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Morningstar | Zoomlion’s Prelim 2Q19 Above Expectations; Shares Remain Overvalued on Long-Term Uncertainties

Despite Zoomlion’s stronger than expected preliminary first-half 2019 results, we think the firm remains overvalued, as we expect a gradual slowdown in China’s infrastructure and construction activities in the long run. Zoomlion guided that first-half 2019 net profit is expected to increase by 172%-212% year over year to CNY 2.4 billion to CNY 2.7 billion from CNY 0.86 billion during the same period last year, above our expectations. This implies that for second-quarter 2019, net profit will increase by 187%-249% year over year to CNY 1.4 billion to CNY 1.7 billion from CNY 0.49 billion during the same period last year. Management attributed the strong first-half 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 real estate and infrastructure construction industries. Management also stated that the firm managed to grow its market share for its core products, namely concrete pump trucks, tower cranes, and construction cranes. The company continues to focus on costs management, along with an increase in production utilization rates, resulted in higher gross margin year over year. We plan to raise our fair value estimate for Zoomlion by around 5% to 15% on this better-than-expected performance pending further clarity on its first-half 2019 results, to be announced in late August. Our no-moat and stable moat trend ratings on the firm remain intact.

Demand for excavator in China was off to a strong start in first-quarter 2019 before decelerating in April and May 2019, based on data by China Construction Machinery Association. Excavator shipments in China only grew by 5% and declined by 6% year over year in April and May, respectively, compared with an increase of 24% year over year in first-quarter 2019. This results in an increase of 14% year over year for the first five months of 2019, versus 58% during the same period last year. As for crane shipments in China, its growth in April was still strong at 52% year over year. However, growth in May slowed to an increase of 31% year over year, resulting in an increase of 47% year over year for the first five months of 2019, versus 62% during the same period last year.

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.