Tonly is a pioneer and standard setter of the off-road wide-body dump truck industry. We forecast that over the next three years, its operating revenue from the domestic main business will steadily post a CAGR of more than 10% as the penetration rate of open-pit coal mines increases. At the same time, Tonly is expanding into larger overseas markets and replacing existing coal dump trucks. We expect its overseas revenue CAGR to exceed 30% in the next three years. Tonly also continues to expand the application of wide-body trucks in non-coal mines globally. In addition, as trends towards vehicle electrification and automotive intelligence gain momentum, we expect the price of dump trucks to double and shore up the profit margins as well. We see Tonly as capable of replicating the overseas expansion logic of Anhui Heli (600761.SH) and Hangcha Group (603298.SH). Backed by accumulated industry experience, precise product definition capabilities, and excellent operating service efficiency, Tonly has kick-started a flywheel effect and built a solid leading position. In addition, the Company has abundant cashflow and low interest-bearing liabilities. We estimate its current market cap implies a dividend yield of at least 6.5% in 2023. We forecast its 2023E/24E/25E EPS to be Rmb1.22/1.45/1.67, respectively. Factoring in the absolute valuation and relative valuation results and the liquidity issues of the Beijing Stock Exchange, we believe Tonly should deserve a reasonable valuation of Rmb5.5bn, corresponding to a 2023 target price of Rmb12 and 10x 2023E PE. We initiate coverage with a "BUY" rating.

A pioneer and standard setter of the off-road wide-body dump truck industry with a track record of nearly two decades.

Founded in 2005, Tonly has independently developed off-road wide-body dump trucks to become the setter of industry standards. According to the data from the China Construction Machinery Association (CCMA), Tonly, a pioneer and leader in off-road wide-body dump trucks, had a market share of around 40% in off-road wide-body dump trucks in 2022. Its main products-off-road wide-body dump trucks-are widely used in various mines, hydropower sites and large-scale engineering projects at home and abroad. By reviewing its past development, we can see that the Company has continued to expand the business scope and explore domestic and overseas markets leveraging the capital market while constantly iterating and upgrading its off-road wide-body dump truck technology.

Benefiting from the rising proportion of open-pit coal mines, replacing existing coal dump trucks overseas, and tapping non-coal scenarios.

The Company's independently developed off-road wide-body dump trucks have the advantages of "high cost-effectiveness and strong adaptability" and have already replaced road dump trucks and mining trucks in domestic open-pit coal mines. Domestic coal mines: According to data from the National Bureau of Statistics and others, with technological, safety and environmental upgrades, the output of open-pit coal mines as a percentage of the total had increased from 15.7% in 2018 to 23.2% in 2022 but remains far　　below the proportion of over 70% in major coal-producing countries in the world. We forecast that the penetration rate of open-pit coal mines in China will continue to increase from 23.2% in 2022 to 28.7% in 2027, and the sales of off-road wide-body dump trucks in China may increase from 24,000 units in 2022 to 38,000 units in 2027, representing a CAGR of 9.3%. Overseas coal mines: Thanks to the advantages of wide-body trucks, the export volume and value of China's off-road wide-body dump trucks have maintained a high growth rate. According to data from the General Administration of Customs, the export value of China's off-road wide-body dump trucks increased at a CAGR of 40% from 2016 to 2022. We expect the penetration rate of domestic off-road wide-body dump trucks in overseas markets to continue to increase from 18.8% in 2022 to 28.8% in 2027, with sales likely to increase from 100,000 units in 2022 to 290,000 units in 2027, corresponding to a CAGR of 21.6%. We expect the scale of the global off-road wide-body dump truck market for Chinese manufacturers to expand from Rmb21.54bn in 2022 to Rmb46.69bn in 2027, implying a CAGR of 16.4%. Non-coal mines: The output of non-coal mines is huge, and there is also great potential for the adoption of off-road wide-body dump trucks.

Trends towards smart and new energy products will drive up sales and margins; the stable duopoly bodes well for increased concentration.

The off-road wide-body dump truck industry is currently developing towards trends of upscaling, globalization, new energy (green mines) and intelligence (automated driving), while the prices and profit margins of new energy and intelligent products are higher than traditional products, which would drive up sales and profit margins, with autonomous driving presenting huge market potential. Under policy promotion, with the development course of electric forklifts as a reference, we expect that the electrification rate of off-road wide-body dump trucks will also increase rapidly. The core competitive elements of the off-road wide-body dump truck industry are costs, products and services. According to CCMA data, the industry currently shows a dual-leader pattern of Tonly and Lingong Group, with the CR2 rising from 70.1% in 2020 to 77.5% in 2021 and likely to rise further in the future. The market share of the third player Sany Heavy Equipment was less than 10% in 2021, showing that the dual-leader pattern of the off-road wide-body dump truck industry is stable and their market share is increasing.

Three advantages will drive Tonly forward to strengthen its leading position, while three highlights will secure its revenue.

Tonly has three major advantages: deep industry accumulation + precise product definition capabilities + excellent operating service efficiency. By continuously deepening the accumulation of know-how in off-road dump trucks for the mining scenario, it has been able to more accurately define the products that customers and the industry need. As its scale expands, Tonly, as a private enterprise, has continued to improve its own operating efficiency and quality of service, enhance customer stickiness, and further strengthen its advantages, thereby further solidifying its position in the industry. In addition, Tonly has three highlights of abundant cash, low liabilities and high dividends: 1) Abundant cashflows and low interest-bearing liabilities: As of the end of 2022, Tonly had cash and cash equivalents of Rmb930mn, accounting for 16.1% of the total assets, and short-/long-term borrowings of Rmb5mn/47mn, accounting for 0.91% of the total assets if combined. 2) A high dividend payout ratio and a high dividend yield: From 2020 to 2022, Tonly's dividend payout ratio came in at 36.8%, 48.3% and 48.5%, implying a dividend yield of 2.3%, 4.1% and 7.1%, respectively. We estimate its current market cap implies a dividend yield of at least 6.5% in 2023.

Potential risks: Intensified industry competition; a decline in downstream industry demand; overseas growth falling below expectation; insufficient capacity expansion; a large balance of accounts receivable.

Investment recommendation: Tonly is a pioneer and standard setter of the off-road wide-body dump truck industry, with its net profit CAGR exceeding 30% from 2018 to 2022. We forecast that over the next three years, its operating revenue from the domestic main business will steadily post a CAGR of more than 10% as the penetration rate of open-pit coal mines increases (rising to 35% from 23%). At the same time, Tonly is expanding into larger overseas markets and replacing existing coal dump trucks. We expect its overseas revenue CAGR to exceed 30% in the next three years, with the share of overseas revenue exceeding 50%. Tonly also continues to expand the application of wide-body trucks in non-coal mines globally. In addition, as trends towards vehicle electrification and automotive intelligence gain momentum, we expect the price of dump trucks to double and shore up the profit margins as well. We see Tonly as capable of replicating the overseas expansion logic of Anhui Heli (600761.SH) and Hangcha Group (603298.SH). Backed by accumulated industry experience, precise product definition capabilities, and excellent operating service efficiency, Tonly has kick-started a flywheel effect and built a solid leading position. In addition, the Company has abundant cashflows and low interest-bearing liabilities. We estimate its current market cap implies a dividend yield of at least 6.5% in 2023. We forecast its 2023E/24E/25E EPS to be Rmb1.22/1.45/1.67, respectively. Adopting the absolute valuation method, we estimate the Company's reasonable valuation should come in the range of Rmb6.27bn-8.93bn. Applying the relative valuation method, we assign 13x 2023E PE to derive a market cap of about Rmb7.2bn. Given the average 40% discount for companies listed on the Beijing Stock Exchange, we believe the Company's reasonable valuation is Rmb4.4bn. Factoring in the absolute valuation and relative valuation results and the liquidity issues of the Beijing Stock Exchange, we believe Tonly should deserve a reasonable valuation of Rmb5.5bn, corresponding to a 2023 target price of Rmb12 and 10x 2023E PE.

We initiate coverage with a "BUY" rating.