Zoomlion’s 3Q20 profit is solid (+85% YoY) and management’s post-results comments on demand (+10% QoQ in 4Q20E) and margin (to improve sequentially) suggest that the business outlook remains favourable. We believe the recent share price pullback on concerns over margin was overdone and we see this as good buying opportunity. We slightly took our 2020E-22E earnings forecast down by 2-4% after modelling higher sales volume but more conservative margins. We fine-tuned our TP from HK$11.2 to HK$10.5, after rolling over our base year to 2021E with a target multiple of 10x (previously 12x 2020E P/E). Maintain BUY.
- Key highlight on 3Q20 results. Net profit in 3Q20 surged 85% YoY to RMB1.67bn, within the range of profit alert (RMB1.48-1.78bn) released in mid-Oct. Revenue grew 73% YoY to RMB16.4bn while gross margin narrowed 2.4ppt YoY and 1.8ppt QoQ to 27%. Net operating cash inflow increased by 58% YoY to RMB2.6bn in 3Q.
- Strong growth across all segments. In 9M20, concrete machinery and crane revenue increased by 34% YoY and 44% YoY, respectively, to RMB13.7bn and RMB23.6bn. Agricultural machinery revenue grew 35% YoY. For new business lines, revenue from excavator surged 244% YoY while revenue from aerial working platform (AWP) grew 60% YoY.
- Gross margin to rebound in 4Q20E. Gross margin contraction in 3Q20 was due to: (1) higher sales of smaller size truck cranes and tower crane that carried lower margin; (2) higher growth of concrete mixer (lower margin) than the concrete pump; (3) fast growing AWP and excavator which had lower margin (though improving), compared with the existing business. That said, management is confident of achieving better margin in 4Q20E, as (1) new business margin keeps improving, and (2) the Company’s central procurement policy started in 3Q20 will help reduce cost going forward.
- Positive outlook in 4Q20E and 2021E. Management believes that solid infrastructure and property investment, together with the replacement of labour and strict environmental protection policies are all favourable drivers. Besides, large players are beneficiaries of rising industry concentration. Management believes that this round of upcycle will be stronger than the previous one.
