Zoomlion’s net profit in 1H20 grew 56% YoY to RMB4bn, which is the midpoint of the earnings range of RMB3.8-4.2bn stated in the profit alert released in Jul. In 2Q20, net profit surged 90% YoY to ~RMB3bn, driven by 49% YoY revenue growth and cost reduction. A surprise comes from the proposed interim dividend of RMB0.21 per share. Besides, in the post-result conference call, management revealed that the gross margin has been stabilized after a short-term contraction in 2Q, which should enhance market confidence. We maintain our bullish stance on Zoomlion, due to the introduction of strategic investors, solid upcycle of concrete machinery and tower crane, as well as the fast-growing excavator and aerial working platform (AWP). We slightly revised up our earnings forecast by 3-6% in 2020E-22E due to lower expense ratios and higher other income assumptions, and lifted our TP to RMB10.2 based on unchanged 12x 2020E P/E. Zoomlion is now our sector top pick.
- Strong revenue growth of crane and other machinery in 1H20. Total revenue in 1H20 grew 30% YoY to RMB28.8bn. Crane machinery grew 39% YoY to RMB15.3bn (revenue mix: truck crane: 60%; tower crane: 40%). Other machinery increased by 34% YoY to RMB3.3bn, driven by fast-growing sales of AWP and excavator. Revenue of agricultural machinery grew 16% YoY with the segment gross margin expanded 2.3ppt YoY to 12.3%. Agricultural machinery achieved breakeven in 1H20, according to the management.
- Concrete machinery revenue +15% with decent gross margin in 1H20. Management reveals that the slow growth of concrete machinery was due to (1) delay of the delivery of some concrete pump stations; (2) revenue decline in overseas due to COVID-related lockdown; (3) lower ASP of concrete trucks due to the cost savings from the use of more domestic chassis. Gross margin of concrete machinery expanded 0.3ppt to 27.7% in 1H20, due mainly to cost reduction.
- Gross margin has been stabilized since Jun. Blended gross margin in 2Q20 reduced by 1.2ppt YoY to 28.8%, due to (1) a change in product mix; and (2) more discount for orders taken during 1Q20 due to COVID-19 which affected the margin in 2Q. Management revealed that ASP started to stabilize in Jun with gross margin trending up in Jun and Jul.
- Excellent operating cost control. In 2Q20, distribution expense ratio dropped 2.7ppt YoY to 6.1%. Besides, decline in finance expense helped boost the net margin by 3.2ppt YoY to 15.2% in 2Q20.
- Resumption of dividend payment. Zoomlion did not propose dividend payment after the release of 2019 results. This time, the Company proposed interim dividend of RMB0.21 per share, which is scheduled to be distributed in late Oct 2020. To recap, Zoomlion plans to distribute at least RMB0.317 per share dividend (per year) in 2020E-22E, according to the announcement of A-share placement plan released in Jul.
- A-share placement progress. Zoomlion is currently in progress to prepare the documentation. The Company plans to submit the materials to CSRC in mid-Sep. The actual date of placement will depend on CSRC’s approval progress.
