EUR 850.00 For Business Accounts Only

Morningstar | Zoomlion’s 1H18 Largely in Line With Expectations; Shares Still Undervalued on Margin Expansion

Zoomlion’s first-half 2018 net profit increased by around 70% to CNY 874 million compared with the year-ago period on a comparable basis (the firm sold its environmental equipment business in 2017). Gross margin improved to 25.5% from 18.0% during the year-ago period. This is driven by an improvement in its product mix as the firm sells more high-margin products and better inventory management. Management also stated that it has managed to raise prices for machinery on the back of rising raw material costs. First-half revenue increased by 45% year over year to CNY 14.7 billion from CNY 10.1 billion, owing to strong demand for its concrete machinery, crane machinery, and other construction machinery, while partly offset by a decline in sales for its agricultural machinery. The strong demand for construction machinery is underpinned by robust spending from the infrastructure industry, replacement demand, increase in mechanization trend, and stricter environmental regulation. Despite the strong first-half performance, we lowered our fair value estimate for Zoomlion to HKD 3.80 (CNY 3.30) from HKD 4.20 (CNY 3.60) after fine-tuning our valuation model and taking into account the depreciation of the Chinese yuan. Our no-moat and stable moat trend ratings are intact. We think Zoomlion is undervalued at the current share price, as we believe the market has yet to fully factor in the higher margins achieved by the company.

For the rest of the year, we expect the growth rate in construction equipment to slow due to a high base in second-half 2017. That said, we acknowledge that the government might take a more accommodative stance on infrastructure spending in the near term to support the economy due to trade war concerns. However, our long-term view on a gradual slow down on China’s infrastructure spending is intact as the central government continues to scale back on fiscal policy to rein in local government debt. As for the firm's agricultural equipment, we expect the restructuring of its product mix and the development of mid- to high-end equipment should help to reverse the revenue downtrend in this division in 2019.