered by 6.5%-9.6%Covering 2023-2025, relative to the report's previous forecasts.
• 2023-2025 EPS ForecastsRMB3.10, RMB3.58, RMB4.21Lowered by 2.7%, 2.9%, and 3.5%, respectively, from previous forecasts.
• 2023-2025 Revenue ForecastsRMB6.513 billion, RMB8.121 billion, RMB9.639 billionCorresponding to year-over-year growth of 19.6%, 24.7%, and 18.7%.
• 2023-2025 Net Profit ForecastsRMB1.571 billion, RMB1.811 billion, RMB2.131 billionThe report's revised annual earnings forecasts.
• Post-Results Share-Price Performance-10%The CSI 300 Index fell 3% over the same period, and the report considers the share-price reaction excessive.
• Target Valuation Multiple22x P/E20% below the 2018-2022 historical average P/E of 28x.
• 2023-2025 EPS CAGR16%Previously forecast at 17%, compared with historical growth of 27% in 2018-2022.
• Target Price and UpsideRMB73.50, +39.7%The previous target price was RMB75.60; the current-price benchmark was the August 18, 2023 closing price of RMB52.60.

Impact & implications

The report believes the company's growth focus is shifting from capacity-constrained scissor lifts and vertical mast lifts toward boom lifts, which offer higher gross margins and greater overseas expansion potential. The North American sales breakthrough and the ramp-up of the new factory are expected to improve 2023-2024 growth visibility, although overall revenue and EPS forecasts were lowered because of product-mix adjustments and higher expense ratios. Despite reducing the target price following a decline in the average EPS forecast, the report still believes the post-results share-price decline does not fully reflect overseas demand, market-share gains, and improvements in the boom lift business.

Risks

• If raw-material prices rise suddenly and the company cannot pass the costs on to end customers, margins may decline; rising labor costs in China could also constrain profitability.
• More domestic machinery manufacturers entering the aerial work platform market could intensify competition. Competitors' price cuts or aggressive credit sales policies could squeeze Zhejiang Dingli's market share and margins.
• Overseas markets accounted for 60% of 1H23 revenue, potentially exposing the company to overseas execution, operational, or financial risks.
• The new factory is designed to add capacity for 4,000 units. If the capacity ramp-up is slower than expected, it will pressure the revenue growth outlook and margins.

What to watch

• Monitor actual progress on the planned shipment of hundreds of boom lifts to North America in 2H23 and whether North American sales can strengthen from 2H23 through 2024.
• Monitor the new factory's trial production and the ramp-up pace of its incremental capacity for 4,000 aerial work platforms.
• Monitor whether the consolidated gross margin can improve quarter over quarter in 3Q23 following a recovery in export shipments.
• Monitor the sustainability of boom lifts' export contribution, overseas market-share gains, and sales breakthroughs in developed markets.