Leading hydraulic roof support producer in China. Zhengzhou Coal Mining Machinery Group (ZMJ) is one of the largest coal mining machinery manufacturers in China, based on 2011 revenue with market share of22.6%, nearly equal to the combined share of the second to fourth largest HRS producers. Capitalizing on its high quality products and rapid expansion plans to meet the market demand, we believe that ZMJ’s leading status is unlikely to be challenged.
Robust growth ahead for China’s coal mining machinery demand. We forecast demand for domestic coal mining machinery to surge at 19.3% CAGR during 2011-15E, driven by: (i) demand for new mining capacity;
ii) demand from equipment replacement; (iii) demand due to higher mechanization of coal mining; and (iv) demand from overseas. In particular, In 2015E, we estimate that demand for equipment replacement and upgrade will surpass Rmb70bn and account for 66.7% of the total.
Adding long term growth driver to enhance revenue mix. Leveraging on:(i) 40% capacity expansion from the ne w production plant; (ii) competitive products with high safety standard and well-supported by after sales services; (iii) leading R&D capability; an d (iv) strong financials, we forecast ZMJ’s could easily stand out from its competitors and achieve a 2011-14E revenue CAGR of 29.4%. In 2012-14E, we project that ZMJ’s net profits will increase to Rmb1.6bn/1.9bn/2.2bn (up 35 %/16%/17% yoy, respectively).
Initiate coverage with a BUY; TP HK$14.02/share. Our target price of HK$14.02/share is based on our DCF model (at WACC: 12.6%), translating into 9.8x 2013E PER. Trading at only 8.0x 2013E PER, ZMJ is trading at 20% discount to its peer Sany Int’l (00631.HK), which is trading at 9.7x 2013E PER. We are of the view that the discount is unjustified given: (i) ZMJ’s leading position in HRS; and (ii) robust growth ahead. A better disclosure of order book would be a major re-rating catalyst to ZMJ. All told, we initiate coverage with a BUY recommendation.