EUR 850.00 For Business Accounts Only

Morningstar | Zoomlion’s Prelim 1Q19 Above Expectations; Shares Remain Overvalued on Long-term Uncertainties

Zoomlion announced preliminary first-quarter 2019 results with net profit expected to increase by 126%-179% year over year to CNY 0.85 billion to CNY 1.05 billion from CNY 0.38 billion during the same period last year, above our expectations. Management attributed the strong first-quarter 2019 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. We believe that gross margin increasing year over year was driven by it selling more high-margin products and better cost management with higher production utilization rates. We expect to raise our fair value estimate for Zoomlion by less than 10% on this better than expected performance, pending further clarity on its first-quarter 2019 results expected to be announced at the end of April. Our no-moat and stable moat trend ratings on the firm are intact. 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 42% and 40%, respectively, year over year for the first two months of 2019, based on data by China Construction Machinery Association, or 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.