Zoomlion released a positive profit alert yesterday, stating that net profit in 1H20E will reach RMB3.8-4.2bn, representing 47-63% YoY growth. This is a surprise as the earnings range implies 75-100% YoY growth in 2Q20E. We raise our 2020E-22E earnings forecast significantly by 24-42% (14-27% above consensus), and lift our TP to RMB9.56. We see Zoomlion entering into a new growth trajectory, driven by the solid upcycle of concrete machinery and tower crane, as well as the aggressive expansion into attractive sub-segments such as excavator, aerial working platform (AWP) and hydraulic components. Near term catalysts include earnings revision by the market and strong machinery demand in 3Q. Reiterate BUY.
- New assumptions. The strong earnings growth in 1H20 was driven by strong demand for concrete pump truck, tower crane and construction crane, as well as the lower expense ratio thanks to the operating leverage and stringent cost control. We revise up our revenue and margin forecast in 2020E-22E. Our new forecast includes the potential dilution effect arising from the share placement and the new capacity expansion plan released by the Company last week.
- Attractive valuation (9.8x 20E P/E) suggests significant upside potential. We switch our valuation methodology from asset-based to earnings-based approach, in order to better capture the robust earnings growth outlook. Our new TP of RMB9.56 is based on 12x 2020E P/E (previously RMB6.85 based on 1.2x 2020E P/B). In 2011, the year when Zoomlion’s earnings reach a historical high of RMB8.3bn, the stock traded at a valuation range of 10-12x despite the high earnings base. We benchmark our target multiple (12x) to such valuation. We believe our target is not aggressive, given our EPS growth estimate of 37%/18% in 2020E/21E.
- Risk factors: (1) Unexpected weakness on infrastructure spending; (2) Slow recovery of property construction; (3) Risks of new business expansion.
