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ZOOMLION HEAVY-H (1157.HK) Summary

Core Content

Zoomlion Heavy Industry Science and Technology (1157.HK) is a leading Chinese construction machinery manufacturer, ranked 6th in the 2012 International Construction Yellow Table. The company is positioned to benefit from urbanization, sanitation machinery growth, and international expansion.

Main Points

• Market Position: Zoomlion holds the largest market shares in domestic construction machinery, including mixers, car pumps, mixing stations, and tower machines.
• Sanitation Machinery: This segment is a prime example of a blue ocean strategy, with significant growth potential due to urbanization and environmental awareness. It contributes 6.3% of revenue, expected to grow at 10% annually for the next five years.
• Export Growth: The company is expanding its international presence through overseas factories and the acquisition of CIFA, aiming for 20% of total sales from exports by 2015E.
• Internationalization: Zoomlion has a low internationalization rate (around 6%) compared to global competitors. However, with CIFA integration and M&A strategies, the company is expected to significantly improve this rate.
• Product Expansion: Zoomlion is diversifying into heavy trucks and agricultural machinery, leveraging its strong financial and technological capabilities.
• Urbanization as a Long-Term Driver: Urbanization is a key growth engine for the company, with the Chinese government promoting it through policy and investment. It is expected to drive RMB40 trillion in investment over the next 10 years.
• Industry Challenges: The engineering machinery sector faces overcapacity and weak demand, especially after the 2008 financial crisis. Credit sales strategies have contributed to financial strain, with accounts receivable and overdue rates rising.
• Financial Performance: Zoomlion's revenue and net income have shown volatility, with a target price of HK$7.40 based on P/B multiplier and DCF models. The company is currently undervalued.

Key Information

Revenue and Net Income (RMB million)

Growth Rates (%)

EPS and DPS (RMB)

Valuation Metrics

Share Performance

• Absolute Return: -1% over 12 months
• Relative Return: -1% over 12 months
• Market Cap (HK$) (mn): 7265
• BVPS (HKD): 5.29
• Free Float: 0.18

Target Price

• Current Price: HK$5.74
• 12-Month Target Price: HK$7.40
• Recommendation: Buy

Strategic Focus

Zoomlion is focusing on five key areas: engineering machinery, sanitation machinery, heavy trucks, agricultural machinery, and financial services. It has a strong foothold in engineering and sanitation machinery, with growing potential in heavy trucks and agricultural machinery through M&A and strategic investments.

Internationalization

• CIFA Acquisition: Zoomlion acquired a 60% stake in CIFA in 2008 and is working to acquire the remaining 40%.
• Global Presence: Subsidiaries in over 40 countries, with a client base covering more than 80 countries.
• Growth Drivers: Building overseas factories in India and Brazil, and R&D centers in Europe, South America, and Asia.

Challenges and Outlook

• Overcapacity: The industry faces overcapacity due to aggressive sales and weak demand.
• Credit Sales: Aggressive credit sales strategies have led to high accounts receivable and overdue rates, but the company is improving risk control.
• Industry Recovery: The company expects a gradual recovery in the engineering machinery industry, with urbanization and policy support driving demand.

Conclusion

Zoomlion is well-positioned to benefit from urbanization, sanitation machinery growth, and international expansion. Despite current challenges in the industry, the company's strong financial position and strategic moves suggest a positive outlook for the future. The target price of HK$7.40 reflects a belief in the company's long-term growth potential.