Zoomlion:First Look,FY12Results

Implications:Zoomlion's FY12sales were up +3.8% (-6.9% below our estimates and -6.7%belowconsensus). EPS wasRmb 0.95 vs. our estimates of Rmb 1.14 and consensus of Rmb 1.12. Gross margin of 32.3% was 10bps below FY11.We expect investors to react negatively to the bottom-line miss andthe increase in overdue finance lease receivables (9.3% vs. 2.1% in 2011) andexpect the stock to trade downslightly on the back of today's resultsand over the next couple of days given impending broker downgrades.We maintain our Position Closed/Neutralratingfor now.

FY12 Results:Reported EPS was Rmb 0.95versus Rmb 1.05in FY11, Rmb 0.19 below our estimates and Rmb 0.16below consensus.Sales were Rmb 48,071mil (+3.8%), Rmb 3,572 milbelow our estimateand Rmb 3,434 milbelow consensus. Strength in Concrete Machinery (+11.2%Y/Y),Environmental & Sanitation Machinery (+1.9%Y/Y), EarthWorking Machinery(+116.5% Y/Y) and Financial Lease Interest Income (+1.1% Y/Y) was partially offset by weaker than expected Crane Machinery (-9.5% Y/Y), RoadConstruction & Pile Foundation Machinery(-10.3% Y/Y), Material Handling Machinery & Systems(-41.7% Y/Y) and Others(-3.3% Y/Y). Relative to our estimated P&L, lower than expected sales, lower gross margins, lower other income and higher administrative expenses were offset by higher than expected sales & distribution expenses, higher R&D, higher net financial interest expenses to deliver EPS of Rmb 0.95. See Figures1 & 2 on pages2and 3for details.

Balance Sheet Review:Looking at the company's balance sheet, the amount total past due for receivables under finance lease climbed to 9.3% compared to 2.1% in 2011. Tradereceivables increased +46.5% Y/Y. We continue to monitor the company's A/R andFinance Lease Receivables as a lengthening repayment cycle, potential loandefaults and any deterioration in customer credit quality could negatively impactthe company.

Investment Recommendation:Our 12-month price target for Zoomlion of HK$8.50 is based on 6.0X our 2013E diluted EPS of RMB1.14.

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