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Morningstar | Zoomlion’s 1Q19 in Line with Prelim; FVE Raised but Shares Overvalued on Bearish Long-Term Outlook

Following a strong first-quarter 2019 performance, we raised Zoomlion’s fair value estimate to HKD 3.70 (CNY 3.18) from HKD 3.40 (CNY 2.90) driven by higher growth assumptions mainly in 2019 and 2020. Our no-moat and stable moat trend ratings on the firm remain intact. Zoomlion announced first-quarter 2019 results with net profit increased by 166% year over year to CNY 1 billion from CNY 0.38 billion during the same period last year, in line with preliminary net profit of between CNY 0.85 billion and CNY 1.05 billion, but beating our expectation. Management attributed the strong performance to continuous strong demand for its construction machinery, which includes concrete, crane and other construction machinery that is underpinned by robust end demand from the infrastructure industry, replacement cycle, an increase in mechanization trend and stricter environmental regulation. Management also stated that the firm managed to grow its market share for its leading products. However, we think the market share gain for Zoomlion is less than that of Sany as Sany experienced a stronger year-over-year revenue growth of 75% in first-quarter 2019 as opposed to Zoomlion’s 42%. We believe that these market share gains are mainly at the expense of foreign manufacturers. The year-over-year increase in gross margin to 30% from 25% was driven by sales of more high-margin products and better costs management with higher production utilization rates. Nonetheless, we think that Zoomlion is currently overvalued, as we expect a gradual slowdown in China’s infrastructure and construction activities in the long run.

Demand for construction equipment in China was off to a strong start at the beginning of 2019, with both crane and excavator shipments increased by 52% and 24%, respectively, year over year for the first quarter of 2019, based on data by China Construction Machinery Association. It is worth pointing out that growth in excavator shipments slowed down in March 2019, only increasing by 16% year over year partly due to the high base achieved in March 2018. We continue to expect the government to take a more accommodating stance on infrastructure spending in the near-term to support the economy due to trade war concerns. However, growth momentum may lose steam going forward as part of the spending came from front-loading of local bond issuances. Our long-term view on a gradual slowdown on China’s infrastructure spending remains intact given China’s already high debt load.