HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Construction machinery sales sustained sequential improvement in Jun. Excavator sales -10.1% (-24.2% in May and -47.3% in Apr) and wheel loader sales -5.8% (-27% in May and -40.2% in Apr).  </li>
<li>It is likely to return to positive YoY in the next two months. Aided by a low base for comparison and increase infrastructure spending in 2H22, industry prospects look brighter. </li>
<li>Both <a href="https://www.smartkarma.com/entities/lonking-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3944:1" rel="noopener">Lonking Holdings (3339 HK)</a> and <a href="https://www.smartkarma.com/entities/zoomlion-heavy-industry-h" target="_blank" data-smartkarma-citation="entities:7817:1" rel="noopener">Zoomlion Heavy Industry (1157 HK)</a> are close to inflexion point, though risks remain high before the disappointing 1H22 result. Beyond that, value may emerge. </li>
</ul>


Construction machinery sales sustained sequential improvement in Jun. Excavator sales -10.1% (-24.2% in May and -47.3% in Apr) and wheel loader sales -5.8% (-27% in May and -40.2% in Apr).  
It is likely to return to positive YoY in the next two months. Aided by a low base for comparison and increase infrastructure spending in 2H22, industry prospects look brighter. 
Both Lonking Holdings (3339 HK) and Zoomlion Heavy Industry (1157 HK) are close to inflexion point, though risks remain high before the disappointing 1H22 result. Beyond that, value may emerge. 


China Construction Machinery: Turning to Positive Soon?

Equity Bottom-Up

China Everbright Environment / Equity Bottom-Up

<ul>
<li>China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.</li>
<li>NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.</li>
<li>Both <a href="https://www.smartkarma.com/entities/china-everbright-environment-group-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a> and <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.</li>
</ul>


China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.
NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.
Both China Everbright Environment (257 HK) and China Communications Construction (1800 HK) are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.


Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

<ul>
<li>China's construction machinery companies should benefit from the decision of bringing forward infrastructure investments by the Central Economic Work Conference; but the Nov industry figures still showed lacklustre performance.</li>
<li>Excavator sales volume was down 36.6% YoY in the month, with domestic sales even plunged by 51.4%. Wheel loader looks to be better with a lesser YoY decline at 8.5%.</li>
<li>High base and time lag for translating into demand mean unit sales will stay weak over the next few months. We prefer <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> as infrastructure play. </li>
</ul>


China's construction machinery companies should benefit from the decision of bringing forward infrastructure investments by the Central Economic Work Conference; but the Nov industry figures still showed lacklustre performance.
Excavator sales volume was down 36.6% YoY in the month, with domestic sales even plunged by 51.4%. Wheel loader looks to be better with a lesser YoY decline at 8.5%.
High base and time lag for translating into demand mean unit sales will stay weak over the next few months. We prefer China Communications Construction (1800 HK) as infrastructure play. 


China Construction Machinery: Not Seeing the End of the Tunnel Yet

Latest industry sales volume for wheel loader and excavator still point to a challenging period for <a href="https://www.smartkarma.com/entities/lonking-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3944:1" rel="noopener">Lonking Holdings (3339 HK)</a> even the stock trades on inexpensive multiples. We think that the tough industry outlook in the near term will keep its valuation depressed, until there is a better YoY volume comparison after 1Q22. Based on industry figures, wheel loader and excavator sales volume was down by 12.3% and 30.6% YoY in Oct, respectively.Domestic market has experienced more significant pressure, and has underperformed overseas market. Even with a sharp rise in special purpose bond issuance by local governments in 3Q21, it will take time to translate into the end-demand. We still consider Lonking a quality company with solid financial position, but it is too early to jump back in. We also see risk of lowering dividend payout ratio on the back of a weaker result in FY21F.

Latest industry sales volume for wheel loader and excavator still point to a challenging period for Lonking Holdings (3339 HK) even the stock trades on inexpensive multiples. We think that the tough industry outlook in the near term will keep its valuation depressed, until there is a better YoY volume comparison after 1Q22. Based on industry figures, wheel loader and excavator sales volume was down by 12.3% and 30.6% YoY in Oct, respectively.Domestic market has experienced more significant pressure, and has underperformed overseas market. Even with a sharp rise in special purpose bond issuance by local governments in 3Q21, it will take time to translate into the end-demand. We still consider Lonking a quality company with solid financial position, but it is too early to jump back in. We also see risk of lowering dividend payout ratio on the back of a weaker result in FY21F.

We think the 1H21 result of <a href="https://www.smartkarma.com/entities/lonking-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3944:1" rel="noopener">Lonking Holdings (3339 HK)</a> is somewhat disappointing as the good volume growth is unable to translate into a corresponding profit improvement. Its earnings only edged up 0.1% despite a 25.8% increase in revenue, indicating that cost-induced margin pressure is higher than expected.In our view, the market is likely to react negatively to the result. However, its low valuations (5.2x PER and 0.82x P/B), decent ROE of 16.7% and strong financial position (net cash and investment equals to 57% of the share price) will serve as buffers for significant downside on share price. That said, we think it will take time for the market to see how Lonking can recover its margin and, in the meantime, share price performance in the near-term is likely to be muted.

We think the 1H21 result of Lonking Holdings (3339 HK) is somewhat disappointing as the good volume growth is unable to translate into a corresponding profit improvement. Its earnings only edged up 0.1% despite a 25.8% increase in revenue, indicating that cost-induced margin pressure is higher than expected.In our view, the market is likely to react negatively to the result. However, its low valuations (5.2x PER and 0.82x P/B), decent ROE of 16.7% and strong financial position (net cash and investment equals to 57% of the share price) will serve as buffers for significant downside on share price. That said, we think it will take time for the market to see how Lonking can recover its margin and, in the meantime, share price performance in the near-term is likely to be muted.

Lonking (3339 HK): Disappointed Us with Worse-Than-Expected Margin in 1H21

China

Guangxi Liugong Machinery Co. Ltd. manufactures and markets construction machinery including loaders, excavators, road rollers, and related parts.

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Guangxi Liugong Machinery A (000528 CH)

China Construction Machinery: Turning to Positive Soon?

The pace of decline in construction machinery sales continued to narrow in Jun, and prospects will further improve in 2H22. Opportunities may...

Osbert Tang, CFA

Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

We see local governments' special purpose bonds issuance and uses for 4Q21 and 1Q22 to benefit environmental and infrastructure construction...

Osbert Tang, CFA

China Construction Machinery: Not Seeing the End of the Tunnel Yet

While CEWC's decision to accelerate infrastructure investment bodes well for the construction machinery sector, high base and time lag in demand...

Osbert Tang, CFA

Lonking (3339 HK): Still Too Early

Weak industry volume for wheel loader and excavator will continue to weigh on Lonking, despite the retreat in share price and low valuations....

Osbert Tang, CFA

Lonking (3339 HK): Disappointed Us with Worse-Than-Expected Margin in 1H21

Lonking's weakened profit in 1H21 due to heavier-than-expected margin contraction is expected to be taken negatively by the market, though the...

Osbert Tang, CFA

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