We are convinced by Zoomlion’s impressive global expansion strategy. On the product side, the offering of full range of machinery through an effective direct sales model enables Zoomlion to penetrate different key markets in overseas. On regions, the priorities on emerging economies such as the Middle East, Middle Asia and Southeast Asia over Europe and North America make it subject to less geopolitical risks. With overseas revenue mix rising to 48% in 1Q24 (vs only <10% three years ago), and with only 15% of machinery sales related to property investments in China (vs >40% three years ago), Zoomlion is set to ride on a new structural growth trajectory. We revise up our 2024E-26E earnings forecast by 12%-14%, driven by higher assumptions for overseas sales and gross margin. Our TP for Zoomlion A/H is revised up to RMB11.6/HK$7.5. Upgrade to BUY from Hold.

Key highlights in 1Q24 results. Revenue grew 13% YoY to RMB11.7bn, driven by overseas growth (+53% YoY to RMB5.7bn) that offset the weakness in China (-9% YoY to RMB6.1bn). Overseas revenue accounted for 48% in 1Q24 (up from 36% in 1Q23), reaching a record high. Blended gross margin expanded 2.3ppt YoY to 28.7%, as gross margin in overseas (>33%) was higher than that in China. Selling & distribution expense ratio increased 0.9ppt YoY to 7.4%, due to more overseas businesses. R&D expense ratio dropped 0.5ppt YoY to 5.7%. Net profit grew 13% YoY to RMB916mn. Operating cash inflow increased 7% YoY to RMB307mn.

Emerging business segments saw strong growth in 1Q24. Excavator: +40% YoY, AWP: +35% YoY, agricultural machinery: +150% YoY, mining machinery: +7x YoY on low base. For traditional segments, overseas revenue growth significantly outpaced domestic sales in 1Q24 (Overseas truck crane: +50%, tower crane: +70%, concrete machinery: +1x)

Excavators outperformed the industry trend. Excavator revenue (+40% YoY) emerged as the second largest segment in 1Q24, which is impressive compared with the weak industry sales (-13% YoY). Management explained that the success comes from the focus on large-size excavators. Besides, the advanced manufacturing capacity enhanced the capability of offering high value added models. The segment gross margin in 1Q24 was ~30% (overseas: 32-33%).