Zoomlion’s net profit came in at RMB2.58bn, up 196% YoY, within the range of 172%-212% growth mentioned in the profit alert. This implied 218% YoY increase in net profit in 2Q19. The strong growth was driven by both sales volume and margin expansion. Net profit in 1H19 is within expectation and accounts for 64% of our full year forecast. Operating cash flow surged 135% YoY to RMB3.3bn, suggesting high quality earnings. We continue to like crane and concrete segment as the demand should continue to be driven by the growth of property area under construction and potential recovery of infrastructure activities. We maintain our BUY rating and TP of RMB6.70, based on 1.3x 2019E target P/B.
- Strong cash flow and reducing gearing ratio. Zoomlion’s operating cash flow grew 1.35x to RMB3.3bn. We believe it was due to management’s strong execution on cash collection and inventory management. Besides, the net debt / equity ratio reduced to 30% in Jun 2019 from 34% in Dec 2018 (note: we included the wealth management product investment into the calculation). This was significantly lower than the 65% in Dec 2016. We believe debt reduction is another driver to lift the Company’s valuation.
- Strong revenue growth + margin expansion. Revenue grew 51%YoY to RMB22.3bn, mainly driven by 95% YoY increase in crane machinery (49% of total revenue) and 31% YoY increase in concrete machinery (34% of total revenue). Blended gross margin expanded significantly by 4.5ppt to 30%. Administrative expense ratio reduced 1.8ppt YoY to 5.9% in 1H19. In 2Q19, growth of revenue / net profit accelerated to 59% YoY / 218% YoY.
- Risk factors: (1) Weakness on property construction activities; (2) slow recovery of infrastructure spending; (3) High earnings volatility.
