Zoomlion (A):Long and winding recovery;credit risk priced in;reinstate at Neutral

We remove the Not Rated designation from Zoomlion. We have a Neutralrating on Zoomlion A/H with a 12m TP of Rmb4.8/HKD3.0, implying 4/5%upside. We expect the company’s concrete/crane machinery to record adecline of -21%/-26% yoy in 2016 before recovering to 2%/8% growth in2017 due to their late-cycle nature and less favorable exposure to propertyconstruction which we expect to normalize into 2016 year-end. We remainpositive on Zoomlion’s environmental growth, supported by its balancesheet-driven investment business and agricultural machinery gross marginexpansion as the company penetrates higher-end markets.

With Zoomlion A/H’s 12-m fwd P/B at 0.9/0.5x, both 1-STD below historicalaverage of 1.6/1.2x despite recovering earnings, we see market’s biggestconcern still on Zoomlion’s Rmb58bn on/off-balance sheet receivable riskvs. equity at Rmb38bn. However, if we assume that the market valuesZoomlion at mid-cycle P/B after write-off, the current A/H valuation implies31%/42% more provision on Zoomlion’s construction machinery (CM)receivable and inventory, or 52%/69% default rate with a 40% salvagevalue on defaulted machines. With 46% of Zoomlion’s CM receivable overtwo years aging, overdue for more than 1 year or off balance sheet, we seeits credit risk as fairly priced in and reinstate Zoomlion A/H at Neutral.

We revise our 2016E/17E/18E EPS from Rmb0.01/0.03/0.05 to Rmb-0.05/+0.01/+0.08 on updated revenue assumptions, severance fee in2016/17E given ongoing capacity cuts, and updated forex forecasts.