Zoomlion Expects Profit to Rise on Environmental-Gear Revenue

Zoomlion Heavy Industry Science & Technology Co. (000157), China’s second-largest maker of construction gear, expects to increase profit this year as it boosts sales of environmental machinery and equipment.

Zoomlion plans to increase revenue from environmental machinery and equipment to as much as 4 billion yuan ($652 million) annually from more than 1 billion yuan at present after it opens an industrial park in the second half of the year, Vice-President Sun Changjun said in an interview at its headquarters in Changsha, China.

“The industry could be as big as construction machinery in the long term,” Sun said. “We really feel like the sector could provide huge growth potential for our company in the next few years.”

The company got 94 percent of its revenue from China in 2012, with concrete machinery accounting for almost half, according to data compiled by Bloomberg. Zoomlion plans to raise sales from outside China to 30 percent in three to five years, through acquisitions or cooperating with overseas businesses, Sun said, declining to identify targets.

Profit Warnings

This year’s profit “should be better than that of 2012 from what we can see now, as our comparison base from last year was quite low,” Chairman Zhan Chunxin said. Zoomlion posted a profit of 7.3 billion yuan last year.

Zoomlion reported earnings of 591.8 million yuan in the first quarter, and has to post a net income of at least 2.2 billion yuan in the second to avoid issuing a profit warning, required under Hong Kong exchange rules. Companies listed in the city must give profit warnings if net income is expected to decline by more than 50 percent from a year earlier.

The construction-gear maker’s profit for the first six months of 2012 was 5.62 billion yuan.

Zoomlion, 16.2 percent owned by the government of Hunan province, and larger competitor Sany Heavy Industry Co. (600031) face declines in orders as China’s slowing economic growth and government curbs on the property market sap demand.

Economic growth in China has stayed below 8 percent for the past four quarters, the first time that has happened in at least 20 years.

Cash Crunch

Chinese companies face a cash crunch in the banking system as the nation’s clampdown on excessive short-term borrowing sent the overnight repurchase rate to a record 13.91 percent last month. The worst cash squeeze in at least a decade has eased after the central bank pumped capital into some finance companies.

Zoomlion has been buffered from the credit squeeze by a strong balance sheet, Hong Xiaoming, Chief Financial Officer, said in the interview.

“We have about 140 billion-yuan credit lines from major Chinese banks that we haven’t used,” Hong said.

Zoomlion’s Hong Kong-traded shares have slumped 55 percent this year, compared with an 8 percent drop for the benchmark Hang Seng Index. Its shares in Shenzhen trading dropped 43 percent.

“The share prices, in my opinion, are undervalued compared with the fundamentals of our company,” said Shen Ke, board secretary.

To contact the reporter on this story: Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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