3Q20 results in line with our forecast
　　Zoomlion Heavy Industry announced its revenue and attributable netprofit rose 42.5% and 63.4% YoY to Rmb45.24bn and Rmb5.69bn over1–3Q20, in line with our forecast. In 3Q20, revenue increased 72.9%YoY to Rmb16.42bn, and attributable net profit rose 84.6% YoY toRmb1.67bn thanks to growth in main businesses and a decline inexpense ratio.
　　Gross margin declines YoY; expense ratio continues to fall.
　　Zoomlion’s gross margin dropped by 2.4ppt YoY to 27.0% in 3Q20 andby 1.3ppt YoY to 28.5% in 1–3Q20 due to changing product mix andintensifying competition. In 3Q20, sales expense ratio fell by 1.9pptthanks to innovative marketing, G&A expense ratio dipped by 0.5pptas the firm strengthened digitization of its information system, andfinancial expense ratio dropped by 3.3ppt thanks to a decline ininterest-bearing liabilities and fluctuations in forex rates. Net marginof the firm rose by 0.6ppt YoY to 10.2% in 3Q20 and by 1.6ppt YoY to12.6% in 1–3Q20. Profitability continued to improve.
　　Operating cash flow increases QoQ; operational quality continuesto improve. Zoomlion focuses on steady development, and its growthof accounts recoverable is aligned with business growth. In 3Q20, netoperating cash flow increased 82.9% YoY and Rmb1.38bn QoQ toRmb2.54bn.
　　Trends to watch
　　Strong performance across various segments; Zoomlionoutperforming the industry in growth. Revenue of the firm totaledRmb45.24bn over 1–3Q20. We expect revenue to rise over 30% YoYto about Rmb23bn for crane machinery, grow more than 40% YoY toRmb13.5bn for concrete machinery and rise about 300% YoY toRmb1.6bn for excavating machinery.
　　See page 3 for details.
　　Financials and valuation
　　Zoomlion’s 3Q20 results are in line with our forecast, and itscompetitiveness has continued to improve. We maintain our 2020 and2021 earnings forecasts. Zoomlion A-share is trading at 8.3x and 6.9x2020e–2021e P/E, and H-share at 6.8x and 5.7x 2020e–2021e P/E. Wemaintain OUTPERFORM on A-shares and H-shares and TPs of Rmb11.33(11x 2021e P/E with 53% upside) and HK$11.55 (10x 2021e P/E with 69%upside).
　　Risks
　　Disappointing downstream demand; intensifying competition.