EUR 850.00 For Business Accounts Only

Morningstar | Zoomlion’s Strong 3Q 2818 in Line With Expectations; Shares Still Undervalued on Margin Expansion

Zoomlion’s strong third-quarter 2018 was in line with our expectations. Net profit nearly tripled to CNY 439 million from CNY 151 million during the same period last year on the back of a 24.6% year-over-year increase on revenue. The increase in revenue is driven by robust demand for its machinery products, especially its concrete, crane, and other construction machinery that is underpinned by strong end demand from the infrastructure industry, replacement cycle, increase in mechanization trend, and stricter environmental regulation. Meanwhile, gross margin improved to 28.2% from 26.3% during the same period last year, due to an improvement in its product mix as it sells more high-margin products and better inventory management. We believe that the company has managed to raise prices for its machinery on the back of rising raw material costs. Despite the strong first-half performance, we lowered our fair value estimate for Zoomlion to HKD 3.50 (CNY 3.10) from HKD 3.80 (CNY 3.30) after fine-tuning our valuation model, factoring in higher research and development expenses and capital expenditures, and taking into account the depreciation of the Chinese Yuan. Our no-moat and stable moat trend ratings remain intact. We think Zoomlion’s current share price is undervalued as we believe the market has yet to fully factor in the higher margin achieved by the company.

Demand has been strong for construction equipment in China in the first three quarters in 2018, with both crane and excavator sales increased by 53% year over year, based on data by China Construction Machinery Association. The latest data for September 2018 shows that the growth in crane and excavator sales slowed down to 24% and 28% year over year, respectively. For the rest of the year, we expect the growth rate in construction equipment to decelerate due to a high base in fourth-quarter 2017. Our long-term view on a gradual slowdown on China’s infrastructure spending remains intact as the central government continues to scale back on fiscal policy to rein in local government debt. That said, we acknowledge that the government might take a more accommodating stance on infrastructure spending in the near term to support the economy due to trade war concerns. 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.