ZHEJIANG DINGLI(603338)：LOWER EARNINGS FORECAST BUT STRUCTURAL STORY STILL INTACT

We trimmed our earnings forecast for 2019E-21E by 4-6% following the release of a set of disappointing 2Q19 results. We believe the weak results have been priced in after the 10% share price decline yesterday. We maintain our constructive view on the aerial working platform (AWP) industry, due to the rising labor cost that will continue to drive the replacement of labor in China. Our TP is revised down to RMB72, based on unchanged target multiple of 30x (2020E)。

    Recap on 1H19 results. Net profit in 1H19 increased 27% YoY to RMB260mn. Revenue in 1H19 increased only 8% YoY, dragged by a 54% YoY revenue decline in North America despite a 35% increase in China market. In 2Q19, revenue dropped 2% YoY and net profit increased 18%, but was mainly driven by (1) the growth of higher margin income from finance leasing; and (2) increase in net finance income, which we do not consider as high quality growth components.

    Still structurally positive. Our discussion with the Company suggested the end user demand remains resilient in North America, despite a more conservative procurement strategy taken by the Company’s clients (i.e. finance leasing companies)。 While the AWP demand in the North America will likely be hit by the uncertain development of trade disputes in the near term, we expect China market will continue to offer multi-year growth opportunity.

    Earnings change. We revised down our sales volume forecast for 2019E- 21E by 8-9% as we are now more conservative on the North America market. We raised our finance lease income assumptions as the Company will continue to boost sales through its own finance leasing subsidiaries. We took our earnings forecast for 2019-21E down by 4-6% accordingly.

    Major risk factors: (1) more new entrants in the AWP market; (2) uncertainty on China-US trade disputes; (3) weaker-than-expected construction activities in China.