We believe the share price pullback yesterday (~5%) following the report of solid earnings in 2020 and strong profit growth in 1Q21 (up 114-153% YoY) is unjustified. In contrast to the negative market response, the upbeat management guidance prompted us to revise up our 2021E/22E earnings forecast by 6%/12% (10%/17% above consensus). We lift our TP from HK$16.0 to HK$16.8, based on unchanged 12x 2021E. Key catalysts: (1) strong machinery demand in 1H21E; (2) upward revision of consensus forecast.
- Agricultural machinery & intelligent agriculture the new growth drivers. Agricultural machinery revenue surged 67% to RMB2.6bn (4% of revenue) in 2020, the highest growth segment among all. Segment gross margin significantly expanded 12.5ppt YoY to 16.8% in 2020. Management expects significant room of import substitution in the agricultural machinery industry over the coming years. At present, large-size tractors (horsepower 230 or above) are dominated by foreign brands. Zoomlion is well prepared to launch the large-size tractors and combined harvesters in 2021E-22E. Besides, Zoomlion has accelerated the development of intelligent agriculture which is expected to drive further growth. Zoomlion targets to deliver 30-35% agricultural machinery revenue growth in 2021E.
- Explosive growth of excavator and aerial working platform (AWP). Zoomlion generated RMB3bn revenue from excavator in 2020 and targets to achieve 80% YoY growth in 2021E. In 2Q21E, Zoomlion targets to achieve 100-150% YoY growth of excavator revenue and >150% growth of AWP.
- Solid growth of concrete machinery and crane. Zoomlion targets to achieve 30-40% YoY growth of concrete machinery sales in 2Q21E. Truck crane / tower crane are expected to grow 25% / >40% YoY in 2Q21E. Zoomlion is confident of the growth of tower crane, driven by the replacement cycle of tower crane (2021E-23E) as well as the rising application of pre-cast construction.
- Measures to ease cost pressure. Zoomlion will continue to centralize the procurement. For pump truck, domestic low-cost chassis already accounted for 60% of the supply and the ratio will further increase in 2021E. Besides, Zoomlion has started to revise up ASP for mixing stations. For tower crane, Zoomlion believes that higher steel cost will likely speed up the industry consolidation given the lack of competitive power of small players.
