ZHEJIANG DINGLI MACHINERY(603338)：1H22 RESULTS SLIGHTLY BEAT;GLOBAL BUSINESS EXPANSION AHEAD

　　1H22 results beat our forecast

    　　Zhejiang Dingli Machinery (Dingli) announced its 1H22 results: Revenue grew 14.2% YoY to Rmb2.94bn and net profit attributable to shareholders increased 13.3% YoY to Rmb574mn. In 2Q22, revenue declined 2.6% YoY to Rmb1.69bn and attributable net profit rose 12.4% YoY to Rmb378mn. The firm achieved double-digit profit growth despite COVID-19 resurgence in east China from April to May. Its results slightly beat our forecast, mainly thanks to higher-than-expected exchange gains. Meanwhile, we think optimizing market structure and falling freight rates have relieved our fear of a falling gross margin in the US market amid anti-dumping and anti-subsidy probes.

    　　Growth of domestic business slowed as we expected; overseas revenue grew rapidly YoY. Specifically, revenue in the domestic market fell 23.3% YoY in 1H22 due to COVID-19 resurgence dampening demand and adjustments in the firm’s market strategy. Revenue from the overseas market grew 71.9% YoY, driven by robust demand and smooth market development. Meanwhile, we think the firm’s business in the US market grew rapidly in 2Q22 despite anti-dumping and anti-subsidy probes in April. In 1H22, overseas sales accounted for 58.4% of overall sales, up 19.3ppt YoY.

    　　2Q22 gross margin down 1.76ppt YoY; expecting higher GM in 2H22. The firm’s GM declined YoY, as: 1) raw material prices and marine transportation costs dropped QoQ but stayed nearly flat YoY; 2) products sold in the US market faced price decline due to dollar appreciation, falling freight rates, and anti-dumping and anti-subsidy probes; and 3) the product mix changed due to a higher proportion of booms lifts. On the other hand, we think the rapid growth in overseas revenue buttressed the firm’s GM. Looking ahead, we think the firm will continue to optimize its market structure. Combined with lower freight rates and raw material prices, we expect the GM to improve in 3Q22.

    　　Exchange gains increased QoQ; net margin rose YoY in 2Q22. The firm’s selling, G&A, and R&D expense ratios grew 0.78ppt, 0.43ppt, and 0.70ppt YoY in 2Q22. Financial expense ratio declined 6.1ppt YoY mainly thanks to rising exchange gains in 2Q22. The firm reported Rmb79.87mn in exchange gains in 1H22. Its net margin was 22.4% in 2Q22, up 2.98ppt YoY.

    　　Trends to watch

    　　Global competitiveness to continue to fuel growth in the overseas market. We believe the firm rapidly expanded in the overseas market thanks to its forward-looking strategies and products with global competitiveness. We remain upbeat that Dingli will gain more market share by adding distribution channels and increasing sales volume of booms lifts. We expect its overseas revenue contribution will increase to over 60% in 2022. For the domestic market, we expect downstream leasing companies to resume production as the COVID-19 pandemic subsides, driving up the demand for equipment.

    　　Financials and valuation

    　　We leave our 2022 and 2023 earnings forecasts at Rmb1.14bn and Rmb1.42bn. The stock is trading at 20.0x 2022e and 16.0x 2023e P/E. We maintain our TP of Rmb56.0, implying 25x 2022e and 20x 2023e P/E, offering 24.9% upside.

    　　Risks

    　　Rising raw material prices; rising freight rates amid tight container shipping capacity; renminbi appreciation; disappointing gross margin of new boom lifts; intensifying industry competition.