Zhejiang Dingli - A (603338 CH )...2018 . A new production line for 3.2k units of boom lift will commence operation in mid -2020. It is worth noting that the ASP of b oom lift is 6x

CMB International Securities | Equity Research | Company Update

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR

China Capital Goods

Wayne Fung, CFA

(852) 3900 0826

[email protected]

Stock Data

Mkt Cap (HK$ mn) 19,749

Avg 3 mths t/o (HK$ mn) 110

52w High/Low (HK$) 61.04/30.73

Total Issued Shares (mn) 346.8

Source: Bloomberg

Shareholding Structure

XU Shugen 47.5%

Deqing Zhongding Equity

Investment Management

13.4%

CCASS (Hong Kong)

XU Zhilong

Free float

3.6%

3.1%

32.7%

Source: Shanghai Stock Exchange

Share Performance

Absolute Relative

1-mth +25.6% +18.8%

3-mth -1.6% -3.1%

6-mth +37.5% +9.2%

Source: Bloomberg

12-mth Price Performance

Source: Bloomberg

Auditor: BDO

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for CMBI research team in the

2019 Asiamoney Brokers Poll:

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6.0

16.0

26.0

36.0

46.0

56.0

66.0

6/2018 9/2018 12/2018 3/2019 6/2019

603338 CH

SHSZ300 (rebased)

(RMB)

BUY (Initiation)

Target Price RMB75.00

Up/Downside +32%

Current Price RMB56.95

1

27 Jun 2019

We believe aerial working platform (AWP) is entering a structural growth

trajectory as the rising labor cost in China will make AWPs incrementally cost

competitive compared with the traditional scaffolding. With AWP fleet size of only

13% of that in the US, we see explosive growth potential in China over the coming

years. We believe Zhejiang Dingli, a Chinese based pure AWP manufacturer, is

set to become the major beneficiary given its global presence, first mover

advantage, cost competitiveness, brand recognition and strong management

execution. We forecast Dingli to deliver an impressive earnings CAGR of 34% in

2019E-21E, with further upside coming from potential capacity additions. Initiate

with BUY and TP of RMB75.

Explosive growth potential in China driven by structural factors.

According to International Powered Access Federation (IPAF), the fleet size

of AWP in China grew 29% YoY to 78k units in 2018, representing only ~5%

of the world’s total. Rising labor cost, time cost and more awareness of safety

issue make AWP more attractive to scaffolding in China. Our case analysis

suggests that the cost savings by applying AWP can reach 19% at present.

Assuming another 40% increase in labor cost in five years (similar to the

increment in 2013-2018), the cost savings will widen to 26%, making AWP

even more attractive to users.

Established global network; Well-designed capacity expansion plan.

Unlike other types of construction machinery makers in China, Dingli has

established its footprints in the developed markets such as Europe and the

US. This put Dingli at a favorable position to capture the growth opportunity in

China. Dingli raised its designed capacity from 5k units in 2014 to 26k units in

2018. A new production line for 3.2k units of boom lift will commence operation

in mid-2020. It is worth noting that the ASP of boom lift is 6x of that of the

scissor lift (the major product of Dingli at present).

Valuation premium justified on secular growth outlook. Our TP of RMB75

is based on 30x 2020E P/E. Our target multiple is based on the peak valuation

level since 2016. Our target valuation is well-supported by our estimated

earnings CAGR of 34% in 2019E-21E. Unlike other types of construction

machinery names that are more cyclical in nature, Dingli is offering a structural

growth potential and we believe it is justified for a growth stock valuation.

Earnings Summary

(YE 31 Dec) FY17A FY18A FY19E FY20E FY21E

Revenue (RMB mn) 1,139 1,708 2,278 3,148 4,171

YoY growth (%) 64.0 49.9 33.4 38.2 32.5

Net income (RMB mn) 283 480 633 869 1,147

EPS (RMB) 0.85 1.38 1.83 2.51 3.31

YoY growth (%) 10.8 62.7 31.8 37.3 32.0

EV/EBITDA (x) 52.0 37.4 25.6 18.2 14.1

P/E (x) 66.9 41.1 31.2 22.7 17.2

P/B (x) 9.0 7.6 6.3 5.1 4.0

Yield (%) 0.4 0.4 0.6 0.8 1.0

ROE (%) 17.2 20.0 22.0 24.6 26.1

Net gearing (%) Net cash Net cash Net cash Net cash Net cash

Source: Company data, CMBIS estimates

Zhejiang Dingli - A (603338 CH)

A structural growth story in a cyclical sector

27 Jun 2019

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2

Contents

Focus Charts ................................................................................................................ 3

AWP has been widely applied in the US and Europe .................................. 4 What is AWP? ................................................................................................................. 4 Major markets in the world ........................................................................................... 4

China AWP is at the early stage of development .......................................... 7 Low penatration rate in China ...................................................................................... 7 AWP is getting more efficient and cost effective due to rising labor cost in

China ................................................................................................................................ 7 Quantifying the cost savings ....................................................................................... 9

Competitive landscape .......................................................................................... 10 Major players ................................................................................................................ 10

Investment positives .............................................................................................. 12 Dingli has already established its global presence ............................................... 12 Strong growth driven by strategic transformation years ago .............................. 12 Well-designed capacity expansion plan and efficiency enhancement .............. 12 Further product mix enhancement with more sales of boom lift ........................ 14 Clear position and pricing strategy .......................................................................... 15

Earnings projection ................................................................................................ 15 We forecast revenue CAGR of 35% in 2019E-21E .................................................. 15 Gross margin to sustain in the foreseeable future ................................................ 15 We forecast 34% net profit CAGR in 2019E-21E ..................................................... 16 Solid balance sheet for upcoming capex ................................................................ 16

Financial Summary ................................................................................................. 17

Valuation premium well-supported by strong earnings outlook......... 18 Historical valuation range .......................................................................................... 18 Initate with BUY with TP of RMB75 ........................................................................... 18

Major risk factors ..................................................................................................... 20 More new players entering the AWP industry in China ........................................ 20 Weaker-than-expected construction activities in China ....................................... 20 Uncertainties on the US economy and trade dispute ............................................ 20 Increase in component cost ....................................................................................... 20 Exchange rate risk ....................................................................................................... 20

Appendix: Dingli’s key products ....................................................................... 21

27 Jun 2019


Focus Charts

Figure 1: AWP fleet size comparison

Source: IPAF, CMBIS estimates

Figure 2: AWP rental revenue comparison

Source: IPAF, CMBIS estimates

Figure 3: Major AWP players revenue comparison

Source: Company data, CMBIS

Figure 4: Major AWP players net profit comparison


Figure 5: Dingli’s revenue and growth


Figure 6: Dingli’s net profit and growth


0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2017 2018 2019E

Units

Europe (10 major countries) USA China

0

2

4

6

8

10

12

14

2016 2017 2018 2019E 2020E

US$ bn

Europe (10 major countries) USA China

-10%

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

TerexCorporation

OshkoshCorporation

LinamarCorporation

HaulotteGroup

AichiCorporation

ZhejiangDingli

US$ mn

2017 2018 Growth (2018) - RHS

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

50

100

150

200

250

300

350

400

450

500

TerexCorporation

OshkoshCorporation

LinamarCorporation

HaulotteGroup

AichiCorporation

ZhejiangDingli

US$ mn

2017 2018 Growth (YoY) - RHS

18%

10%

28%

45%

64%

50%

33%

38%

32%

0%

10%

20%

30%

40%

50%

60%

70%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

(RMB mn)Other

business

Forklifts

Vertical lifts

Scissor lifts

Boom lifts

Growth

(YoY) - RHS

50%

10%

37% 39%

62%

70%

32%37%

32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

200

400

600

800

1,000

1,200

1,400

2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

RMB mn

Net profit Growth (YoY) - RHS

27 Jun 2019


AWP has been widely applied in the US and Europe

What is AWP?

Aerial work platform (AWP), or Mobile elevating work platform (MEWP), is a mechanical

device used to provide temporary access for people or equipment to inaccessible areas,

usually at height. They are generally used for temporary, flexible access purposes such as

maintenance and construction work, which distinguishes them from permanent access

equipment such as elevators.

AWP includes mainly boom lift, scissor lift and vertical lift. These products can be applied

for a wide range of applications, such as shipbuilding, maintenance and manufacturing of

large equipment (e.g. wind turbine installation and aircraft), subway, station, construction

project and warehouse management.

Major markets in the world

According to the latest report published by International Powered Access Federation

(“IPAF”), the global fleet size of AWP was 1.47mn units in 2018. The North America (the

US and Canada) is the largest market of AWP in the world, representing 47% of the world.

Europe and the Middle East is the second largest market with a share of 27%, followed by

the Asia Pacific (22%).

The US and Europe are the two major markets for AWP. The US is the largest market in

the world, with fleet size of 627k units in 2018 (2009-2018 CAGR: 4%). Fleet size in Europe

(including 10 major countries) was 294k units in 2018 (2009-2018 CAGR: 3%).

Given the nature of low utilization rate of AWP (normally <70%), rental companies normally

are the major buyers and owners of AWP. Therefore, AWP rental revenue is another key

indicator of the sector. According to IPAF, the AWP rental revenue in Europe and the US

reached EUR2.75bn (~US$3.3bn) and US$10.4bn, respectively, in 2018. Over the past 10

years, the average retention period of AWP in Europe and the US is around eight years

and five years, respectively. The fleet size of AWP and rental revenue have largely been

driven by the construction spending.

Figure 7: Fleet size breakdown by region (2018)

Source: IPAF, CMBIS

Figure 8: Fleet size breakdown by product (2018)

Source: IPAF, CMBIS

North America47%

Europe & the Middle East

27%

Latin America4%

Asia Pacific22%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

NorthAmerica

Europe &the Middle

East

LatinAmerica

AsiaPacific

World total

Units

Others

Scissors

Straightbooms

Articulatedbooms

27 Jun 2019


Figure 9: US AWP rental revenue v.s. US non-

residential construction spending

Source: US Census Bureau, IPAF, CMBIS

Figure 10: US AWP fleet size versus US non-

residential construction spending

Source: US Census Bureau, IPAF, CMBIS

The AWP fleet size in Europe (10 major countries: Figure 11, 12) increased from 234k units

in 2009 to ~303k units in 2018, representing a CAGR of 3%. The fleet size in 2018

increased by 5% YoY, driven by both construction sectors (residential, commercial, retail

and industrial) and non-construction sectors (maintenance, cleaning, utilities, events etc).

Rental companies focused on both expanding and renewing their fleets with more

advanced equipment.

Three markets dominate the European AWP rental market, namely Germany, the UK and

France. The three countries accounted for 64% of total rental revenue in Europe.

The UK has the largest rental fleet in Europe, reaching 59k units (20% of the ten countries),

following by France (57.4k units) and Germany (56.5k units).

Figure 11: European rental revenue breakdown by

countries (2018)

Source: IPAF, CMBIS

Figure 12: European fleet size breakdown by

countries (2018)

Source: IPAF, CMBIS

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US MEWP rental revenue growth

US non-residential construction spending growth (RHS)

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US MEWP fleet size growth

US non-residential construction spending growth (RHS)

Germany26%

France19%

UK19%

Italy10%

Netherlands8%

Sweden5%

Spain4%

Finland3%

Norway3%

Denmark3%

Germany19%

France20%

UK20%

Italy9%

Netherlands7%

Sweden6%

Spain8%

Finland5%

Norway3%

Denmark3%

27 Jun 2019


IPAF estimates the fleet size in the US and Europe to increase 5% and 3%, respectively,

in 2019E. We expect the annual sales volume to be largely driven by replacement demand

in these regions.

Figure 13: AWP fleet size in the US and Europe

Source: IPAF estimates, CMBIS

Figure 14: AWP utilisation rate


Figure 15: AWP rental revenue


Figure 16: AWP retention period


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Units

Europe (10 major countries)

USA

Europe (10 major countries) growth rate

USA growth rate

0%

10%

20%

30%

40%

50%

60%

70%

80%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

Europe (10 major countries) USA

0.0

2.0

4.0

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8.0

10.0

12.0

14.0

2016 2017 2018 2019E 2020E

US$ bn


0

1

2

3

4

5

6

7

8

9

10

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E

Years


27 Jun 2019


China AWP is at the early stage of development

Low penatration rate in China

Unlike the western countries, scaffolding is still widely applied in China while AWP has yet

to become the major application. According to IPAF, China’s AWP’s fleet size grew 29% in

2018 to 78k units, representing only 13% of that in the US. The rental revenue in 2018 was

RMB4.4bn (+35% YoY), which was only 6% of that in the US.

While in the US and Europe the AWP demand is largely driven by equipment upgrade and

replacement, the demand in China will be driven almost entirely by new demand over the

coming few years.

We see huge growth potential over the coming years as AWP is getting more cost

competitive compared to the traditional scaffolding for aerial works. Based on our

calculation, the number of construction worker per unit of AWP was 18 in the US, much

lower than China’s 437 (figure 18). This suggests significant upside to the penetration rate

of AWP. IPAF estimates 26-28% annual growth of fleet size between 2019E and 2020E.

Figure 17: AWP fleet size in China


Figure 18: No. of construction worker per unit of

AWP

Source: Bureau of Labor Statistics of the US, NBS, Wind, IPAF, CMBIS estimates

AWP is getting more efficient and cost effective due to rising labor

cost in China

The cost of project construction and installation mainly comprises (1) labor cost, (2) time

cost, (3) equipment cost and (4) safety cost.

In the developed regions, AWP started gradually replacing the traditional scaffolding

decades ago, as the application of AWP can improve safety, work efficiency and reduce

cost. In China, AWP is still at an early stage of development. However, we have already

witnessed a structural change for a few years as the overall cost is increasing, making the

application of AWP more attractive.

Labor cost According to NBS, China’s average annual wage of construction industry increased >40%

between 2013 and 2018 (CAGR: 7%). Besides, many of the new generation refuse to

engage in the construction work. We believe the trend of wage increase will continue over

the coming years. For traditional scaffolding, it normally requires around 3-4 workers to set

up and operate the scaffolding, while only 1-2 workers are needed for operating an AWP.

0%

5%

10%

15%

20%

25%

30%

35%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2017 2018 2019E 2020E

Units

0

50

100

150

200

250

300

350

400

450

500

Construction labour per unit of AWP

US China

27 Jun 2019


Safety

Applying AWP can help reduce the risk of casualties as there is no need to move up and

down the scaffold. According to the Ministry of Housing and Urban-Rural Development,

there are a total of 734 incidents related to the property and municipal construction projects

in China in 2018, representing an increase of ~6% YoY. The number of death was 840 in

2018, representing an increase of 4% YoY. Of the total number of incidents, falls accounted

for 52%, the highest among all type of incidents.

Time cost

AWP can reduce the time needed for setting up, compared with scaffolding. Besides, by

using AWP, certain assemble process can be conducted on the ground before lifting up by

the AWP and therefore improve the efficiency.

Figure 19: China construction industry annual wage

Source: NBS, Wind, CMBIS

Figure 20: No. of incidents breakdown in 2018

Source: The Ministry of Housing and Urban-Rural Development, CMBIS

Figure 21: No. of incidents related to property and

municipal projects


Figure 22: No. of deaths related to property and

municipal projects


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

10,000

20,000

30,000

40,000

50,000

60,000

2013 2014 2015 2016 2017 2018

RMB

Construction industry annual wage (RMB) Growth (YoY)

Falls52%

Falling objects15%

Crane-related8%

Structure collapse

7%

Equipment-related

6%

Others12%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

200

400

600

800

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1,200

1,400

Number of incidents Change (YoY)

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Number of dealth Change (YoY)

27 Jun 2019


Quantifying the cost savings

We use an equipment installation project to showcase the cost difference between

scaffolding and AWP. We estimate that applying AWP can achieve project cost savings of

19%, based on the current labor and equipment cost, mainly due to less labor and time

required to complete the project.

Assuming 40% increase in labor cost over the coming five years and other factors being

constant (we assume rental cost to be largely stable due to more supply of AWPs and

rental companies), the cost savings will widen to 26% based on our estimates. This will

make AWP incrementally attractive to users.

Figure 23: Comparison between AWP and scaffolding

Source: CMBIS estimates

Scaffolding AWP

Currently

Number of workers - 3 2

Daily labour cost per person RMB 300 300

Total daily labour cost RMB 900 600

Daily equipment rental cost RMB 20 300

Total daily cost RMB 920 900

Construction period Days 30 25

Total construction cost RMB 27,600 22,500

Total cost savings RMB - 5,100

% - 18.5%

Assuming 40% increase in labour cost in five years

Number of workers - 3 2

Daily labour cost per person RMB 420 420

Total daily labour cost RMB 1,260 840

Daily equipment rental cost RMB 20 300

Total daily cost RMB 1,280 1,140

Construction period Days 30 25

Total construction cost RMB 38,400 28,500

Total cost savings RMB - 9,900

% - 25.8%

27 Jun 2019


Competitive landscape

Major players

The AWP manufacturing industry has long been dominated by Western and Japanese

brands. JLG Industries (a brand of Oshkosh Corporation [OSK US]), Genie (a brand of

Terex [TEX US]), Haulotte (PIG FP), Skyjack (a brand of Linamar Corporation [LNR

CN]), and Aichi (6545 JP) are the major international manufacturers with strong

competitive strength in terms of R&D, technology, manufacturing capability and distribution

network. That said, over the past couple of years, the Chinese manufacturers gradually

emerged on the back of enhancement of product quality and cost advantage. These players

include Dingli (603338 CH, BUY), Jingcheng heavy Industry (unlisted) and Sinoboom

(unlisted). Besides, traditional leading construction machinery manufacturers such as

XCMG (000425 CH) and Zoomlion (1157 HK, BUY) also started entering AWP industry

since 2018.

Figure 24: Global AWP manufacturer comparison

Note: For Linamar, AWP revenue is included in the Industrial segment.


Figure 25: Revenue and growth comparison

Source: Company reports, CMBIS

Figure 26: Gross profit and margin comparison


Company Year Terex Corporation Oshkosh Corporation Linamar Corporation Haulotte Group Aichi Corporation Zhejiang Dingli

Ticker (TEX US) (OSK US) (LNR CN) (PIG FP) (6345 JP) (603338 CH)

Financial year end Dec Sep Dec Dec Mar Dec

Unit (US$ mn) (US$ mn) (CAD mn) (EUR mn) (Yen mn) (RMB mn)

Group revenue 2016 4,443 6,279 6,006 458 57,108 695

2017 4,363 6,830 6,546 499 62,608 1,139

2018 5,125 7,706 7,621 556 61,474 1,708

Group revenue growth 2017 -1.8% 8.8% 9.0% 9.1% 9.6% 64.0%

2018 17.5% 12.8% 16.4% 11.3% -1.8% 49.9%

AWP revenue 2016 1,978 3,012 866 n/a n/a 669

2017 2,072 3,026 1,116 n/a n/a 1,099

2018 2,560 3,777 1,886 n/a n/a 1,641

AWP revenue growth 2017 4.7% 0.5% 28.9% n/a n/a 64.3%

2018 23.6% 24.8% 68.9% n/a n/a 49.3%

Gross profit 2016 712 1,056 1,003 115 13,225 294

2017 816 1,174 1,079 129 14,533 478

2018 967 1,356 1,237 132 14,252 709

Gross margin 2016 16.0% 16.8% 16.7% 25.1% 23.2% 42.3%

2017 18.7% 17.2% 16.5% 25.8% 23.2% 42.0%

2018 18.9% 17.6% 16.2% 23.7% 23.2% 41.5%

Net profit 2016 (176) 216 522 23 4,601 175

2017 129 286 549 18 5,119 283

2018 114 472 591 18 5,785 480

Net profit growth 2017 - 32.0% 5.2% -24.2% 11.3% 62.0%

2018 -11.7% 65.2% 7.7% 1.5% 13.0% 69.6%

-10%

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

TerexCorporation

OshkoshCorporation

LinamarCorporation

HaulotteGroup

AichiCorporation

ZhejiangDingli

US$ mn

2017 2018 Growth (2018) - RHS

0%

5%

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20%

25%

30%

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40%

45%

0

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800

1,000

1,200

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TerexCorporation

OshkoshCorporation

LinamarCorporation

HaulotteGroup

AichiCorporation

ZhejiangDingli

US$ mn

2017 2018 Gross margin - RHS

27 Jun 2019


Figure 27: Net profit and growth comparison


Figure 28: Oshkosh’s revenue breakdown (2018)

Source: Oshkosh, CMBIS

Figure 29: Terex’s revenue breakdown (2018)

Source: Terex, CMBIS

Figure 30: Terex’s AWP revenue breakdown (2018)

Source: Terex, CMBIS

Figure 31: Haulotte’s revenue breakdown (2018)

Source: Haulotte, CMBIS

Figure 32: Linamar’s revenue breakdown (2018)

Source: Linamar, CMBIS

-20%

-10%

0%

10%

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60%

70%

80%

0

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100

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300

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500

TerexCorporation

OshkoshCorporation

LinamarCorporation

HaulotteGroup

AichiCorporation

ZhejiangDingli

US$ mn

2017 2018 Growth (YoY) - RHS

United States80%

Other North America

4%

Europe, Africa and the Middle

East11%

Rest of World5%

Oshkosh Corporation

North America 55%

Western Europe23%

Asia-Pacific13%

Rest of World9%

Terex Corporation (Group)

North America 63%

Western Europe21%

Asia-Pacific10%

Rest of World6%

Terex Corporation (AWP revenue)

Europe60%

Asia Pacific18%

North America14%

Latin America8%

Haulotte Group

Canada50%

Other North America

11%

Asia Pacific6%

Europe33%

Linamar Corporation

27 Jun 2019


Investment positives

Dingli has already established its global presence

Zhejiang Dingli was founded in 2005, headquartered in Deqing, Zhejiang. Dingli is engaged

in the development, manufacture and marketing of various high-end AWPs, including boom

lifts (12% of total revenue in 2018), scissor lifts (75%), vertical lifts (9%) and others (4%).

Dingli has established a strong presence in the US and European markets, and is one of

the major aerial working platform manufacturers in China. Currently, the annual production

capacity is ~26k units. XU Shugen is the controlling shareholder with ~47.5% interest in

Dingli. The Company has been listed in SSE since Mar 2015.

Unlike other construction machinery makers in China, Dingli has established its footprints

in the developed markets such as Europe and the US. Dingli is now one of the few Chinese

AWP manufacturers that successfully entered into these developed regions. Over the past

seven years, overseas revenue accounted for 51-65% of total revenue. First mover

advantage, proven track record and good reputation put Dingli at a favorable position to

capture the fast growing trend in China.

Strong growth driven by strategic transformation years ago

Forklift was one of the key products of Dingli in 2012, contributing 22% of total revenue.

Dingli realized the keen competition landscape of forklift and therefore gradually scaled

down the business and exited the business entirely in 2016. At the same time, Dingli put

its effort in the fast growing AWP business. We believe the transformation was critical to

change the future of the Company, suggesting strong management capability.

Well-designed capacity expansion plan and efficiency enhancement

Dingli raised its AWP designed capacity from 5k units in 2014 to 11k units in 2016, financed

by the capital raised from IPO in 2015. In 2018, Dingli completed the capacity expansion

plan for its small-size scissor lifts with annual capacity of 15k units, taking the total capacity

of the Company to 26k units. On the back of the well-planned capacity expansion and

successful marketing strategy, Dingli’s AWP sales volume increased from 6k units in 2012

to 27k units in 2018.

It is worth noting that the actual production can be raised above the designed capacity for

couple of reasons: (1) the Company has already established a fully automatic production

line for its scissor lifts and has continued to improve the production efficiency. For example,

the production time for one set of large-size scissor lift reduced from 15 minutes years ago

to 10 minutes at present. The production time for a set of small-size scissor lift reduced

from 8 minutes last year to 6 minutes currently; (2) the Company can add shifts to raise the

production.

27 Jun 2019


Figure 33: Revenue breakdown by region


Figure 34: Capacity expansion plan


Figure 35: Dingli’s laser cutting robots

Source: CMBIS

Figure 36: Dingli’s bending machine

Source: CMBIS

Figure 37: Dingli’s automatic production line

Source: CMBIS

Figure 38: Dingli’s boom lift and scissor lift products

Source: CMBIS

0%

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2012 2013 2014 2015 2016 2017 2018

Overseas

China

0

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25,000

30,000

35,000

2012 2013 2014 2015 2016 2017 2018 2019E 2020E

Units

27 Jun 2019


Further product mix enhancement with more sales of boom lift

According to IPAF, boom lifts normally accounted for 35-40% of the total AWP fleet size in

the US and Europe. In China, boom lifts accounted for slightly below 30% of the total fleet

size.

Dingli’s scissor lifts and vertical lifts accounted for 82% and 16%, respectively, of the total sales volume in 2018. Boom lift accounted for only 2% of the total sales volume. Dingli is currently adding a new fully-automated production line for 3.2k units of large-size boom lift. The Company expects the capacity will commence operation in mid-2020. This will raise the Company’s total capacity to 29.2k units. It is worth noting that the ASP of boom lift is >6x of that of scissor lift. In other words, the revenue and profit contribution will be much higher. In longer term, we see further upside potential for Dingli’s boom lift, given the Company’s proven track record on capacity growth.

Figure 39: AWP fleet size breakdown in the US


Figure 40: AWP fleet size breakdown in Europe


Figure 41: AWP fleet size breakdown in China


Figure 42: Dingli sales volume breakdown

Source: Company, CMBIS estimates

0%

10%

20%

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40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016 2017 2018 2019E

Others

Vehicle-mountedplatforms

Scissors

Booms

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2012 2013 2014 2015 2016 2017 2018 2019E

Others

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Scissors

Booms

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2016 2017 2018

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Booms

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Forklift

Vertical lifts

Scissor lifts

Boom lifts

27 Jun 2019


Clear position and pricing strategy

Leasing companies are the major customers of Dingli in both China and overseas markets. According to Dingli, the number of AWP leasing company is around 800-900 in China, and the Company expects the number to continue to increase going forward. In 2018, Dingli signed a strategic agreement with Horizon Construction Engineering, a subsidiary of Far East Horizon (3360 HK, NR). Dingli became the first Chinese manufacturer supplying AWP to Horizon Construction Engineering. Dingli positions itself in the high-end segment. In terms of pricing strategy, Dingli’s ASP is ~20% lower than the major overseas brands such as JLG Industries (a brand of Oshkosh Corporation [OSK US]) and Genie (a brand of Terex [TEX US]), due to cost advantage. Compared with domestic players, Dingli prices its product slightly higher. Dingli adopts a prudent credit policy for customers. On average, down payment received from customers is ~20-30%, and the total credit term is within a year.

Earnings projection

We forecast revenue CAGR of 35% in 2019E-21E

Dingli delivered an impressive revenue CAGR of 34% in 2013-2018, on the back of strong

sales volume growth. Revenue in 1Q19 increased 23% YoY. While we expect revenue

growth in 2Q19 could be slightly affected by the China-US trade disputes, we expect the

growth to accelerate starting 2H19E driven by favorable policies to boost infrastructure

spending in China.

We forecast Dingli to deliver revenue growth of 33%/38%/33% in 2019E/20E/21E, driven

by sales volume growth. We forecast the growth in 2019E to be driven mainly by the full

utilization of its 15k units of scissor lift capacity. In 2020E, we expect the new production

line of boom lift (3.2k units) to commence operation in mid-2020 and start revenue

contribution.

Gross margin to sustain in the foreseeable future

Dingli maintained a respectable gross margin range of 41-44% in 2013-2018. We believe

the higher-than-peers gross margin was due to its focus on AWP business, continuous

product mix enhancement and excellent operating efficiency.

We project Dingli’s gross margin to stay at ~42% in 2019E-21E for a couple of reasons:

The strong demand growth for AWPs should reduce the risk of price war even

if more players enter the industry;

In 2018, Dingli’s boom lift segment gross margin was 34.6%, lower than the

Company’s blended average of 41.5%. That said, the commencement of the

3.2k units of boom lift capacity will significantly enhance the production

efficiency and lift the segment gross margin due to economies of scale.

The 25% import tariff imposed by the US government will be applied on Dingli’s

product shipping to the US. Based on our understanding, Dingli will absorb 9 ppt

of the tariff while the remaining 16 ppt will be absorbed by Dingli’s customers

and the end users. We believe the overall impact on gross margin is

manageable as the aforementioned factors should offset the tariff factor.

27 Jun 2019


Figure 43: Revenue breakdown by products


Figure 44: ASP by products


Figure 45: Gross margin by products


Figure 46: Net profit and growth


We forecast 34% net profit CAGR in 2019E-21E

Dingli’s net profit CAGR reached 43% in 2013-2018, driven by strong revenue growth and

operating leverage. In 1Q19, net profit grew 44% YoY to RMB101mn. We forecast Dingli

to deliver earnings growth of 32%/37%/32% earnings growth in 2019E/20E/21E. While we

have not assumed further capacity expansion plan after the 3.2k units of new boom lift

production line, we believe Dingli has room to further raise capacity given the track record

of the Company and the strong demand in China over the coming years. Any new capacity

expansion plan will offer upside to our forecasts.

Solid balance sheet for upcoming capex

Dingli has maintained a solid balance sheet with net cash position since listing. We expect

Dingli to maintain a prudent approach on balance sheet management. Dingli has budgeted

a total of RMB880mn capex for its new boom lift capacity. Part of the capex was invested

over the past 1-2 years and Dingli expects the remaining budget of ~RMB600mn will be

spent in 2019E and 2020E. We forecast Dingli’s operating cash flow to be more than

enough to cover the upcoming capex.

18%

10%

28%

45%

64%

50%

33%

38%

32%

0%

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(RMB mn)Other

business

Forklifts

Vertical lifts

Scissor lifts

Boom lifts

Growth

(YoY) - RHS

0

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RMB

Boom lifts Scissor lifts Vertical lifts

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2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Boom lifts Scissor lifts Vertical lifts

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Net profit Growth (YoY) - RHS

27 Jun 2019


Financial Summary

Income statement Cash flow summary

YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E

Total revenue 1,139 1,708 2,278 3,148 4,171 Pretax profit 333 565 745 1,022 1,350

Cost of sales (661) (999) (1,324) (1,829) (2,431) Finance cost 25 0 10 11 12

Gross profit 478 709 954 1,319 1,740 Interest income 0 (22) (49) (62) (82)

Surcharge (11) (10) (14) (19) (25) Profit / loss of associates 0 13 (11) (11) (12)

S&D expenses (51) (92) (123) (170) (225) Depreciation and

amortization

24 25 71 111 117

Administrative expenses (72) (118) (144) (192) (250) Income tax paid (50) (85) (112) (153) (202)

Asset impairment (4) (7) (7) (9) (13) Change in working capital 27 (82) (47) (221) (469)

EBIT 340 482 667 929 1,227 Others (10) 2 0 0 0

Net finance income/(cost) (23) 36 40 51 70 Cash flow from operation 349 416 607 696 713

Finance income 2 37 49 62 82 Net capex on PP&E (154) (199) (330) (330) (50)

Finance expenses (25) (2) (10) (11) (12) Interest received 6 27 49 62 82

Other gains/(losses) 16 60 27 31 42 Others (886) 329 0 0 0

Profit of JV & associates 0 (13) 11 11 12 Cash flow from investing (1,035) 157 (281) (268) 32

Pretax profit 333 565 745 1,022 1,350 Proceeds from equity

financing/(repurchase)

868 0 0 0 0

Income tax (50) (85) (112) (153) (202) Net bank borrowings 62 163 30 30 30

After tax profit 283 480 633 869 1,147 Dividend paid (29) (71) (87) (114) (156)

MI 0 0 0 0 0 Interest paid (3) (9) (10) (11) (12)

Net profit 283 480 633 869 1,147 Others (4) 0 0 0 0 Cash flow from financing 894 83 (66) (95) (138)

D&A 24 25 71 111 117 Change in cash 208 656 260 334 607

EBITDA 364 507 738 1,039 1,343 Cash at beginning of the year 247 751 1,045 1,306 1,639

FX gains/(losses) & others 296 (362) 0 0 0

Cash at the end of the year 751 1,045 1,306 1,639 2,246

Balance sheet Key ratios

YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec FY17A FY18A FY19E FY20E FY21E

Non-current assets 656 1,027 1,315 1,591 1,675 Revenue mix (%)

PP&E 211 232 494 717 653 Boom lifts 9 12 13 19 30

JV/associates 0 206 217 228 239 Scissor lifts 75 75 77 73 63

LT trade receivables 151 278 296 342 481 Vertical lifts 13 9 7 6 5

Intangible assets 146 143 140 137 134 Others 4 4 3 2 2

AFS investments 105 0 0 0 0 Total 100 100 100 100 100

Others 34 167 167 167 167 Profit & loss ratio (%)

Deferred tax assets 8 0 0 0 0 Gross margin 42.0 41.5 41.9 41.9 41.7

Current assets 2,123 2,607 2,956 3,904 4,929 EBITDA margin 32.0 29.7 32.4 33.0 32.2

Inventories 243 359 461 571 800 EBIT margin 29.9 28.2 29.3 29.5 29.4

Trade and bill receivables 440 899 886 1,391 1,580 Net profit margin 24.9 28.1 27.8 27.6 27.5

Prepayment 8 5 5 5 5 Growth (%)

Others 680 298 298 298 298 Revenue 64.0 49.9 33.4 38.2 32.5

Cash 751 1,045 1,306 1,639 2,246 Gross profit 62.8 48.2 34.6 38.3 31.9

EBITDA 87.0 39.2 45.6 40.8 29.3

Current liabilities 478 882 962 1,422 1,530 EBIT 96.0 41.6 38.5 39.2 32.1

Trade and bill payables 308 521 582 1,022 1,109 Net profit 62.0 69.6 31.8 37.3 32.0

Bank borrowings 28 150 170 190 210 Balance sheet ratio

Tax payable 57 70 70 70 70 Current ratio (x) 4.4 3.0 3.1 2.7 3.2

Advance from customers 11 11 11 11 11 Receivable turnover days 116 143 143 132 130

Others 74 129 129 129 129 Inventory turnover days 117 110 113 103 103

Non-current liabilities 98 151 161 171 181 Payable turnover days 135 152 152 160 160

Bank borrowings 34 75 85 95 105 Net debt / total equity (%) Net cash Net cash Net cash Net cash Net cash

Deferred tax liabilities 0 2 2 2 2 Profitability (%)

Deferred income 62 64 64 64 64 ROA 13.6 15.0 16.0 17.8 19.0

Others 1 10 10 10 10 ROE 17.2 20.0 22.0 24.6 26.1

Equity 2,203 2,601 3,148 3,903 4,893 Per share data

Shareholders' equity 2,203 2,601 3,148 3,903 4,893 EPS (RMB) 0.85 1.38 1.83 2.51 3.31

MI 0 0 0 0 0 BVPS (RMB) 6.35 7.50 9.08 11.25 14.11

DPS (RMB)

0.20 0.25 0.33 0.45 0.60


27 Jun 2019


Valuation premium well-supported by strong earnings

outlook

Historical valuation range

Dingli has been trading at an average of 28x forward P/E since listing in 2015.

In 2016-17, Dingli traded at 24-30x PE. The valuation was supported by the strong

earnings growth during the period.

In 2018, as a result of the weak A-share market in general, Dingli’s trading range

moved downward to 18-24x.

That said, starting from this year, the valuation range has returned to 24-30x, back to

the level in 2016-17.

Initate with BUY with TP of RMB75

We are initiating coverage on Dingli with a BUY rating and TP of RMB75, based on 30x

2020E P/E. Our target multiple is based on the peak valuation level since 2016, which is

7% above the historical average. Our target valuation is well-supported by our estimated

earnings CAGR of 34% in 2019E-21E. Unlike other types of construction machinery names

that are cyclical and therefore trading at lower multiple, Dingli is offering a structural growth

potential and we believe it is justified to apply a growth stock valuation. Besides, compared

with AWP peers, Dingli delivered outstanding growth and profitability.

Figure 47: Dingli 12M forward P/E band

Source: Bloomberg, Company data, CMBIS estimates

Figure 48: 12M forward P/B band


0

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27 Jun 2019


Figure 49: Peers comparison


Ticker Company Rating Price TP Upside/ Market cap EV/EBITDA (x) Dividend yield (%)

(local

currency)

(local

currency)

(downside)(US$ mn) FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E

HK listed

631 HK Equity SANY INTERNATIONAL BUY 2.80 4.72 69% 1,111 8.5 7.0 1.1 1.0 5.2 4.3 3.5 4.3

3339 HK Equity LONKING HOLD 2.10 3.15 50% 1,151 5.5 5.3 0.9 0.8 3.2 3.1 11.6 12.1

1157 HK Equity ZOOMLION HEAVY-H BUY 5.29 5.83 10% 6,535 11.7 10.5 0.9 0.9 8.1 7.6 7.7 8.6

2338 HK Equity WEICHAI POWER-H BUY 13.02 16.20 24% 13,897 9.1 8.6 2.0 1.8 4.7 4.6 6.1 6.4

3808 HK Equity SINOTRUK HK LTD BUY 13.76 21.50 56% 4,865 6.8 6.5 1.1 1.0 3.1 3.0 5.2 5.4

564 HK Equity ZHENGZHOU COAL-H NR 3.68 - - 1,367 5.2 4.5 0.5 0.4 4.1 3.6 4.3 4.9

HK listed average 7.8 7.1 1.1 1.0 4.7 4.3 6.4 7.0

A share

603338 CH Equity ZHEJIANG DINGLI -A BUY 56.95 75.00 32% 2,867 31.2 22.7 6.3 5.1 25.6 18.2 0.6 0.8

600031 CH Equity SANY HEAVY IND-A NR 12.95 - - 15,743 11.5 10.3 2.7 2.2 7.9 7.1 2.8 3.0

000425 CH Equity XCMG CONSTRUCT-A NR 4.53 - - 5,151 11.4 9.4 1.2 1.1 7.5 6.5 2.0 2.6

000157 CH Equity ZOOMLION HEAVY-A NR 5.99 - - 6,531 15.0 13.5 1.2 1.1 10.4 9.7 6.0 6.7

000528 CH Equity GUANGXI LIUGON-A NR 6.70 - - 1,434 8.6 7.7 0.9 0.9 8.2 7.6 3.9 4.3

600815 CH Equity XIAMEN XGMA-A NR 3.14 - - 437 n/a n/a n/a n/a n/a n/a n/a n/a

600761 CH Equity ANHUI HELI CO-A NR 9.67 - - 1,039 10.5 9.1 1.4 1.3 4.3 3.8 4.9 5.8

603298 CH Equity HANGCHA GROUP-A NR 12.55 - - 1,127 11.9 10.1 1.8 1.6 7.8 6.6 3.0 3.1

000338 CH Equity WEICHAI POWER-A NR 12.25 - - 13,890 9.7 9.2 2.1 1.9 5.0 4.9 5.7 6.0

000951 CH Equity CNHTC JINAN T-A NR 16.50 - - 1,607 9.3 7.9 1.6 1.5 6.6 5.7 5.6 6.4

601100 CH Equity JIANGSU HENGLI-A NR 30.87 - - 3,952 22.9 18.7 4.9 4.1 16.2 13.4 1.3 1.6

601717 CH Equity ZHENGZHOU COAL-A NR 5.79 - - 1,366 9.3 8.0 0.9 0.7 7.3 6.4 2.4 2.8

600582 CH Equity TIAN DI -A NR 3.47 - - 2,084 9.8 8.2 0.9 0.8 7.2 5.9 n/a n/a

002526 CH Equity SHANDONG MININ-A NR 2.35 - - 608 n/a n/a n/a n/a n/a n/a n/a n/a

002691 CH Equity JIKAI EQUIP MA-A NR 7.00 - - 345 n/a n/a n/a n/a n/a n/a n/a n/a

A-share average 11.8 10.2 1.8 1.6 8.1 7.0 3.8 4.2

Overseas

CAT US Equity CATERPILLAR INC NR 133.7 - - 76,465 10.8 10.3 3.7 3.1 6.7 6.6 2.7 2.9

6305 JP Equity HITACHI CONST MA NR 2,786.0 - - 5,578 8.9 8.9 1.1 1.0 6.2 6.2 3.6 3.8

6301 JP Equity KOMATSU LTD NR 2,543.0 - - 23,010 9.7 9.5 1.2 1.1 6.4 6.3 4.4 4.5

042670 KS Equity DOOSAN INFRACORE NR 6,480.0 - - 1,165 4.9 4.6 0.6 0.6 6.0 5.9 0.0 0.0

Overseas (AWP players)

TEX US Equity TEREX CORP NR 31.0 - - 2,206 7.7 7.9 2.3 1.9 6.9 7.1 1.4 1.5

OSK US Equity OSHKOSH CORP NR 82.1 - - 5,740 10.6 10.5 2.1 1.9 7.2 7.4 1.3 1.4

LNR CN Equity LINAMAR CORP NR 47.4 - - 2,350 5.3 5.2 n/a n/a 4.3 4.2 1.0 1.0

PIG FP Equity HAULOTTE GROUP NR 7.3 - - 261 8.2 7.1 0.8 0.7 6.1 5.8 3.7 4.0

6345 JP Equity AICHI CORP NR 666.0 - - 492 10.1 11.9 0.8 0.7 5.1 5.6 3.3 3.3

Overseas average 8.5 8.4 1.6 1.4 6.1 6.1 2.4 2.5

PE (x) PB (x)

27 Jun 2019


Major risk factors

More new players entering the AWP industry in China

Due to the attractive industry outlook and decent profitability, there are more new players entering the market. Some of them are the traditional construction machinery makers such as Zoomlion (1157 HK, BUY) and XCMG (000425 CH, NR). These players have strong R&D and distribution network. Faster-than-expected supply growth might exert pressure on the existing players such as Dingli.

Weaker-than-expected construction activities in China

While we see AWP as a structural growth product in China, the demand is still subject to the change in macro economy in the near term. Failure to boost infrastructure spending might reduce the demand for AWPs.

Uncertainties on the US economy and trade dispute

Any unfavorable changes in the US economic outlook and a prolonged China-US disputes might hurt the sentiment of Dingli’s customers and therefore affect Dingli’s sales in the US.

Increase in component cost

Steel is one of the direct costs as well as the cost of the components. While the steel price has declined since the peak level in 2018. Any rebound of steel price will exert pressure on the production cost. Besides, any unexpected price increase or shortage of components (such as hydraulic pumps) will affect the cost and production volume.

Exchange rate risk

Dingli generated more than half of the revenue from the overseas markets and the transactions were mainly settled with US$ and EUR. Appreciation of RMB is unfavorable to Dingli’s profit margin given that majority of the cost items are settled in RMB.

27 Jun 2019


Appendix: Dingli’s key products

Figure 50: Boom lift

Source: Company, CMBIS

Figure 51: Articulated boom lift


Figure 52: Scissor lift


Figure 53: Vertical lift


27 Jun 2019


Disclosures & Disclaimers

Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

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CMB International Securities Limited (“CMBIS”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly owned subsidiary of China Merchants Bank)

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Zhejiang Dingli - A (603338 CH )...2018 . A new production line for 3.2k units of boom lift will commence operation in mid -2020. It is worth noting that the ASP of b oom lift is 6x