EUR 850.00 For Business Accounts Only

Morningstar | Zoomlion’s Strong Fiscal-Year 2018 Above Our Expectations; Shares Fairly Valued

Zoomlion announced preliminary full-year 2018 results with net profit expected to increase by 46%-61% year over year to CNY 1.95 billion to CNY 2.15 billion from CNY 1.332 billion in 2017. The results were above our expectations and imply that Zoomlion’s net profit for fourth-quarter 2018 was around CNY 647 million to CNY 847 million, a huge increase 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. We believe that the higher gross margin year over year was driven by sales of more high-margin products, better costs management, and higher production utilization rates. Management also stated that the firm managed to grow its market share in 2018. 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 full-year results that are expected to be announced in March. Our no-moat and stable moat trend ratings on the firm remain intact. Nonetheless, we think that Zoomlion is currently fairly valued, as we expect a gradual slowdown in China’s infrastructure and construction activities in the long run.

Demand has been strong for construction equipment in China in 2018, with both crane and excavator shipments increased by 48% (year-to-date until November 2018) and 45%, respectively, year over year, based on data by China Construction Machinery Association, or CCMA. However, we noticed that the growth rates decelerated toward the end of the year, which could be due to a slowdown in demand for crane and a high base in fourth-quarter 2017 for excavator. 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. Nonetheless, our long-term view on a gradual slowdown on China’s infrastructure spending remains intact given China's already high debt load. 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 onward.