2019 results in line with our expectationsZoomlion Heavy Industry announced its operating revenue rose50.9% YoY to Rmb43.307bn and attributable net profit grew 116.4%YoY to Rmb4.371bn （or Rmb0.56/sh） in 2019, largely in line with ourexpectations. 4Q19 revenue rose 50.8% YoY to Rmb11.552bn and netprofit increased 24.4% YoY to Rmb892mn.
　　Revenue increased markedly; gross margin rose YoY. In 2019,revenue grew 36.8% and 77.6% YoY to Rmb13.9bn and Rmb22.15bnfor concrete and hoisting machinery, with gross margin rising by3.4ppt and 2.7ppt YoY to 27.4% and 32.8% on economies of scale andimproved product mix. Zoomlion’s gross margin expandedsignificantly by 2.9ppt YoY to 30.0% in 2019.
　　See page 3 for details.
　　Trends to watch
　　1Q20 operations to remain stable; 2020 domestic demand still likelyto grow. We think Zoomlion’s revenue may remain flat YoY in 1Q20,with a slight YoY decline in construction cranes and mild YoY growthin concrete machinery and construction cranes. Given relaxed fiscaland monetary policies, we expect downstream constructionmachinery demand to be stable in 2020, helping Zoomlion’s revenueand earnings to remain stable or rise mildly.
　　Financials and valuation
　　Given the impact from COVID-19, we lower our 2020 and 2021 EPSforecasts 8.0% and 6.7% to Rmb0.65 （+17.3% YoY） and Rmb0.76（+17.3% YoY）。 Zoomlion-A is trading at 8.7x 2020e and 7.5x 2021eP/E. Zoomlion-H is trading at 7.5x 2020e and 6.4x 2021e P/E. Wethink the valuations are slightly low. Given the revised earningsforecasts, we cut our TP 8% to Rmb7.19 for Zoomlion-A （11x 2020eand 9x 2021e /E, 26% upside） and 8% to HK$7.34 for Zoomlion-H （10x2020e and 8.6x 2021e P/E, 30% upside）。 Maintain OUTPERFORM.
　　Risks
　　Lower-than-expected downstream demand; intensifying competition.