Sany Heavy International's prelim net profit worse than expected

It plunged 35%, even below market consensus.

Sany Heavy International (631 HK) issued its preliminary financial results for 2012 on 21 January after the market close. Based on a preliminary (unaudited) review, the company recorded:

· Consolidated revenue of Rmb3,681mn for 2012, representing a 3% y/y decline.

· Net profit of Rmb507mn, representing a 35% y/y decline.

· Gross margin decline of 2ppt to 38% from 40% in 2011 due to the change in product mix.

Sany Int'l attributes the profit drop mainly to: 1) negative growth of revenue in 2H12 due to a significant decline in the demand for coal mining equipment since 2Q12; and 2) SG&A and finance costs overrun. (For example, selling and distribution costs rose 12% y/y in 2012, while finance costs increased by 20% y/y.)

Barclay's reading:

Sany’s preliminary net profit was below even our already below-consensus net profit estimates. Barclays expected net profit to grow 17% y/y while Bloomberg consensus factored in 18% y/y growth. Thus, we expect downward earnings revision pressure in the near term. We reiterate our Underweight rating on Sany Heavy Int'l and will review our forecasts. We continue to be cautious on the market demand outlook for coal mining equipment going into 2013 and we expect the end-market demand for the biggest profit contributor, road headers, will remain weak until coal production growth improves. Meanwhile, profitability of other products such as CCMU and coal mining vehicles remains low (evidenced by declining gross margin in 2012) despite ramping up the revenue contribution. Sany Int'l is trading at 9.8x 2013E P/E on our estimates and 9.2x P/E on consensus.