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Zoomlion Heavy Industry: Terex Selling MHPS Business To Zoomlion Heavy Industry | May 17, 2016 MORGAN STANLEY RESEARCH May 17, 2016 MORGAN STANLEY ASIA LIMITED+ Kevin Luo, CFA Zoomlion Heavy Industry [email protected] +852 2239-1527 Corey Chan, CFA Terex Selling MHPS Business to [email protected] +852 2848-5911 Frank Xu Konecranes; Slightly Positive for [email protected] +852 2848-8191 Zoomlion's Potential Acquisition Thomas Zhang [email protected] +852 2239-1883 Industry View Stock Rating Price Target Attractive Overweight HK$4.00 Zoomlion Heavy Industry ( 1157.HK, 1157 HK ) China Industrials / China Stock Rating Overweight Overview of sale: US-based machinery company Terex (TEX.N, covered by Industry View Attractive Morgan Stanley analyst Mili Pothiwala) today announced that it will sell its Price target HK$4.00 Material Handling & Port Solutions (MHPS) business to Konecranes (a Finland- Shr price, close (May 16, 2016) HK$2.35 Up/downside to price target (%) 77 based machinery company, KCR1V.HE, Not Covered) for a total consideration 52-Week Range HK$6.88-1.95 of ~USD1.3bn, including US$820mn in cash and 19.6mn shares of Konecranes Sh out, dil, curr (mn) 1,430 (~25% of total shares outstanding). Mkt cap, curr (mn) Rmb28,638 EV, curr (mn) Rmb52,770 We believe the sale of the MHPS business is positive for Zoomlion's Avg daily trading value (mn) HK$34.93 potential acquisition of Terex: We cite three main reasons: Fiscal Year Ending 12/15 12/16e 12/17e 12/18e ModelWare EPS (Rmb) 0.01 0.13 0.27 0.37 1. It is less profitable for Terex: The MHPS business generated Consensus EPS (Rmb)§ (0.03) 0.04 0.12 0.20 US$1.45bn revenue in 2015, or 22% of Terex's total. Its adjusted OP Revenue, net (Rmb 20,753 22,610 25,488 29,028 was US$27mn, or 1.8% adjusted OP margin, vs. Terex's overall mn) adjusted OP margin of 6.3%. The US$1.3bn total consideration implies EBITDA (Rmb mn) 1,908 3,217 4,503 5,518 ModelWare net inc 89 970 2,080 2,873 ~16x EV/ 2015 EBITDA (MHPS adjusted EBITDA in 2015 was (Rmb mn) US$82mn, according to Terex's annual results) P/E 208.5 15.0 7.0 5.1 P/BV 0.5 0.4 0.3 0.3 2. The sale lowers Terex's debt balance significantly: Terex RNOA (%) 1.5 2.8 4.1 5.1 estimates net cash proceeds from the sale of US$770mn, which will ROE (%) 0.2 2.4 5.1 6.7 EV/EBITDA 32.0 16.8 11.9 9.5 lower its net debt to US$737mn, 1.8x of its EBITDA (without MHPS) in Div yld (%) 6.2 0.7 1.4 2.0 the last 12 months ending 1Q16 (actual net debt as of 1Q16: FCF yld ratio (%) (33.4) (8.6) 5.3 10.0 US$1.51bn). Terex's net debt to equity as of 1Q16 would be lowered Leverage (EOP) (%) 59.3 61.2 57.1 51.2 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework to 34% from 80% after the sale. § = Consensus data is provided by Thomson Reuters Estimates e = Morgan Stanley Research estimates Assuming that Zoomlion still acquires Terex following the sale of the MHPS business, at US$31 per share, according to its latest proposal, the valuation of the deal would be lowered to 9.2x EV/EBITDA (LTM ending 1Q16), vs. 9.4x originally. We estimate that the sale of the MHPS business woukd also slightly lower the net debt to equity ratio of the enlarged Zoomlion-Terex group, to ~96% from ~109%. 3. The sale of the MHPS business removes part of the regulatory Morgan Stanley does and seeks to do business with risks for Zoomlion's acquisition: Terex's MHPS business could companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict require non-US service personnel on locations at US ports, which US of interest that could affect the objectivity of Morgan regulators may be reluctant to approve. Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered w ith FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications w ith a subject company, public appearances and trading securities held by a research analyst account. 1 Zoomlion Heavy Industry | May 17, 2016 MORGAN STANLEY RESEARCH Valuation Methodology and Risks 1157.HK Our price target of HK$4 is our base case scenario value, derived from our DCF valuation model. Key assumptions in our DCF valuation model include: 1. Cost of equity: 12.5%, derived from a risk-free rate of 1.6%, a market risk premium of 7.0%, and a beta of 1.28. 2. Cost of debt: We assume the pretax cost of debt to be 6%, and after-tax cost of debt to be 4.5%. 3. Operating cash flow to grow 6% p.a. 4. Stable capex assumption. 5. Terminal growth rate of 1%, we assume the company reaches a steady growth period after 2027. Key downside risks to our price target 1. Property and infrastructure investment slows down significantly. 2. Competition intensifies as industry overcapacity persists. 3. Export market contributes less than expected. 2 Zoomlion Heavy Industry | May 17, 2016 MORGAN STANLEY RESEARCH Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited, regulated by the Securities and Exchange Board of India (“SEBI”) and holder of licenses as a Research Analyst (SEBI Registration No. INH000001105); Stock Broker (BSE Registration No. INB011054237 and NSE Registration No. INB/INF231054231), Merchant Banker (SEBI Registration No. INM000011203), and depository participant with National Securities Depository Limited (SEBI Registration No. IN-DP-NSDL-372-2014) which accepts the responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research, and/or PT Morgan Stanley Asia Indonesia and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any recommendation, rating or price target referenced in this research report, please contact the Client Support Team as follows: US/Canada +1 800 303-2495; Hong Kong +852 2848-5999; Latin America +1 718 754-5444 (U.S.); London +44 (0)20-7425-8169; Singapore +65 6834-6860; Sydney +61 (0)2-9770-1505; Tokyo +81 (0)3-6836-9000. Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Corey Chan, CFA; Kevin Luo, CFA; Frank Xu. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies As of April 29, 2016, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: China Machinery Engineering Corp, Yangzijiang Shipbuilding (Holdings) Ltd., Zoomlion Heavy Industry. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of CCCC, China Railway Group. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from CCCC, China Railway Group. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from CCCC, China Railway Construction, China Railway Group, China Railway Signal & Communication, China State Construction Engineering, China State Construction International, CRRC Corp Ltd, CSICL, Guangxi Liugong Machinery Co., Ltd, Haitian International Holdings Limited, Hollysys Automation Technologies, Metallurgical Corporation of China, Sany Heavy Industry Co., Ltd., Shenzhen Inovance Technology, Siasun Robot & Automation, Sinotruk (Hong Kong) Limited, WeiChai Power, XCMG, ZMJ, Zoomlion Heavy Industry.
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