ZOOMLION(000157)：1H24 EARNINGS BELOW EXPECTATION; GROWTH OF EMERGING MARKETS ON TRACK

　　Zoomlion’s overseas sales remained strong in 2Q24 but were more than offset by the weakness in China. We calculate that the core profit in 1H24 (after excluding gains on asset disposal) dropped 18% YoY to RMB1.65bn. We revise down our 2024E-26E earnings forecast by 9.6-10.0%, after incorporating the weak demand for concrete machinery and cranes in China, as well as higher distribution expenses due to overseas expansion. That said, we remain positive on Zoomlion’s overseas strategy with priorities on emerging economies such as the Middle East, South America and Southeast Asia. Our TP for Zoomlion A/H is revised down to RMB10.5/HK$6.8 with 2024E target P/E multiple unchanged at 22x/13x. Maintain BUY.
　　2Q24 earnings helped by gains on disposal of assets. Revenue in 2Q24 dropped 7% YoY to RMB12.7bn, as the decline in China’s revenue (-29% YoY to RMB6.4bn) offset the growth overseas (+37% YoY to RMB6.3bn). Overseas revenue accounted for 50% of revenue in 2Q24 (up from 34% in 2Q23), reaching a record high. Blended gross margin contracted 1ppt YoY to 28%. Selling & distribution expense ratio increased 0.7ppt YoY to 8.1%, due to more overseas and emerging businesses. R&D expense ratio dropped 1.9ppt YoY to 5%. Administrative expense ratio increased 2.5ppt to 7.8% due to the recognition of share incentive expenses. Net profit grew 12% YoY to RMB1.37bn, but was largely helped by an RMB636mn gain on assets disposal due to plant relocation. In 1H24, revenue grew 2% YoY to RMB24.5bn. We estimate the adjusted net profit (excluding the disposal gain) in 1H24 dropped 18% YoY to RMB1.65bn.
　　Overseas growth remains exciting. Overseas revenue surged 44% YoY to RMB12bn in 1H24, driven by (1) ~33% growth of concrete, tower crane and truck crane, (2) ~100% growth of emerging business. Zoomlion sees Southeast Asia, the Middle East and Russia as the tier-one markets (20% YoY growth in 1H24, 60% of total overseas sales), as these regions are similar to China in the way that products are subject to less modification. Tier-two markets include South America, India and Africa, where growth doubled in 1H24 (25% of overseas sales). Tier-three markets include Europe, North America, Australia and New Zealand (double YoY in 1H24 on low base, 15% of overseas sales). These developed markets have higher requirements on brand, products and after-sales services.
　　13 factories outside China. Zoomlion’s construction of factories in Turkey, Mexico and India has been gradually completed. Zoomlion currently has 13 factories overseas, with a potential annual output value of RMB10bn.
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