EUR 850.00 For Business Accounts Only

Morningstar | Zoomlion’s Fiscal-Year 2018 in Line; FVE Raised, Shares Remain Overvalued on Long-Term Uncertainties

We raise Zoomlion’s fair value estimate to HKD 3.40 (CNY 2.90) from HKD 3.00 (CNY 2.62), following minor adjustments to our valuation model and rolling forward of our estimates. The lower net debt due to stronger-than-expected cash flow generations in 2018, the appreciation of CNY against HKD and slightly higher growth assumptions resulted in the increase of our fair value estimate. Our no-moat and stable moat trend ratings on the firm remains intact.

Zoomlion announced full-year 2018 results with net profit increasing by 51.3% year over year to CNY 2.03 billion from CNY 1.34 billion in 2017, in line with its preliminary announcement of net profit of between CNY 1.95 billion to CNY 2.15 billion. For fourth-quarter 2018, Zoomlion’s net profit increased significantly to CNY 717 million from CNY 50 million during the same period last year. Management attributed the strong full-year 2018 performance to robust demand for its machinery, especially its concrete, crane, and other construction machinery that is underpinned by strong end demand from the infrastructure industry, replacement cycle, an increase in mechanization trend, and stricter environmental regulation. Demand has been strong for construction equipment in China in 2018, with both crane and excavator shipments increased by 47% and 45%, respectively, year over year, based on data by China Construction Machinery Association, or CCMA. We believe that gross margin increased year over year driven by it selling more high-margin products and better costs management with higher production utilization rates. Dividend per share of CNY 0.25 per share has been proposed, representing a 25% year-over-year increase from CNY 0.20 per share declared in 2017, in line with the improvement in its profitability. Nonetheless, we think that Zoomlion is currently overvalued, as long-term uncertainties remain as we expect a 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 42% and 40%, respectively, year over year for the first two months of 2019, based on data by CCMA. 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, our long-term view on a gradual slowdown on China’s infrastructure spending remains intact as the central government continue to scale back on fiscal policy to rein in local government debt. As for its 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 and improve the profitability of this division in 2019 and more significantly from 2020.