3Q24 results miss our expectations

Huatie Emergency Equipment Science & Technology announced its 3Q24 results: In 1-3Q24, revenue rose 15.88% YoY to Rmb3.73bn, net profit attributable to shareholders fell 13.41% YoY to Rmb487mn, and recurring net profit fell 13.01% YoY to 466mn. In 3Q24, revenue rose 7.1% YoY to Rmb1.37bn, and attributable and recurring net profit fell 35.9% and 42.82% YoY to Rmb152mn and Rmb132mn. The firm’s 3Q24 results missed our and market expectations, mainly due to pressure on operations of aerial work platform (AWP) segment and the structural support equipment segment.

AWP maintained rapid growth. The firm's AWP segment continued to expand. In 3Q24, the firm's managed AWPs rose 38.8% YoY to 161,000 units (compared to over 40,000 units at the end of 2023), and its occupancy rate continued to rebound QoQ to 89%, remaining flat YoY. In 3Q24, revenue from the AWP segment increased by 20% YoY to Rmb1.10bn, accounting for more than 80% of the firm's total revenue. For other businesses, we estimate that revenue from other segments (e.g., aluminum molds and steel supports) fell by 25% YoY to Rmb270mn in 3Q24 due to the sluggish construction sector.

GM fell: Blended GM fell 5.8ppt YoY to 42.9% (largely flat QoQ) in 3Q24 due to continued pressure on rental prices of AWP (a YoY decline of about 10%).

Rising financial expenses drove up expense ratio: In 3Q24, the firm's expense ratio rose 5.9ppt YoY to 28.5%, with selling, G&A, R&D, and financial expenses up 23%, up 16%, down 26%, and up 69% YoY, corresponding to expense ratios of 10.1%, 4.1%, 1.2%, and 13.1% (+1.3ppt, +0.3ppt, -0.5ppt, +4.8ppt).

Net margin under pressure: Due to the impact of GM and expense ratio, net margin fell 7.5ppt YoY to 11.1% in 3Q24 (-3.1ppt QoQ).

Ample funds: In 3Q24, the firm's cash-to-revenue ratio rose 1ppt YoY to 82%, and rose 4.5ppt YoY to 86% in 1-3Q24.

High gearing ratio: In3Q24, interest-bearing liabilities increased Rmb0.65bn from end-2023 to Rmb10.9bn, implying a gearing ratio of 71%.

Trends to watch

The domestic AWP market is consolidating rapidly; small- and medium-sized companies are exiting the market, leading to increased concentration among the leading companies. In our view, supply has slowed YTD, with domestic sales of AWPs falling 34% YoY to 72,500 units over the period of January to September 2024. Most of these companies are now concentrated among the leading firms. AddFitionally, leading companies are steadily raising prices due to synergies between supply and demand. The occupancy rate has recently rebounded QoQ, and we expect the industry to bottom out. Furthermore, as Hainan Haikong Industrial Investment has become the controlling shareholder of the firm and its corporate bond rating has been upgraded from AA- to AA+, the company expects its funding costs to gradually decline, further reducing financial expenses.

Financials and valuation

Due to mounting operating pressure in the AWP sector, we cut our 2024 and 2025 net profit forecasts 22% and 27% to Rmb670mn and Rmb720mn. The stock is trading at 15x 2024e and 14x 2025e P/E. Considering the firm is an industry leader, we maintain an OUTPERFORM rating and TP of Rmb5.5, implying 16x 2024e and 15x 2025e P/E, and offering 10% upside.

Risks

Fiercer competition weighs on rental prices; weak downstream demand; cash flow management risks.