SANY Heavy (SANY)’s net profit in 2023 came in at RMB4.53bn (+6% YoY), which is 12% below both our and consensus estimates. In addition, net profit in 1Q24 only grew 5% YoY to RMB1.58bn due to a lack of revenue growth (-1% YoY). We are still concerned about further slowdown of export this year, given the weakness in the overseas demand (in particular in Europe). We maintain our 2024E earnings forecast but revise up our 2025E estimates by 8% as we take into consideration a moderate recovery in China’s market. Still, our new estimates remain 24%/29% below consensus. Maintain HOLD with new TP of RMB14.8, based on 24x 2024E P/E.

4Q23 results below expectations. Revenue declined 17% YoY to RMB17.9bn. Gross margin narrowed 1.9ppt YoY to 25.6%. EBIT was RMB698mn (-25% YoY), largely helped by a fair value gain of RMB602mn. Net profit dropped by 29% YoY to RMB480mn.

Slowdown of overseas revenue in 2H23. Overseas revenue in 2H23 (62% of SANY’s revenue) grew 4% YoY to RMB20.8bn (slowed from 36% in 1H23). In terms of region, Europe grew 15% YoY to RMB8.1bn (39% of overseas revenue). Asia Pacific (ex-China) remained stable at RMB7.6bn (36% of overseas). Both America and Africa revenue dropped 6% YoY in 2H23 (17%/7% of overseas).

Sluggish 1Q24 results. Revenue dropped 1% YoY while gross margin expanded 0.5ppt to 28.4%. Helped by lower R&D and administrative expense ratio, net profit grew 5% YoY to RMB1.58bn. On the positive side, operating cash flow improved significantly to RMB4.38bn (vs -RMB1.6bn in 1Q23).

Valuation. We revise up our TP to RMB14.8, based on 24x 2024E P/E which is equivalent to 0.5SD above the average of 20x since 2017 (previous TP: RMB12.3, based on 19x). We now apply an above average target multiple as we see initial signs of stabilisation of excavator sales in China’s market, and we expect a moderate recovery in 2025E.

Upside risk: stabilization of property investment in China; Downside risk: further slowdown of overseas demand.