China Machinery Mining : Lower estimates on prolonged weakness; SANYI down to Neutral

Lowering EPS forecasts for mining machinery companies...

    We lower our 2014/15/16 EPS forecasts for China mining machinerycoverage by 20%/31%34% on average, mainly reflecting: 1) Lower miningmachinery sales forecasts on prolonged weakness in the coal sector, whichhas led to coal miners lowering their capex plans; and 2) margincompression due to potential ASP erosion and higher operating leverage.

    Our estimates are now 30%/40%/38% below Wind/Bloomberg consensus.

    ...on cycle trough margins and extended cash conversion cycleOur updated estimates imply cycle-trough net margins for our miningmachinery coverage in 2014E at c.8%, less than half of peak level at 18%;we also expect average cash conversion cycle to extend to c.230 days by2015E from c.160 days in 2013, marking a historical high. We view cashflow as a key focus for mining equipment companies during this downcycle, and expect tighter sales policies to in turn hurt sales even further.

    SANYI: Down to Neutral from Buy on weaker demand outlookWe lower our 2014/15/16 EPS forecasts for SANYI by 39%/51%/50% toRmb0.10/0.10/0.11, 40%/49%/39% below Wind/Bloomberg consensus.

    While we remain constructive on SANYI’s new product development andcost control effectiveness, we expect the roadheader business, a significantportion of revenues/profits in 2013, to face both volume declines and ASPerosion, and do not expect growth in new businesses, i.e. Combined CoalMining Units (CCMU) and mining trucks, to be enough to cover this. Ournew 12-m EV/GCI vs. CROCI/WACC based TP of HK$1.90 (was HK$2.50) isbased on a distressed 0.7X EV/GCI (previously based on 0.60X H-shareValratio) due to its bottom-quartile 2015E CROCI among our coverage.

    ZMJ(A)/Tian Di: Still Neutral, but lower earnings estimatesWe revise our 2014/15/16E EPS for ZMJ (A)/Tian Di by -20%/-30%/-36% and-2%/-13%/-17% respectively, mainly on lower mining machinery salesforecasts. The earnings impact for Tian Di is lower than the other two,especially in FY2014E, as we think Wangpo mine production resumptionfrom 4Q2013 could partly offset declines in mining machinery businesses.

    Reflecting our new estimates and revised valratios, our new 12-m EV/GCIvs. CROCI/WACC based TPs for ZMJ (A) and Tian Di are Rmb4.8/8.1 (prev.

    Rmb6.4/8.5) with -3%/-9% potential downside, we remain Neutral.