XCMG(000425) ZHESHANG SECURITIES·2024-10-16 08:23Investment Rating - The investment rating for the company is "Buy" (maintained) [1] Core Views - XCMG is positioned as a leading player in the Chinese construction machinery sector, with significant benefits from mixed ownership reform, enhanced global competitiveness, and potential for value reassessment. The company ranks fourth globally with a market share of 5.3% according to the latest Yellow Table, maintaining its position as the top player in China. The average ROE for H1 2024 is 6.4%, outperforming peers such as Liugong (5.8%), Sany Heavy Industry (5.2%), and Zoomlion (4.1%). The net profit margin has improved from 4.5% in 2022 to 7.5% in H1 2024, indicating ongoing profitability enhancement. With the deepening of state-owned enterprise reforms, there is substantial room for improvement in asset quality and profitability [2][3]. Summary by Sections Market Expectations - The domestic construction machinery market is currently perceived to be in a downturn, with insufficient real estate demand and concerns over infrastructure funding. However, recent announcements from the Ministry of Finance regarding a significant increase in debt limits to support local governments may stimulate project progress and improve demand for new machinery sales [3]. Indicators and Catalysts - Key indicators to monitor include monthly excavator sales, domestic real estate and infrastructure investment, new project starts, excavator operating rates, and the company's gross and net profit margins. Potential catalysts include upward trends in domestic real estate and infrastructure investments, policy support, and improved operating rates [4]. Unique Insights - Contrary to market concerns about a downturn in the construction machinery sector, the report suggests that demand is stabilizing and risks are manageable. The benefits from mixed ownership reform are becoming evident, and as the industry stabilizes, XCMG's international business is accelerating, leading to performance improvements and enhanced asset quality [5]. Financial Projections and Valuation - Revenue projections for 2024-2026 are estimated at 919 billion, 1094 billion, and 1334 billion respectively, with corresponding net profits of 62 billion, 81 billion, and 100 billion. The expected PE ratios are 14, 11, and 9 times, with a compound annual growth rate of 23% for net profit from 2023 to 2026, supporting the "Buy" rating [10][11].