Zoomlion (1157.HK): China January Excavator Data Distorted By Timing; Trimming Zoomlion Estimates

What’s New:Chinese excavator sales for January were down -9.3% Y/Y, compared to +20.1% Y/Y in December and +19.8% in November. Recall that in May 2013, China excavator sales grew +6.1% Y/Y -the second positive month of Y/Y growth since April 2011. For 2013, excavator sales declined approximately -3.0%.

Conclusion:Unsurprisingly, excavator data for January was distorted by fewer selling days thismonthcompared to last January given the distortion in the timing of Chinese New Year’s. For February, this trend should reverse given more selling days, which should add to organic growth. That said, we will unlikely see an apples-to-apples comparison until March given the selling day differentials. We retain our positive stance on Lonking given exposure to a nicely recovering early-cycle loader/excavator market. Lonking remains well positioned for growth in its key end-markets withmargin upside underpinned by cost cutting initiatives.

Trimming Zoomlion Estimates:Following our recent field trip to China in January, where we met with representatives from the construction equipment industry, we make adjustments to our Zoomlionmodel. We still see some headwinds over the first six months of the year given a weaker demand environment for its key late-cycle business in Concrete Machinery. We cut our top-line estimates by -1% to -5% and our EPS forecasts by -4% to -5% for 2013-15E(see page 2 for details). Given the limited up/downside to our price target, we maintain our Neutral recommendation for now.

Investment Recommendation:Our 12-month price target for Zoomlion of HK$6.25(previously HK$7.25)is based on 6.5x our 2015E dilutedEPS of Rmb0.78 (previously Rmb0.82).

Risks To Our Price Target: (1) Stronger than expected industry growth; (2) Stronger than expected market share gains; (3) Faster than expected inventory destocking; (4) Faster than expected rebound in concrete machinery sales; and (5) Better than expected FAI spend.