Zoomlion issued a positive profit alert saying that its net profit in 2019 is expected to grow 113-123% YoY to RMB4.3-4.5bn. The net profit range is slightly below our estimate of RMB4.55bn but is largely in line with the consensus of RMB4.4bn. We have left our earnings forecast unchanged but we raise our TP to RMB7.55 from RMB7.28 after rolling over the valuation base to 2020E (based on 1.4x P/B, on the back of 13% ROE in 2020E-21E). Strong industry sales data points will likely serve as near term catalyst. Reiterate BUY.
- Key reasons for the earnings growth in 2019E. The strong net profit growth was driven by strong demand for both crane and concrete machinery, as well as new products such as the earth working machinery (i.e. excavators) and aerial working platform (AWP). Besides, oversea business also reported continuous growth. All these helped Zoomlion achieve above industry average growth. On the other hand, gross margin expanded thanks to the improvement in manufacturing efficiency, product upgrade and higher sales volume. Net profit in 4Q19E grew 47% YoY to RMB1.07bn.
- Upcoming drivers. We maintain our positive stance on Zoomlion in 2020E, with positive drivers coming from the potential recovery of infrastructure spending in 1Q20E, resilient property construction activities, acceleration of the replacement of NES III trucks, strong delivery of large-size tower cranes and fast-growing new products sales.
- Risk factors: (1) Unexpected weakness on property construction activities; (2) Slow recovery of infrastructure spending; (3) High earnings volatility.
