What’s new? We believe the stock ownership plan that announced last Friday will offer strong motivation to the management and key employees to deliver sustainable earnings growth over the next three years, which should more than offset the share incentive expense arising from this. We maintain our TP of HK$7.65 (based on 1.3x 2019E P/B, on the back of 12%-13% ROE in 2019E-21E). Zoomlion - H remains our top pick.
- Details of the stock ownership plan. The participants include the core management and key employees in the Company, with a maximum of 1,200 employees. The purchase price is set at RMB2.75 per share. The lock-up period is divided into three stages, with 40%, 30% and 30% of the shares to be unlocked in 2020E, 2021E and 2022E respectively, subject to Zoomlion’s net profit targets during the period. Either of the following two criteria has to be satisfied for each of the year: (1) In 2020/ 21/ 22, the net profit growth to be no less than 80%/90%/100%, compared with the Benchmark (Benchmark = average net profit in 2017-19); (2) the total net profit in 2020-21 to grow 170% from the Benchmark, and the total net profit in 2020-22 to grow 270% from the Benchmark (Figure 1). The stock ownership plan is subject to the approval by shareholders in EGM.
- Higher expense but higher employee incentive. Given that the underlying shares of the stock ownership plan are the 390mn A shares (4.96% of total o/s shares) the Company repurchased in 2Q19 (average price: RMB5.49), we calculate that the total share incentive expense to Zoomlion to be RMB1bn in 2020E-22E. That’s said, we believe the discount on purchase price (RMB2.75) is attractive to the participants, offering strong incentive.
- Investment in agricultural machinery segment. Zoomlion plans to invest RMB2.05bn in 2020-25 (annual capex: RMB342mn) in the intelligent agriculture machinery business in Wuhu. While the industry has been on a downcycle, Zoomlion expects the favourable government policy to support the upgrade of agriculture machinery will offer new opportunities. In 2018/1H19, revenue from agricultural machinery accounted for only 5%/4% of the total revenue. Zoomlion targets to achieve breakeven this year versus a loss in 2018. We fine-tuned our 2020E-21E earnings forecast by -0.5%/-0.5% after incorporating the capex but have not modelled growth in this segment. Any improvement will offer upside to our existing forecast.
