20131031-美银美林-Sales_via_finance_leasing_lowered,_provision_increased_20页_1mb

Summary of Zoomlion's 3Q13 Performance and Outlook

Core Content

Zoomlion, a leading construction machinery manufacturer in China, reported its 3Q13 results, showing a net profit of RMB889mn, a decrease of 34% YoY, which was in line with estimates. Despite the decline in net profit, the company exceeded revenue expectations, with a 13% YoY drop. The EBIT margin fell by 6.4ppts YoY, primarily due to increased provisions for receivables with high default risk. The company also reduced its factoring of accounts receivables under finance leasing significantly, from RMB4.0bn per quarter in previous periods to RMB0.3bn in 3Q13.

Main Points

• 3Q13 Results:

  • Net profit was RMB889mn, down 34% YoY, aligning with expectations.
  • Revenue declined by 13% YoY, better than expected.
  • EBIT margin dropped by 6.4ppts YoY, below estimates.
  • Operating cash flow was negative at RMB-855mn, reflecting liquidity constraints in the construction industry.

• Sales via Finance Leasing:

  • Sales via finance leasing were reduced, with the company shifting to bank mortgages due to the VAT reform in August 2013.
  • The amount of factoring of accounts receivables under finance leasing dropped significantly, from RMB4.0bn to RMB0.3bn in 3Q13.
  • The suspension of leaseback sales had minimal impact on concrete machinery sales, which contributed about 10% of the segment's total sales.

• Segment Performance:

  • Concrete Machinery: Sales were largely flat YoY, with a 10% contribution from leaseback.
  • Crane Machinery: Sales fell 30% YoY, affected by liquidity constraints and the suspension of leaseback.
  • Other Segments: Environmental and sanitation machinery, road construction machinery, and earth working machinery showed mixed performance, with some segments experiencing growth and others decline.

• Estimates and Valuation:

  • FY13-15E EPS was cut by 9-10% due to lower interest income from finance leasing and higher provisions.
  • The P/E ratio increased to 8.97x in 2013E, and the EV/EBITDA ratio rose to 7.08x.
  • Free cash flow yield was negative in 2013E but expected to improve in FY14.

• Outlook:

  • 4Q13 revenue is expected to be flat or slightly negative YoY due to a low base.
  • Net profit is anticipated to grow YoY, driven by improving demand in property and infrastructure construction.
  • Crane sales are expected to recover in FY14 due to increased demand in infrastructure projects.
  • The company plans to expand into related sectors like environmental protection, agriculture machinery, and heavy trucks.

Key Information

• Investment Opinion: "Buy" is maintained, based on the expectation of an earnings upcycle in 4Q13 and growth potential in new business areas.
• Share Incentive Scheme: Pending approval from the CSRC, with potential changes from the initial plan.
• Liquidity and Risk Control: Tightened liquidity and enhanced risk control measures have led to higher down-payment ratios and a shift in sales methods.
• VAT Reform Impact: Increased tax burden on leaseback sales, prompting a shift to bank mortgages.
• Overdue Ratio: Total overdue ratio remained stable, with a slight increase in overdue ratio for finance leasing receivables.
• Growth Drivers: Domestic and overseas market expansion, as well as diversification into related sectors, are key growth strategies.

Financial Highlights

• Revenue: Declined by 13% YoY in 3Q13, with a mix of performance across segments.
• Gross Margin: Shrank by 5.8ppts YoY, primarily due to the reduced contribution of concrete pump trucks.
• EBIT Margin: Fell by 6.4ppts YoY, influenced by increased provisions and lower finance leasing income.
• Operating Cash Flow: Negative at RMB-855mn, indicating liquidity challenges.
• Free Cash Flow: Negative in 2013E, but expected to improve in FY14.
• Net Debt-to-Equity Ratio: Increased to 4.0% in 2013E, but is projected to decline in subsequent years.

Strategic Moves

• Zoomlion is focusing on improving cash flow through better receivable collection and increased reliance on bank mortgages.
• The company is expanding into new markets and related businesses, aiming to increase overseas sales to 30% of total revenue within five years.
• The company is actively monitoring policy changes related to finance leasing and is prepared to adapt accordingly.

Market Position

• Zoomlion holds a leading position in the construction machinery market, with a concentrated market share.
• The company's management and employees own about 8% of the shares, with the Hunan government and its controlled enterprise owning 16.8%.
• The company is expected to benefit from the upcycle in the construction sector and its strong market position.