Changsha Zoomlion Heavy Industry (1157 HK)
Current shareprice: HKD5.59
Target price: HKD5.75
Potential yield: +3%
We maintain a BUY action on this counter. Let’s take a look at the insights of the technology company.
Zoomlion Heavy Industry Science And Technology Co., Ltd. is principally engaged in the research, development, manufacture and sales of engineering equipment, environmental sanitation equipment and agricultural equipment. The Company operates through four segments. The Engineering Equipment segment includes concrete equipment, lifting equipment, earthmoving equipment, foundation construction equipment, road construction equipment and forklifts, which mainly serve the construction of infrastructure and real estate. The Environmental Industry segment is engaged in the production of sanitation equipment, as well as environmental management investment and operating business. The Agricultural Equipment segment consists of farming machinery, harvesting machinery, drying machinery and agricultural machinery, among others. The Financial segment provides financial leasing and other financial services.
Revenue and profits:
Changsha Zoomlion Heavy Industry (Zoomlion) reported a 3Q19 net profit of more than Rmb890m, up 98%. 9M19 net profit continued to surge by 160%, beating Bloomberg consensus and our forecasts. Decent revenue expansion sustained, as the company maintained decent revenue growth of 50% in 3Q19, indicating robust downstream demand for the company’s key products, particularly tower cranes, pump trucks and truck cranes etc. Meanwhile, R&D expenses in 9M19 surged by 90% to Rmb730m.
Improvements in working capital:
We are glad to see that the company has achieved significant improvements in its working capital management. Cash conversion days in 9M19 shortened to 256 days from 414 days in 9M18, among which account
receivable/inventory days declined by 113/26 days while account payable days extended by 18 days. We believe the more stringent receivable collection policies and higher upfront payment requirements are the main reasons behind these improvements.
Strong momentum to sustain into 4Q19 and 2020. Riding on the infrastructure FAI stimulus, the company is expected to sustain its strong sales momentum in 4Q19 and 2020, in our view. Meanwhile, the company’s tower crane business is set to benefit from upgrading demand from the fast-growing prefabrication construction business in the next few years. Thus, we believe Zoomlion will likely deliver above-guidance contribution from the tower crane business in 2019/20, leveraging its dominating market position in the high-end large tower crane market.
Favourable product mix to benefit from late-cycle products’ up-cycle. We reiterate our view that late-cycle construction machinery products (concrete machinery and crane machinery) will continue to deliver robust growth in 2019-20, given: a) the sequence of their positioning in the process of construction activities, and b) relatively longer life span. We believe Zoomlion is a major beneficiary of this up-cycle, given its late-cycle-skewed product mix.
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*** This report is neither an offer nor the solicitation of an offer to sell or purchase any investment. Comments are based on information obtained from sources believed to be reliable but FIDES ASSETS makes no representation and accepts no responsibility or liability as to its completeness or accuracy.