A leader in the construction machinery industry in the context of state-owned assets, building core competitiveness from the top down.

Established in 1992, Zoomlion Heavy Industries was born out of Construction Minister Sha Construction Machinery Research Institute. It has now grown into one of the leaders in the domestic construction machinery industry. In 2023, the company ranked 3rd in the domestic construction machinery industry and 12th in the global construction machinery industry. Reviewing the company's development history, we believe that the alpha attribute of the company's differentiated competition is fundamentally due to ① the modern governance mechanism shaped under the mixed ownership system and ② the “end-to-end” direct sales model of innovation and transformation. Under the leadership and command of the company's superstructure, the competitiveness of the company's lower-level business continues to improve, and is ultimately realized as a strong growth momentum for the “international market+emerging business”.

Top-level structure: A model for mixed ownership enterprises, successfully building a modern governance mechanism.

The company completed mixed ownership reform in 2012 and became a mixed ownership enterprise in the context of state-owned assets, forming a diversified shareholding structure bordered by state-owned capital, foreign capital, management, and war investors. In the first half of 2024, the Hunan Provincial State-owned Assets Administration Commission indirectly held 14.48% of the company's shares, and the company's management and employees held 20.25% of the company's shares (including the A+H employee shareholding platform). While the state-owned asset position was stable, management and employees fully held shares. At the same time, the company's board of directors has a balanced structure, which is jointly structured by “1 management+1 state-owned assets representative +1 war investment representative + 4 sole directors”. Company ownership and management rights are organically combined to create a modern governance mechanism where the interests of state-owned assets, management, and small and medium shareholders are highly consistent.

Business model: Build an “end-to-end, digital and localized” overseas direct sales system.

The company first started the “end-to-end, digital” transformation of the direct sales model in the domestic market. After the operation matured, the new “localized” kernel was transferred to overseas markets, and eventually formed an overseas direct sales model with “Zhonglian characteristics”. With this model, the company realizes direct connection between headquarters and customers, and integrates management of business processes such as R&D, production, service, risk control, etc., which ultimately translates into the company's high profitability and healthy asset quality.

In 2023, the gross margin of the company's overseas business reached 32.23%, leading the industry in profitability; the sales expense ratio was 7.56%, and the construction cost of the direct sales model was manageable; the total bad debt accrual ratio of accounts receivable was 17.97%, of which 7.12% were combined accounts and 10.85% per item. The quality of the company's assets remained healthy, and the “end-to-end” business model showed the advantages of the “end-to-end” business model for accurate assessment of account risk.

International expansion and emerging strategic businesses are the driving force for the company's growth.

1) International expansion: With unswerving implementation of the direct sales model, the company's overseas revenue grew by leaps and bounds in 2020-2023, growing from 3.832 billion yuan to 17.905 billion yuan, with a 3-year CAGR of 67.18%; 2024H1 overseas revenue was +43.9% year-on-year, accounting for 49.11% of overseas revenue. With the differentiated competitive route of the direct sales model, the company's overseas revenue growth is good, and it has a latecomer advantage over the industry.

2) Emerging strategic business: While the company's traditional dominant business position for cranes and concrete machinery is stable, the company is actively expanding strategic emerging businesses such as earthmoving machinery, aerial machinery, agricultural machinery, and mining machinery. In 2023, it achieved 66.48, 5.707, 2.092, and 0.8 billion yuan respectively, with a year-on-year ratio of +89.29%, +24.17%, -2.15%, and +140%, respectively, with strong growth momentum. Among them, earthmoving machinery, represented by excavators, bucked the trend, making up for the company's pro-cyclical growth elasticity; high machinery grew rapidly and ranked 7th in the world in 2023; agricultural machinery strengthened R&D, and product strength gradually increased, 2024H1 revenue was +112.41% compared to the same period; mining machinery accelerated development and entered a trillion-level race track. The comprehensive development of the company's emerging strategic business is expected to become an important driving force for the company's future growth.

Investment advice: We expect the company's revenue in 2024-2026 to be 50.27, 58.56 and 68.7 billion yuan respectively, with growth rates of 6.8%, 16.5% and 17.3% respectively, net profit of 4, 5.43 and 6.7 billion yuan respectively, with growth rates of 14.2%, 35.7% and 23.3% respectively; corresponding PE is 15.5X, 11.4X and 9.2X respectively; the market share of the company's traditional business is stable, which is expected to fully benefit from the recovery of industry demand; Turkey, high-altitude, agriculture and mining Emerging businesses such as machinery inject new momentum into the company's growth. The “end-to-end” direct sales model helps the company continue to better explore the international market and has outstanding growth; given a buy-A investment rating, the target price for 12 months is 8.82 yuan, which is equivalent to a dynamic price-earnings ratio of 14X in 2025.

Risk warning: Domestic demand recovery falls short of expectations, risk of global macroeconomic fluctuations, increased risk of trade friction, increased risk of competition in traditional business markets, risk of emerging business expansion falling short of expectations, overseas business expansion falling short of expectations, profit forecasting assumptions falling short of expectations.