1Q22 results miss our forecast

Eddie Precision Machinery announced its 2021 and 1Q22 results: Revenue rose 19% YoY to Rmb2.68bn and net profit attributable to shareholders fell 9% YoY to around Rmb470mn. In 1Q22, revenue dropped 31% YoY to Rmb615mn and attributable net profit declined 63% YoY to Rmb72mn, missing our expectation. This was mainly due to the sharp YoY decrease in the domestic sales of construction machinery resulting in falling market demand for related parts and components.

Capacity of hydraulic components ramping up; overall GM fell sharply. In 2021, revenue from quartering hammers dropped 13% YoY to Rmb1.11bn and that from hydraulic components rose 61% YoY to Rmb1.52bn, mainly thanks to the rising market share of hydraulic main pumps and motors amid capacity ramp-up. The firm’s overall gross margin (GM) slid 6.9ppt YoY to 33.8% in 2021, with that of quartering hammers and hydraulic components down 11.4ppt and 1.2ppt YoY to 33.2% and 32.5%.

Net profit margin down YoY; cash inflow declined. The firm’s expense ratio rose YoY in 2021, with the selling, G&A, R&D, and financial expense ratios up 0.2ppt, 0.1ppt, 0.3ppt, and 0.3ppt YoY. Due to falling GM, its net margin dropped 5.4ppt YoY to 17.5%. The firm’s net operating cash inflow dropped by Rmb127mn to Rmmb207mn in 2021, as working capital dropped due to higher raw material prices.

Trends to watch

Domestic demand for construction machinery weakens in 2022; overseas demand remains strong. Domestic demand for construction machinery was sluggish in the past year, due to replacement demand rotation and the downtrend in the real estate sector. Since May 2021, the monthly sales volume of excavators in the domestic market has declined by more than 20%, which fell 60% in March 2022. Although export sales have almost doubled since May 2021, overall monthly sales maintained double-digit YoY decrease. Demand and prices of parts & components declined. Looking ahead, we expect the sales decline in the excavator sector to narrow MoM, thanks to the financial support from stabilization policies, and to the easing impact of the pandemic on construction projects.

Financials and valuation

Considering falling demand in the construction machinery sector, we lower our 2022 EPS forecast by 40% to Rmb0.46, and introduce a 2023 EPS forecast of Rmb0.51. The stock is trading at 42x 2022e and 37x 2023e P/E. Given lower earnings forecast, we cut our target price by 40% to Rmb22.93m, implying 50x 2022e and 45x 2023e P/E, offering 20% upside. Maintain OUTPERFORM.

Risks

Disappointing demand for construction machinery; fiercer industry competition.