24 August 2025 | 11:33PM HKT Sany Heavy (600031.SS) Earnings Review: Strong FCF generation leaves room for shareholder return enhancement; near-term cyclical setup more favorable; up to Neutral | | | We upgrade Sany Heavy to Neutral from Sell, post its 2Q25 results (see our first take note here) which revealed Sany's much improved FCF generation capability sustained so far in this cycle (1.5-2x net profit vs. historical mid-cycle average of 1.2x) and better-than-expected improvement in operational efficienc ...

Core Insights - Caterpillar Inc. (CAT) reported a decline in both revenue and earnings for the second quarter of 2025, marking the sixth consecutive quarter of revenue decline and the fourth straight quarter of earnings decline [1][9][10] - Despite a 5% drop in shares following the earnings report, CAT has achieved a year-to-date gain of 13.7%, outperforming the industry average of 11.9% [2][5] - The company anticipates slightly higher revenues in 2025 compared to 2024, with operating margins affected by tariff costs [7][13] Financial Performance - Q2 revenues decreased by 1% year-over-year to $16.6 billion, while adjusted operating profit fell 22% to approximately $2.92 billion, resulting in an adjusted operating margin of 17.6% [9][10] - Earnings per share were reported at $4.72, down 21% from the previous year due to lower revenues and tariff impacts [10] - Operating cash flow for the first half of 2025 was $4.4 billion, a decrease from $5.07 billion in the same period last year [10] Volume and Segment Performance - CAT experienced a net volume increase of $237 million in Q2, primarily driven by a $326 million increase in the Energy & Transportation segment, which offset declines in other segments [11] - The company noted challenges in the Chinese market, particularly in the excavator segment, but expects positive momentum moving forward [12] Outlook and Guidance - CAT's revenue projection for 2025 is set at $42-$72 billion, with anticipated operating margins between 10% and 22% depending on revenue levels [16] - The company has revised its outlook for operating margins, expecting them to be in the top half of the target range excluding tariffs, and in the bottom half when including tariffs [15] Market Position and Valuation - CAT's current forward P/E ratio is 20.51X, higher than the industry average of 19.46X, indicating a premium valuation [24] - Competitors such as Komatsu, Terex, and Manitowoc have lower forward P/E ratios, suggesting they may be more attractive options at present [25] Long-Term Growth Drivers - Long-term growth for CAT is supported by anticipated increases in U.S. infrastructure spending and rising demand for mining equipment due to energy transition trends [26] - The company is focusing on enhancing its autonomous fleet and expects to double its service revenues from $14 billion in 2016 to $28 billion by 2026 [27] Dividend and Shareholder Returns - CAT offers a dividend yield of 1.80%, which is higher than the sector's average of 1.39% and the S&P 500's 1.15% [28] - The company has a strong track record of increasing dividends for 30 consecutive years, with a five-year dividend growth rate of 7.9% [28] Investment Considerations - Current market conditions and ongoing revenue and earnings declines suggest caution for new investors, while existing shareholders may benefit from long-term demand prospects [29][30]

Core Viewpoint - John Deere is committing to invest nearly $20 billion over the next decade to enhance its US operations and support American manufacturing [1][5]. Investment Focus - The investment will focus on developing new products, advanced technology, and improved manufacturing capabilities [2]. Recent Developments - John Deere is constructing a $70 million factory in Kernersville, North Carolina, dedicated to manufacturing excavators [3]. - A $40 million expansion has been completed at the Des Moines, Iowa factory to produce See & Spray sprayers, which utilize computer vision and AI for weed detection [4]. - The company has invested nearly $150 million to renovate its East Moline, Illinois factory for the production of new X9 combines, which increase harvesting capacity by approximately 45% [6]. Employment and Sales - Nearly 80% of John Deere's US sales and 25% of international sales come from domestically manufactured products [7]. - The company employs around 30,000 people across more than 60 US locations, with an additional 50,000 employed by its network of independent US dealerships [7].

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **China machinery industry**, particularly construction machinery and trucks, with a preview of earnings for 2Q25 and 1H25 [1][19]. Core Insights and Arguments - **Earnings Lagging Demand Shift**: Despite a notable divergence in demand between excavators and trucks, earnings have not yet reflected this shift. Excavators saw a deceleration in demand, while trucks experienced significant acceleration [1][2]. - **Domestic Demand Dynamics**: Truck demand increased by **25% year-over-year (yoy)** in 2Q25 compared to a **-4% yoy** decline in 1Q25, driven by government policy measures. Excavators, however, only grew by **8% yoy** in 2Q25, down from **38% yoy** in 1Q25 [2][18]. - **Export Performance**: Most construction machinery categories maintained positive growth, with notable declines in AWP exports due to US-China trade tensions. However, June saw a recovery in AWP exports, growing **23% yoy** [3][7][18]. - **Earnings Forecast Adjustments**: EPS estimates for coverage companies were revised by **-9% to +40%** based on year-to-date developments. Notable upgrades were made for Lonking (+31-40%) and downgrades for Weichai (-7% to -9%) [1][13][14]. Additional Important Insights - **Construction Machinery Outlook**: The outlook for construction machinery appears vulnerable to a macroeconomic slowdown, while truck demand may remain resilient due to replacement policies [9][10]. - **Sales Volume Expectations**: For 2025, domestic sales volume for trucks is expected to reach approximately **750,000 units**, representing a **26% yoy** increase, while excavator demand growth is projected to moderate [10][11]. - **Profitability Trends**: Higher margins are anticipated for coverage companies due to solid export performance and favorable foreign exchange movements, particularly benefiting Hengli and Dingli [22]. - **Company-Specific Performance**: - **Dingli**: Expected to have flattish top-line growth but benefits from inventory in the US [22]. - **Lonking**: Strong export performance expected, particularly from Shanghai and Fujian [22]. - **Sany**: Anticipated to achieve **10%+ yoy** growth in sales for 2Q25 [25]. - **Hengli**: Expected to see **10%+ yoy** growth in sales for 2Q25 [30]. Conclusion - The China machinery industry is experiencing a mixed demand landscape, with trucks outperforming excavators. Earnings forecasts have been adjusted to reflect these trends, and while some companies are expected to perform well, others face challenges due to unfavorable market conditions.

Summary of Sany Heavy Industry (600031.SS) Conference Call Company Overview - **Company**: Sany Heavy Industry - **Industry**: Construction Machinery - **Key Products**: Concrete machinery, excavators, cranes, road construction machinery, hoisting machinery, and pile driving machinery [doc id='23'][doc id='24'] Financial Performance - **2Q25 Earnings Estimate**: Expected net profit of Rmb2.6 billion, representing a 31% year-over-year increase [doc id='1'][doc id='19] - **Revenue Growth**: Anticipated 13% year-over-year revenue growth [doc id='1'][doc id='19] - **Gross Profit Margin (GPM)**: Expected GPM expansion of 0.4 percentage points year-over-year [doc id='1'][doc id='19] - **Comparison with Competitors**: Sany is preferred over Zoomlion, which is expected to see a 23% year-over-year earnings decline in 2Q25 due to lack of asset disposal gains [doc id='1'][doc id='19] Upcoming IPO - **HK IPO Plans**: Sany aims to complete its Hong Kong IPO by early September, targeting to raise between US$1.0 billion and US$1.5 billion (Rmb7.2 billion to Rmb10.8 billion) for global expansion [doc id='3'] Investment Ratings - **Current Price**: Rmb19.94 - **Target Price**: Rmb24.00, indicating a potential upside of 20.4% [doc id='4'] - **Expected Total Return**: 22.7% including a dividend yield of 2.4% [doc id='4'] Key Financial Metrics - **Market Capitalization**: Rmb168.99 billion (US$23.49 billion) [doc id='4'] - **Earnings Summary**: - 2023A: Net Profit Rmb4.527 billion - 2024A: Net Profit Rmb5.975 billion - 2025E: Net Profit Rmb7.904 billion - 2026E: Net Profit Rmb8.957 billion - 2027E: Net Profit Rmb10.008 billion [doc id='4'][doc id='7'] Risks and Challenges - **Downside Risks**: 1. Delayed recovery in machinery demand due to weaker property and infrastructure investment [doc id='26'] 2. Worse-than-expected gross profit margins [doc id='26'] 3. Weaker-than-expected export sales growth [doc id='26'] Strategic Insights - **Management's Outlook**: Management does not rule out the possibility that domestic sales could outgrow overseas revenue in 2025, contrary to previous guidance [doc id='24'] - **Cost Discipline**: Continuous earnings growth attributed to operational expense (OPEX) discipline, particularly in R&D [doc id='1'][doc id='2'] Conclusion - Sany Heavy Industry is positioned for strong earnings growth in 2Q25, driven by both domestic and international sales, with a favorable outlook for its upcoming IPO and overall market performance. The company maintains a strong preference over competitors like Zoomlion, with a solid investment rating and target price reflecting its growth potential.

Summary of the Conference Call on China's Construction Machinery Sector Industry Overview - The conference call focused on the **China construction machinery sector** and the potential impact of the **lower YTR hydropower project** on annual sales [2][3]. Key Insights 1. **Sales Impact Estimates**: - The lower YTR project could boost annual construction machinery sales by approximately **3-5%** under base case scenarios and **5-10%** under bull case scenarios, based on data from the **China Construction Machinery Association (CCMA)** [2][3]. - The total revenue for the sector is estimated at **Rmb800 billion**, with new equipment sales accounting for around **Rmb500 billion** [2]. 2. **Equipment Type Demand**: - **Concrete-related machinery** is expected to see the most significant increase in demand, with projections indicating it may account for **40%** of the total equipment share from the lower YTR project [3]. - Other equipment types are expected to have varying impacts: **earthmoving equipment** and **cranes** at approximately **20%** each, **tunnel boring machines (TBM)** at **5-10%**, and various auxiliary equipment at **10-15%** [3]. 3. **Procurement Cycles**: - The first wave of excavator procurement is anticipated in **2027/2028**, with a second wave driven by replacement demand expected in **2030/2031** [4]. - The main construction phase of the lower YTR project is projected to commence in **H226**, leading to a peak in excavator purchases during the first wave [4]. 4. **Trends in Equipment Requirements**: - There is a growing emphasis on **electrification**, **upsizing**, **digitalization**, and **premiumization** in construction machinery, which is likely to favor leading domestic players over smaller brands [7]. - The expert highlighted that most construction equipment for tunnel operations will likely be new energy models, focusing on mid- to large-sized equipment, particularly **30-60 ton** excavators [7]. Risks and Opportunities 1. **Downside Risks**: - Potential risks include slower-than-expected growth in property and infrastructure investment due to government policies, weaker replacement demand, and impacts from trade friction [12]. - Overcapacity issues may persist if smaller manufacturers do not exit the market promptly [12]. 2. **Upside Risks**: - Faster-than-expected growth in property and infrastructure investment, stronger replacement demand, and supportive policies for domestic brands could enhance market conditions [13]. - Stricter environmental protection policies may accelerate the exit of older machinery, benefiting leading brands [13]. Conclusion - The lower YTR hydropower project presents a significant opportunity for the China construction machinery sector, with expected increases in sales and procurement cycles. However, stakeholders should remain vigilant regarding potential risks that could impact growth and demand in the sector [2][12][13].

Summary of China Import/Export Tracker and European Capital Goods Industry Overview - The report focuses on the capital goods industry, specifically analyzing 32 product categories relevant to European exports and Chinese imports/exports [3][51]. Key Insights - **Market Share Dynamics**: - Europe currently holds 44% of global capital goods exports, down from 56% in 2005. - China's market share has increased from 6% in 2005 to 22% in 2024, representing a 16 percentage point gain [3][17]. - **Export Growth Trends**: - In June 2025, global export values rose by 21% year-over-year, while import values increased by 9% year-over-year [8]. - Notable growth in Chinese exports includes: - Rail: +46% - Switchgear: +41% - Fibre cable: +40% - Heavy Duty Trucks: +40% - Copper wire: +31% [8][27]. - **Import Declines**: - Significant declines in Chinese imports were observed in: - Tractors: -78% - LED lighting: -40% - Shovel loaders: -39% - Turbochargers: -33% [30]. - **Regional Export Changes**: - Exports to Europe from China have shown substantial increases in categories like switchgear (+99%) and rail (+69%) [32]. - Conversely, exports of marine engines (-34%) and commercial vehicle engines (-27%) have decreased significantly [32]. Competitive Landscape - **Chinese Competition**: - Chinese exports to Europe have grown significantly, particularly in rail and construction equipment, indicating increased competition for European manufacturers [7][10]. - Certain product categories, such as commercial vehicle engines and bearings, have remained relatively insulated from Chinese competition [7]. - **Market Share Risks**: - The report highlights potential risks for European companies in sectors like automotive bearings, energy storage, and construction equipment due to increasing Chinese competition [44][43]. Additional Observations - **Trade Balance Trends**: - China has turned into a net exporter in categories like medium voltage equipment and heat exchangers, while imports have expanded in marine engines [36]. - **Technological Positioning**: - The report notes that the technological positioning of products exported from China may differ significantly from those imported, particularly in high-end industrial robots [54]. - **Long-term Implications**: - The ongoing trends suggest that China is making progress towards self-sufficiency in capital goods, which could impact European exporters negatively, especially in mid- to high-value categories [53]. Conclusion - The analysis indicates a shifting landscape in the capital goods market, with China increasing its competitive presence globally, particularly in Europe. European companies need to be aware of these dynamics and adjust their strategies accordingly to mitigate risks associated with rising Chinese competition.

Group 1: Legislative Impact - The Senate passed an amended version of President Trump's "One Big Beautiful Bill Act" with a 51 to 50 vote, which includes a $150 billion military spending boost and $46.5 billion for border infrastructure [1] - The bill is expected to add $3.3 trillion to the national debt, raising concerns among some stakeholders, including Elon Musk [1] Group 2: Defense Sector - Lockheed Martin is a primary beneficiary of the military spending increase, with a $176 billion backlog indicating strong global demand for its advanced systems [4][5] - Despite facing $2 billion in classified program losses, Lockheed's stock offers an investment opportunity at 14.5 times projected 2027 earnings, below historical multiples [4][5] - The company generated $71 billion in revenue in 2024 with a 9.8% operating margin, positioning it well for increased Pentagon budgets [5][6] Group 3: E-commerce Sector - Amazon stands to benefit from tax breaks that enhance discretionary spending for service and hourly workers, which constitutes its core customer base [7] - The company reported a 19% growth in advertising revenue to $13.9 billion in Q1 2025, showcasing its pricing power [8] - Amazon Web Services (AWS) generated $29.3 billion in quarterly revenue, providing substantial cash flow to support retail operations [8][9] - Analysts project Amazon's revenue to grow from $665 billion in 2025 to over $1 trillion by 2030, making current valuations appear reasonable [10] Group 4: Infrastructure Sector - Caterpillar is positioned to benefit from the $46.5 billion allocation for border-wall construction, as its equipment is essential for such projects [11] - Despite a 10% revenue decline to $14.2 billion in Q1 2025, Caterpillar maintained an 18.3% operating margin, indicating strong pricing power [11][12] - The company generated $1.3 billion in operating cash flow in Q1 2025, positioning it well for future infrastructure demand [13] - Trading at 16.5 times projected 2027 earnings, Caterpillar offers a reasonable valuation amid anticipated government-funded projects [14]

Investment Rating - The report maintains a positive outlook for the construction machinery sector, projecting a full-year growth of 15% for domestic excavator sales in FY25, despite short-term fluctuations in demand [2][3][6]. Core Insights - Domestic excavator sales experienced a decline in May due to a significant drop in medium excavators, but the overall upward trend in the industry is expected to continue until 2027/28 [2][3]. - Small excavators showed the fastest growth in May, while large excavators lagged behind, primarily driven by urban underground utility tunnel construction [2][3]. - The expert anticipates that wheel-loader growth may surpass excavators in 2025E, influenced by the rise of electric wheel-loader penetration [2][3]. - The report highlights that the price competition for medium excavators has intensified, while competition for small and large excavators remains milder compared to previous cycles [4][6]. Summary by Sections Domestic Demand - Domestic excavator sales are expected to fluctuate in the short term, with a rebound anticipated in June due to mid-year KPI pressures, although real demand may remain weak during the off-season [3][6]. - The expert forecasts a 5% year-on-year growth in H225E for domestic excavators, indicating a gradual recovery post-September [3][6]. Competitive Landscape - Price competition is more pronounced in the medium excavator segment due to lower brand concentration, while Tier-1 manufacturers focus on profitability [4][6]. - The report notes that as domestic brands enter the large and extra-large excavator segments, price cuts may become more significant in those areas [4][6]. External Demand - The impact of trade tensions on external demand is considered limited, with Chinese OEMs expected to continue gaining market share in overseas markets [6].

Investment Rating - The report maintains a "Buy" rating for Volvo CE, indicating confidence in its growth potential within the machinery sector [27]. Core Insights - Domestic demand for trucks is accelerating, while construction machinery demand is moderating due to factors such as replacement policies and seasonal effects [2][3]. - The growth for construction machinery may have peaked in Q1 2025, with a notable slowdown observed in recent months [3][6]. - Sany expects a 20% year-on-year growth in domestic demand for excavators for the full year, despite a challenging competitive landscape [10][12]. - The electrification of machinery is gaining traction, with significant implications for exports, particularly to Europe [14][16]. Summary by Sections Domestic Demand - There is a divergence in domestic demand, with trucks experiencing growth while construction machinery sales are moderating due to replacement policies and seasonal factors [2][3]. - Sany reported a moderation in machine fleet operating rates and utilization hours, indicating a slowdown in demand [6]. Exports - Demand for exports is stronger in Southeast Asia and Africa, while the CIS region shows weakness [9]. - Sany's excavator export volume increased by 16% year-on-year in the first five months of 2025, with a focus on Asia and Africa [12][13]. Technology and Electrification - The focus on electrification is rising, with Chinese OEMs aiming to penetrate European markets, which are more challenging under traditional internal combustion engine (ICE) standards [14][16]. - Weichai and Sinotruk anticipate a ceiling for electrification penetration in heavy-duty trucks at 25-30% due to infrastructure constraints [16]. Competitive Landscape - Pricing pressure has resurfaced in the industry, particularly for large-sized machines and electrified heavy-duty trucks (eHDTs) [17][18]. - The emergence of a "shared excavators" business model is noted, contributing to monthly sales volume but not considered real demand [20].