Reiterate BUY. We are more bullish on Zoomlion given: (1) High certainty on concrete machinery growth in 2021E; (2) Explosive growth of excavator sales; (3) Resilient margin outlook. We raise our 2020E-22E earnings forecast by 6-7% after modelling higher sales volume across different segments. We believe the consensus remains conservative and our new net profit forecast for 2021E/22E are 13%/15% above that. We raise our TP from HK$10.5 to HK$16.0, based on 12x 2021E (up from 10x). Key catalysts: (1) strong machinery sales in 1Q21E, (2) completion of share placement in 1Q21E.
- 2020E preliminary results. Zoomlion released a positive profit alert last week, stating that net profit in 2020E is expected to grow 60-72% YoY to RMB7.0-7.5bn. This implies net profit of RMB1.3-1.8bn in 4Q20E, up 46%-102% YoY. We estimate Zoomlion achieved revenue of RMB20bn from concrete machinery (+44% YoY) and RMB35bn from crane machinery (+58% YoY) in 2020E. Besides, we believe gross margin in 4Q20 rebounded QoQ, helped by cost control.
- High certainty on concrete machinery growth in 2021E. Zoomlion expects the industry growth rate of concrete machinery to reach 15%, driven by 10-20% of growth of pump truck and 20% growth of mixer truck. Zoomlion sees high certainty on concrete machinery as many infrastructure projects will enter the construction stage this year after the completion of earthworks in 2020. Besides, the implementation of National Emission Standard (NES) VI starting in Jul 2021 will continue to boost replacement demand.
- Explosive growth of excavator to continue. We estimate Zoomlion delivered 7k units of excavator and generated RMB2.5bn revenue in 2020E. Zoomlion targets to achieve 12-14k units of excavator sales in 2021E, representing a substantial growth YoY. For medium size excavators, Zoomlion is able to leverage its existing sales network for concrete machinery to speed up the penetration. Besides, Zoomlion, for the first time, delivered large size excavators (45-48t) starting this year. Zoomlion maintains its strategic target to become the top 5 player in China in 3 years and top 3 player in 5 years.
- Huge potential on aerial working platform (AWP). We estimate Zoomlion achieved 100% YoY growth on AWP sales in 2020E. Zoomlion believes that it has competitive edge on boom lifts and therefore capable to achieve higher ASP than competitors. Zoomlion sees strong growth potential for the industry as a whole and the Company will continue to enhance its product development and sales strategy.
- Resilient margin outlook. We believe Zoomlion achieved gross margin improvement in 4Q20. Going forward, we expect the gross margin for each business line to remain resilient. More importantly, the growing sales volume and digital transformation will drive operating leverage, resulting a higher operating margin going forward.
