On Thursday, Citi downgraded shares of Zoomlion Heavy Industry Science & Technology (1157:HK) (OTC: ZLIOF), shifting from a Buy to a Neutral stance and reducing the price target from HK$6.50 to HK$3.80. The downgrade is attributed to the anticipated prolonged weakness in construction machinery demand due to China's slowing property investment and new stringent guidelines for infrastructure project approvals.
Citi expressed concerns over Zoomlion's accounts receivables, which appear to be aging more than those of its peers, potentially indicating a higher risk of credit impairment losses in the face of tough macroeconomic conditions. This risk assessment has prompted Citi to adjust its earnings forecasts for Zoomlion for the fiscal years 2024 and 2025, with a decrease of 6% and 12% respectively.
The revision of Zoomlion's price target to HK$3.80 is based on a valuation of 0.5 times its projected 2024 book value, a decrease from the previous 0.9 times. This change reflects a more conservative outlook on demand within China and anticipates greater asset impairment risks.
Despite the downgrade, Citi has opted to maintain a Neutral rating rather than a Sell. This decision comes after Zoomlion's shares experienced a significant drop of approximately 40% and currently offer a dividend yield of around 9%, which may offer some investment appeal despite the challenging environment.
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