20201103-招银国际-中联重科-000157.SZ-Margin_risk_priced_in__Good_buying_opportunity_5页_1022kb

Zoomlion Heavy Industry - A (000157 CH) Summary

Core Content

Zoomlion Heavy Industry - A (000157 CH) reported strong performance in its 3Q20 results, with a net profit increase of 85% YoY to RMB1.67bn, within the expected range of RMB1.48-1.78bn. Revenue also saw significant growth of 73% YoY to RMB16.4bn, though the gross margin narrowed to 27%, down by 2.4ppt YoY and 1.8ppt QoQ. The company's net operating cash inflow increased by 58% YoY to RMB2.6bn, reflecting robust operational performance.

Main Points

Strong Growth Across Segments

• Concrete machinery revenue grew by 34% YoY to RMB13.7bn in 9M20.
• Crane machinery revenue increased by 44% YoY to RMB23.6bn.
• Agricultural machinery revenue rose by 35% YoY.
• Excavator revenue surged by 244% YoY, while aerial working platform (AWP) revenue increased by 60% YoY.

Gross Margin Outlook

• The gross margin contraction in 3Q20 was attributed to:
  1. Higher sales of lower-margin truck cranes and tower cranes.
  2. Greater growth in lower-margin concrete mixers than concrete pumps.
  3. Fast-growing new business lines (AWP and excavator) with lower margins.
• However, management is optimistic about margin improvement in 4Q20E, citing:
  1. Continued improvement in new business margins.
  2. The implementation of central procurement policies starting in 3Q20, expected to reduce costs.

Positive Outlook

• The company anticipates a stronger upcycle in 2020E-21E, driven by:
  • Infrastructure and property investment.
  • Replacement of labor.
  • Strict environmental protection policies.
• Large players are expected to benefit from rising industry concentration.

Key Financial Metrics

Metric	FY18A	FY19A	FY20E	FY21E	FY22E
Revenue (RMB mn)	28,697	43,307	63,942	76,025	84,903
YoY growth (%)	39.3	50.9	47.6	18.9	11.7
Net income (RMB mn)	2,031	4,381	6,887	8,727	9,928
EPS (RMB)	0.27	0.58	0.87	0.96	1.09
YoY growth (%)	51.5	119.2	50.0	9.3	13.7
EV/EBITDA (x)	16.0	10.5	7.9	6.5	5.8
P/E (x)	27.0	12.6	8.7	7.9	6.8
P/B (x)	1.5	1.5	1.3	1.2	1.0
Yield (%)	3.5	0.0	4.9	5.1	5.9
ROE (%)	5.4	11.4	16.3	16.8	16.1
Net gearing (%)	33.6	31.3	20.8	4.7	3.6

Earnings Summary

• 2020E earnings forecast slightly reduced by 2-4% due to higher sales volume but more conservative margin assumptions.
• Target Price adjusted from RMB10.20 to RMB9.56, with a 12x P/E multiple for 2021E (previously 12x 2020E P/E).

Share Performance

• Current Price: RMB7.24
• 1-mth: -8.8% (Absolute), -10.9% (Relative)
• 3-mth: -10.4% (Absolute), -10.4% (Relative)
• 6-mth: +15.6% (Absolute), -3.7% (Relative)
• 12-mth: Price Performance Chart (see image)

Shareholding Structure

Holder	Percentage
SASAC of Hunan Province	15.9%
Management team	4.9%
A share free float	61.4%
H share free float	17.7%

Risk Factors

1. Unexpected weakness in infrastructure spending.
2. Slow recovery in property construction.
3. Risks associated with new business expansion.

Analyst's View

• Rating: BUY
• Target Price: RMB9.56
• Up/Downside: +32%
• Analyst: Wayne Fung, CFA
• Contact: (852) 3900 0826, waynefung@cmbi.com.hk

Key Ratios

Ratio	FY18A	FY19A	FY20E	FY21E	FY22E
Gross margin (%)	30.0	30.6	28.7	29.1	29.2
Net profit margin (%)	6.9	9.9	10.7	11.4	11.6
ROE (%)	5.4	11.4	16.3	16.8	16.1
Net debt / total equity (%)	33.6	31.3	20.8	4.7	3.6

CMBIS Ratings

• BUY: Stock with potential return of over 15% over next 12 months.
• HOLD: Stock with potential return of +15% to -10% over next 12 months.
• SELL: Stock with potential loss of over 10% over next 12 months.
• NOT RATED: Stock not rated by CMBIS.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark.
• MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark.
• UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark.

Disclaimer

• This report is not investment advice.
• Past performance does not guarantee future results.
• CMBIS is not liable for any losses or damages incurred from relying on this report.
• Investors are encouraged to consult a financial advisor for personalized advice.

Auditor

• KPMG

Related Reports

1. Zoomlion (000157 CH, BUY) - Profit surprise in 3Q20 reaffirms our positive view - 15 Oct 2020
2. Zoomlion (000157 CH, BUY) – Interim dvd. a positive; Gross margin stabilized; Sector top pick – 24 Aug 2020
3. Zoomlion (000157 CH, BUY) - 2Q20 profit a strong beat; Lift earnings est. & TP - 15 Jul 2020
4. China Construction Machinery & HDT Sector - Raise industry sales forecast in 2020E-21E; Solid upcycle - 30 Jun 2020

Conclusion

Zoomlion's recent results and outlook are positive, with strong growth in multiple segments and confidence in margin improvement. The analyst believes the recent share price pullback was overdone and sees this as a good buying opportunity. Despite the margin contraction in 3Q20, the company is expected to recover in 4Q20E and beyond, supported by its central procurement policy and favorable industry conditions.