1H20 results in line with our expectationZoomlion announced 1H20 results: Revenue rose 29.5% YoY toRmb28.82bn and attributable net profit increased 56.0% YoY toRmb4.02bn, in line with our expectation. The domestic constructionmachinery sector trended upward in 2Q20, driven by equipmentupgrades and rising domestic demand. The firm’s 2Q20 revenueadvanced 49.2% YoY to Rmb19.76bn and attributable net profit gained90.1% YoY to Rmb2.99bn (Rmb0.38/sh).
　　Strong performance across various segments; market share rising.
　　1Q20 revenue rose 39.4% YoY for crane machinery, 15.3% for concretemachinery, 33.9% for other machinery and products, 15.8% foragricultural machinery and 25.1% for financial services. Specifically,Zoomlion’s core products enjoy core competitive edges and theirgrowth leads the sector. 1H20 gross margin fell 0.6ppt YoY to 29.4%due to changing product mix and price competition. Gross margin ofcrane machinery and other machinery fell 0.9ppt and 4.4ppt YoY, butcould stabilize in 3Q20, in our opinion.
　　Financial expenses plunging; net margin reaching a new high. 1H20sales, G&A and financial expense ratio fell 1.8ppt, 0.9ppt and 2.6pptYoY. Zoomlion continued to reduce debts, with end-1H20 short-termand long-term borrowings down 56.6% and 16.0% YoY. 1H20 netmargin rose 2.4ppt YoY to 13.9%, a new high since 2014. We expectfull-year net margin to rise over 2ppt YoY to 12-13%.
　　High payout ratio rewarding investors. Per ten shares, Zoomlionannounced a Rmb2.10 dividend (including tax), implying total cashdividend of Rmb1.66bn, payout ratio of 41.3% and A-share andH-share dividend yields at 5.0% and 5.9% (including tax).
　　Trends to watch
　　Strong advantages in traditional business; new products ramping up.
　　1H20 sales volume of truck crane rose over 30% YoY, with market sharerising 3ppt. Revenue of crawler crane doubled YoY; the firm holds asolid No.1 market share in China. 1H20 excavator sales volume andrevenue exceeded 3,000 units and Rmb1.0bn; we expect its full-yearmarket share to exceed 3% in 2020.
　　Financials and valuation
　　Given in-line 1H20 results, we keep our 2020-2021 earnings forecastunchanged. Zoomlion A-shares and H-shares are trading at10.0x and8.5x 2020e P/E. Given valuation rollover, we raise TPs of A-shares28.8% to Rmb11.33 (11x 2021e P/E with 35.9% upside) and H-shares30.4% to HK$11.55 (10x 2021e P/E with 43.5% upside). MaintainOUTPERFORM on Zoomlion A- and H-shares. Risks: Disappointingdownstream demand; intensifying competition.