Sany Heavy Industry – Beneficiary of China’s strong infrastructure spending

Sany Heavy Industry Composite Valuation

Main Points

  • Sany Heavy Industry is a major producer of construction equipment. It is expected to surpass Caterpillar in global sales for excavators for the first time in 2018.
  • With roughly 70% of its sales in China, Sany Heavy Industry is poised to benefit from strong infrastructure spending. China’s construction sector is expected to see a strong growth rate in the medium to long term.
  • With only about 30% of its sales being international sales and spread over several regions, the company is not heavily hit by US trade sanctions. In fact, the trade war may spur Chinese companies to buy from Sany rather than from US manufacturers such as Caterpillar.
  • Company is growing its international presence in such countries as India where it plans to invest over $9 billion.
  • Stock is trading at good valuations with good potential upside of up to 30%
Name of Company Country of Origin/ Exchange Traded Sector Stock Price Target Price
SANY HEAVY INDUSTRY CO LTD China/
SHSE
Industrials – Farm & Construction Machinery – Farm & Construction Equipment CNY8.83 CNY11.52
@ 23 Aug 2018
COMPANY PROFILE Sany Heavy Industry Co Ltd is in the business of manufacturing of construction machinery. Its products include concrete and crane machinery to excavator, road construction, and earth-working equipment.

Sany is China’s largest construction machinery manufacturer and the fifth-largest worldwide in terms of revenue. Its products range from concrete and crane machinery to excavator, road construction, and earth-working equipment. We anticipate a 7%-8% top-line CAGR on back of sustained infrastructure spending ramp-up in China, as well as potential new opportunities from “Belt and Road” countries.

Stock Code 600031
Annual Dividend Yield 1.7%
Market Capitalization CNY66.23 billion
SUMMARY
Valuation Based on the Composite Valuation Indicator, the stock has a Target Price of CNY11.52 within a 12-month period. Our Target Price represents upside of 30.5% based on stock price of CNY8.83 as at 23 Aug 2018.
Growth EPS Growth for the company is very positive.
Financial Condition The company’s financial condition is quite strong.
Quality of Earnings The quality of the company’s earnings is very high.
Operational Efficiency The company’s operational efficiency is very high.

Sany Heavy Industry Overview

Valuation
ProThinker believes in using a combination of valuation methods to arrive at a suitable valuation for the stock. This is because while each valuation method has its benefits, it also has its shortcomings. Price to Earnings and Price to Cash Flow Ratios are meaningless when the company has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but assets are not directly related to a company’s profitability.
While it is important to value stocks based on multiple indicators, they sometimes lead to differing views on valuation. One indicator may tell you a stock is overvalued while the other tells you it is undervalued. That is why we use our proprietary Composite Valuation Indicator, which gives you one conclusion based on the best combination of the different indicators, to tell you whether a stock is under or overvalued. The graphical format allows you to determine whether or not the composite valuation accurately values the stock and gives you confidence to act on the decision.
In addition, we go all the way back 20 years (or as much as information is available) to give you a meaning “average” valuation of the company that takes extreme periods of the dot.com bubble and global financial crisis. Without this long a period, you won’t know the extreme highs and lows and therefore will not be able to determine the norm.

 

Sany Heavy Industry PE

The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. Or Net Profit After Tax may be volatile and it is better to use Earnings Before Interest and Tax (EBIT) to value the company. We use the PE Band or Price/EBIT Band to show whether a stock is overvalued or undervalued based on its historical valuation.
At the price of CNY8.83 as at 23 Aug 2018, Sany Heavy Industry Co Ltd is trading at a PE Ratio of 18.8 times last 12 months earnings.  This is a 13.0% premium to its historical average Price to Earnings Ratio of 16.6 times. (Price based on the historical average PE of the company is indicated by the red line.)

Sany Heavy Industry Price to Sales

The Price to Sales Ratio is another commonly used valuation indicator for a stock. It overcomes some of the limitations of the Price Earnings Ratio in that it can be used even when the company is not making a profit or only making minimal profits. However, it should not be used by itself because a company may be achieving sales but not profits.
At the price of CNY8.83 as at 23 Aug 2018, Sany Heavy Industry Co Ltd is trading at a Price to Sales Ratio of 1.5 times last 12 months sales.  This is a 8.0% discount to its historical average Price to Sales Ratio of 1.6 times.

Sany Heavy Industry Price to Cash Flow

Price to Cash Flow is an alternative method to value shares. This is because accounting profits can be subject to manipulation. Therefore, some investors prefer to value a company based on cash flows generated by the operating activities of the company. It also acts as a reality check to valuation measures such as Price to Earnings and Price to Sales. If a company generates high profits and sales but not operating cash flows, it could be heading for trouble because it is cash that pays the operating expenses. However, the Price to Cash Flow ratio of most firms are volatile and should not be used in isolation to determine the valuation of the stock.
At the price of CNY8.83 as at 23 Aug 2018, Sany Heavy Industry Co Ltd is trading at a Price to Cash Flow Ratio of 12.5 times last 12 months cash flow.

Sany Heavy Industry Price to Book

Price to Earnings, Price to Sales and Price to Cash Flow ratios all value a company based on what it is generating (i.e. profits, sales or cash flow). Price to Book ratio is different in that it values a company based on what it owns (i.e. its net assets). This is usually a suitable valuation indicator for a financial institution, which frequently revalues its assets and liabilities, or a company with huge asset base e.g. utilities company.
At the price of CNY8.83 as at 23 Aug 2018, Sany Heavy Industry Co Ltd is trading at a Price to Book Ratio of 2.4 times current book value.  This is a 24% premium to its historical average Price to Book Ratio of 2.0 times.

Sany Heavy Industry Dividend Yield

For stocks that have a history of paying meaningful dividends, the stock price is often dependent on how much dividend the company pays.
At the price of CNY8.83 as at 23 Aug 2018, Sany Heavy Industry Co Ltd is trading at a Dividend Yield of 1.7%. This is a 31.7% premium to its historical average Dividend Yield of 2.5%.  (Note: The lower/higher the dividend yield, the more expensive/cheaper the stock is.)

Sany Heavy Industry Composite Valuation

The Composite Valuation Indicator is derived using our proprietary method to put all the valuation indicators in a way that explains the stock price best. It recognizes that looking at a single indicator is dangerous and inadequate. It also overcomes the difficulty of different indicators pointing giving different signals and difficult to act upon if you do not have a composite valuation. Our Composite Valuation Indicator does not assume that valuation stays constant at the average level. If the growth of the company slows down, it will adjust the valuation downwards to reflect the slower growth. Please note, however, that the Composite Valuation Indicator does not account for situations when the market is willing to pay a much higher price for the stock because of an anticipated takeover or some other special event. It is also possible that investors are now attributing a lower valuation to the stock because the stock or sector’s long-term prospects are poor.
Based on the Composite Valuation Indicator, the stock has a Target Price of CNY11.52 within a 12-month period. Our Target Price represents upside of 30.5% based on stock price of CNY8.83 as at 23 Aug 2018. We recommend that investors take profit from 20% onwards.
The target price takes into account the appropriate valuation of the company and analysts estimates for profit, sales, cash flow, book value, dividends, etc. as well as other factors such as financial condition, growth prospects and ROE.

Other Considerations

Of course, in deciding whether or not a stock is attractive, it is more than determining its valuation and future fundamentals. We need to consider other aspects of the stock such as growth, financial condition, operational excellence, cash flow, technicals, etc.
It is difficult to find a stock that is attractive valued and still pass every single criterion of the investor with flying colors. At times, we need to make certain trade-offs. For a full quantitative analysis, you could refer to this report.
Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.