Zoomlion’s net profit in 2019 came in at RMB4.38bn, up 116% Y0Y, within the profit growth range of 113-123% YoY released in the profit alert earlier. That said, the Company unexpectedly proposed not to pay dividend (compared with 98% payout in 2018), in spite of its strong operating cash flow. We believe such move aims at protecting balance sheet and offers flexibility to buyback outstanding bonds. We fine-tuned our 2020E/21E earnings forecast -5%/-2% on lower revenue assumptions. Our TP is revised down to RMB6.85, based on 1.2x 2020E P/B (down from 1.4x), on the back of 11.7%-12% ROE in 2020E-22E. Recovery of construction machinery demand in 2Q will serve as key catalyst.
- Key highlights on 2019 results. The revenue growth in 2H19 was 50% YoY and gross margin expanded 1.3ppt YoY to 30% (stable HoH). However, S&D expense ratio increased to 9% in 2H19, compared with 8.3% in 2H18 and 8.4% in 1H19. Besides, R&D expense ratio increased to 5% in 2H19, up significantly from 2.7% in 2H18 and 2.1% in 1H19. We believe the higher expense ratio was due to the launch of new products. Thanks to lower finance expense and effective tax rate, net profit in 2H19 grew 55% YoY to ~RMB1.8bn.
- Dividend cut reflects the conservative approach taken by the Company. We are surprised about the dividend cut as the Company generated strong operating cash flow of RMB6bn in 2019, though it spent RMB2.1bn on share buyback for employee share incentive scheme. The latest dividend policy suggested that the Company is potentially planning for debt repayment or redemption. Several tranches of bonds will be matured over the coming few years, with the first one in Dec 2022 (principal amount of US$600m with coupon rate of 6.13%). The recent volatile bond market due to the lack of liquidity may offer the Company with the opportunity to buyback at discount.
- Risk factors: (1) Unexpected weakness on property construction activities; (2) Slow recovery of infrastructure spending; (3) High earnings volatility.
