Undoubtedly, Sany Heavy Industry is the "giant" in the construction machinery field: according to the semi-annual report for the first half of 2021, Sany Heavy Industry's revenue exceeded 60 billion yuan, with a net profit of over 10 billion yuan. The sales volume even reached 98,000 units, accounting for half of the entire construction machinery industry.

Despite such an impressive report card, Sany Heavy Industry's stock price is not favored by the market. It has been falling continuously for several months, with its market value having shrunk by more than 200 billion yuan. Even when Sany Heavy Industry changed its leadership in January, with Xiang Wenbo replacing Liang Wengen as chairman, the market did not show a "good face."

Why can't such excellent technology and revenue stop the stock price from falling? It indicates that the market has widespread concerns about cyclical stocks. Although Sany Heavy Industry's current performance is good, its revenue expectations are worrying.

Firstly, the short-term stock price has increased by 9 times, and the market has a fear of heights. From 2016 to 2021, in just six years, the stock price has risen from less than 5 yuan to a maximum of over 40 yuan, increasing by 9 times. Market panic sentiment is pervasive, and any slight turmoil will lead to a scramble among investors. Looking closely at the stock price, Sany Heavy Industry's current stock price has fallen back to around 20 yuan, which is already halved from its peak.

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Secondly, the operating costs of the machinery industry have increased significantly. Under the pandemic, international raw material prices have risen sharply, with the prices of metal commodities such as rebar, copper, and iron increasing dramatically, with some even doubling. As the machinery industry is a resource-dependent enterprise, Sany Heavy Industry's production costs have increased significantly, and operating profits will inevitably decline.

Of course, the rise in commodity prices is a challenge faced by the entire machinery manufacturing industry. In fact, not only Sany Heavy Industry, but also industry giants like Zoomlion have seen poor stock price trends.

Thirdly, the stock price cycles of cyclical industries rise and fall. Cyclical industries face three typical cycles: recovery, prosperity, and decline. When the industry enters an upward cycle, the market often treats companies as growth stocks and gives high valuations. When the industry as a whole is declining, the market remembers that companies are cyclical stocks, and performance cannot rise indefinitely, leading to a situation of valuation compression.Sany Heavy Industry, located in the machinery manufacturing industry, is a typical cyclical industry. Construction machinery itself has a service life, and downstream companies do not purchase machinery every year, which leads to the demand side of Sany Heavy Industry showing fluctuations.

The peak of Sany Heavy Industry's last cycle appeared in 2012. Data shows that Sany Heavy Industry's revenue began to decline sharply year by year from 2012, with the revenue in 2015 being halved compared to 2011, only 23.36 billion yuan; net profit decreased from 8.649 billion yuan in 2011 to less than 5 million yuan.

Subsequently, Sany Heavy Industry's cycle rebounded, and in 2019, the domestic excavator sales volume was 220,643 units, exceeding the historical peak in 2011. In 2020, domestic excavator sales continued to shine, reaching 292,864 units.

In 2020, Sany Heavy Industry's revenue broke through the 100 billion yuan mark for the first time, ushering in the best performance in history. However, the market understands the principle of "the highest point leads to decline," and behind the best performance in history, it is very likely to be the decline of the next cycle.

Adding to the problem, real estate is the main customer group of the machinery manufacturing industry. However, the current real estate market has become a market consensus, and real estate can no longer continue to support the performance explosion of Sany Heavy Industry and similar companies.

Considering the above three factors, although Sany Heavy Industry's performance is good, the market is difficult to give a beautiful valuation. Mr. Market is occasionally emotional, but most of the time he is wise.

In conclusion:

For investors, continuously betting on a cyclical stock that has soared five times in two years and is at a high point in the cycle, the risk is self-evident. If the bet is wrong, they will face a long period of cyclical decline after the peak, lasting for several years.

Measuring the potential risks and returns, buying Sany Heavy Industry may not be a cost-effective investment: the potential risk is higher than other weak cyclical varieties. Once the cycle downturn is confirmed, it will start a performance kill + valuation kill that will last for many years.