Sany constructs new IPO bid, as low ROE threatens to undermine its valuation

The construction equipment maker’s new Hong Kong listing bid comes after it pulled the plug on previous IPO attempts in Hong Kong, Switzerland and Germany

Key Takeaways:

• Sany Heavy has applied to list in Hong Kong, hoping to sell investors on its status as the world’s biggest seller of excavators
• The heavy construction equipment maker’s overseas business has been outpacing its domestic sales, accounting for over 60% of its revenue last year

By Bai Xinrui

After a long winter, the Hong Kong IPO market has suddenly erupted as a hot fundraising portal for domestically listed Chinese companies looking to expand their investor bases into the global marketplace. In the last two weeks alone, two such companies, leading electric vehicle battery maker CATL, and Hengrui Pharma, a leader in China’s drug sector, have collectively raised nearly $6 billion in two of the year’s biggest new listings.

Now, another leader, the world’s third-biggest construction machinery maker and largest maker of excavators, Sany Heavy Industry Co. Ltd. (600031.SH), is hoping to cash in on the fever, submitting its own listing application for a Hong Kong IPO late last month.

The company’s history dates back to 1989, when it was founded as the Hunan Lianyuan Welding Material Factory by Liang Wengen, Tang Xiuguo, Mao Zhongwu and Yuan Jinhua in China’s earliest days experimenting with privately owned and managed companies. The factory was restructured into a Chinese enterprise focused on construction equipment in 1994, and further reorganized as a limited liability company in 2000.

It went public in 2003 on the Shanghai Stock Exchange. It passed a major milestone a decade later in 2013 when its overseas revenue passed the 10 billion yuan ($1.4 billion) mark. Another decade on, it passed yet another important milestone as its overseas revenue overtook its domestic sales in 2023.

The company currently counts the similarly named Sany Group as its biggest shareholder with about 30% of the total shares. Liang Wengen, one of its original founders, is Sany Group’s majority shareholder with 56.74% of its stock. Liang was also once China’s richest man at the height of its building boom in the 1990s and first part of the 21^st century.

This isn’t the first time for Sany to test the Hong Kong market. The company planned to list in the city as early as in 2011, and in 2022 and 2023 it also flirted with potential listings on stock exchanges in Switzerland and Frankfurt, respectively. But the company ended up pulling the plug all three times due to unsuitable market conditions, making the current foray a sort of Hong Kong homecoming after a long global journey.

Growing excavator demand

The global market for construction machinery is vast, mainly driven by demand for infrastructure investment to meet growing energy needs, digital transformation and technological upgrades of mining and extraction operations. The global construction machinery market was worth $213.5 billion in 2024 and is expected to reach $296.1 billion by 2030, growing at 5.6% annually over that time, according to third-party data in Sany’s listing document. As the world’s third biggest construction machinery maker based on 2024 sales, Sany is well positioned to capitalize on that demand.

Construction machinery covers a wide range of products, including loaders and machinery for excavation, hoisting, road-building, concrete-handling and piling. Excavators are one of the biggest product categories, worth $63.2 billion in sales last year, accounting for 29.6% of the total construction machinery market. The excavator segment is expected to outpace the overall market in terms of growth over the next few years, reaching $92.8 billion, or 31.3% of total construction equipment sales, by 2030.

Excavators are heavy engineering vehicles used for infrastructure construction, mining and extraction, as well as urban development. The rapid adoption of intelligent and energy-saving, environmentally friendly technologies in recent years has improved construction efficiency and equipment durability. That, coupled with the growing number of mining and other large-scale infrastructure projects under development around the world, is driving demand for new, higher-tech excavators and also replacements of older ones.

Sany is king of the global excavator market, commanding 11.3% of worldwide sales between 2020 and 2024, and about a quarter of all sales in China. It has been China’s leading seller in that segment since 2011.

Climbing gross margins

As Sany’s biggest breadwinner, excavators generated 30.37 billion yuan of the company’s revenue last year, up 9.9% year-on-year, bringing in gross profits of 9.67 billion yuan, up 13.4%. The segment accounted for 38.8% of the company’s total revenue for the year, and for 46.2% of its total gross profit.

Sany’s overall revenue rose 5.9% last year to 78.38 billion yuan, spurred by growing global demand for its mid- to large-sized excavators, and also by a rebound in demand in China for small ones. Its net profit for the year rose 32% to 5.98 billion yuan.

The company’s gross margin has also been rising steadily, growing from 22.6% in 2022 to 26.7% last year. Part of that owes to declining steel prices, which account for 20% to 35% of construction equipment costs. It also owes to the company’s growing self-sufficiency in component sourcing. Sany now self-produces 60% of its overall components, and the number is an even higher 90% for excavator components.

As we’ve previously noted, Sany’s overseas revenue has outperformed its domestic business in recent years. Such sales accounted for 45.5% of the company’s revenue in 2022, and rose to 62.3% last year. Asia, Australia and the Middle East are its biggest overseas markets, accounting for 42.6% of its international sales.

Sany has also been generous to its shareholders, distributing 29.3 billion yuan in dividends since its Shanghai listing in 2003, equal to payout ratios of 30.6%, 40.4% and 49.8% of its net profit in 2022, 2023 and 2024, respectively.

Potential investors should also note that construction equipment sales are highly seasonal. Business usually slumps during winter due to falling demand as the cold weather and Lunar New Year lead to slower construction activity and projects get temporarily put on hold. But as spring arrives, construction tends to pick up and new projects also get started, translating to rising sales.

ROE underperformer

Despite its sold positioning, Sany is less stellar when it comes to return on equity (ROE), delivering at a rate of just 8.5% last year. That makes it a relative laggard compared with global peers like Caterpillar (CAT.US), with an ROE of 55.3%, and Komatsu (6301.J), with a ratio of 14.1%. But Sany’s Shanghai-listed shares outperform its peers in terms of price-to-earnings (P/E) ratios, trading at 23 times, compared to 16.7 for Caterpillar and 9.2 for Komatsu.

That said, Sany may need to focus on boosting its ROE through better performance or perhaps via share buybacks. A double-digit ROE to complement its market-leading position in the global construction machinery market could support its overall valuation as it rumbles closer to finally achieving its goal of an offshore listing.

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