Zhejiang stock target cut by RMB25, JPMorgan shifts to Underweight rating due to slowing demand

On Thursday, JPMorgan issued a downgrade for Zhejiang Dingli Machinery (603338:CH), shifting the rating from Overweight to Underweight and adjusting the price target to RMB40.00, a decrease from the previous RMB65.00. The firm's analysis points to a deceleration in the company's revenue and profit growth, projecting a compound annual growth rate (CAGR) of 12% for revenue and 3% for profit over the fiscal years 2024 to 2026.

Zhejiang Dingli, a leading Aerial Working Platform producer with about 10% of the global market share, has been a significant exporter of Chinese machinery. The company's sales and profit, with 67% and 73% respectively coming from overseas in 2023, are largely dependent on the U.S. and Europe, which together account for approximately 51% of total sales. Despite a strong growth track record, with revenue and profit rising at approximately 30% and 40% CAGR respectively from fiscal year 2021 to 2023, JPMorgan anticipates a slowdown.

The company's performance has stood out against domestic competitors like Zoomlion and XCMG, especially during a three-year downcycle in the domestic construction machinery industry. However, the anticipated deceleration is attributed to increased competition and a slowdown in demand both in China and internationally.

Zhejiang Dingli's stock has not kept pace with broader market trends year to date, showing a 2% decline compared to the CSI300's 16% increase. The valuation has also experienced a significant contraction, now sitting at 12.7 times price-to-earnings (P/E), a stark contrast to its mid-cycle average of approximately 25 times.

JPMorgan's revised price target is based on a discounted cash flow (DCF) analysis with a horizon extending to the end of 2025. The firm has expressed concern over potential earnings downside risks, which has influenced the new Underweight rating and reduced price target for Zhejiang Dingli Machinery.

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