Zoomlion’s net profit in 3Q19 is expected to surge 94%-117% YoY to RMB850-950mn, according to the positive profit alert. The impressive growth is above expectation, which we believe was driven by strong sales and operating leverage. We raised our earnings forecast for 2019E-21E by 13-18% on higher volume and gross margin assumptions. Our TP is raised from HK$6.95 (1.2x 2019E P/B) to HK$7.65 (1.3x 2019E P/B). Our higher target multiple is supported by higher ROE (2019E-21E: 11.6%-13.4%), similar to the level in 2013 (11.8%). We believe strong infrastructure spending in 4Q19E will continue to fuel Zoomlion’s growth, serving as a share price catalyst. Zoomlion – H remains our sector top pick.
- What’s new? Zoomlion’s net profit growth of 94-117% YoY in 3Q19 was driven by a couple of factors: (1) strong property and infrastructure construction activities boosted the demand for both crane and concrete machinery; (2) the launch of new products and core products such as concrete pump trucks, tower cranes and construction cranes helped drive the growth; (3) the stringent cost control and operating leverage helped margin expansion. In 9M19, the net profit is expected to surge 163%-171% YoY to RMB3,426-3,526mn.
- Upcycle to continue in 2020E. We continue to like crane and concrete machinery as the demand should continue to be driven by the growth of property area under construction and resilient infrastructure spending. Besides, Zoomlion is set to benefit from the rising demand for large-size tower cranes, driven by an increasing application of pre-cast concrete construction. In addition, the elimination of NES III trucks will continue to lend strong support to the demand for truck crane and concrete trucks over the coming two years.
- Risk factors: (1) Unexpected weakness on property construction activities; (2) Slow recovery of infrastructure spending; (3) High earnings volatility.
