HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

While sales for excavators and wheel loaders are still seeing YoY decline of 9.2% and 11.5% for Jul, there is no further significant deterioration when compared with the pace in Jun. We think that part of the reasons for the slowdown in the last few months are high base effect, and the extreme weather situation and outbreak of local COVID-19 cases have both exacerbated the headwinds. Nonetheless, we see outlook for 2H21 to be more promising.Similarly, a high base for 2H21 comparison should be well-anticipated. However, the recent positive tone from the government on infrastructure investment and the potential acceleration in special purpose bond issuance should bode well for the industry and we continue to see <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> as well-placed. The encouraging new contract signed in 1H21 at <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> also lent a helping hand to the demand, in our view.

While sales for excavators and wheel loaders are still seeing YoY decline of 9.2% and 11.5% for Jul, there is no further significant deterioration when compared with the pace in Jun. We think that part of the reasons for the slowdown in the last few months are high base effect, and the extreme weather situation and outbreak of local COVID-19 cases have both exacerbated the headwinds. Nonetheless, we see outlook for 2H21 to be more promising.Similarly, a high base for 2H21 comparison should be well-anticipated. However, the recent positive tone from the government on infrastructure investment and the potential acceleration in special purpose bond issuance should bode well for the industry and we continue to see Lonking Holdings (3339 HK) as well-placed. The encouraging new contract signed in 1H21 at China Communications Construction (1800 HK) also lent a helping hand to the demand, in our view.

China Construction Machinery: Better Trajectory for 2H21

Equity Bottom-Up

We spoke with <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> following its recent share price weakness. Operationally, sales volume for 5M21 stayed very solid, with wheel loader and forklift well ahead of the industry growth rates. May figures are, however, weaker than industry, but we do not think this is a concern. Moreover, for 5M21, its forklift sales already reached more than 55% of its full-year target, suggesting better-than-expected performance in this booming segment.It is true that higher cost will erode 1H21 percentage gross margin, but the strong volume growth, price increase and cost containment measures should limit the impact on the overall gross profit. We think earnings growth for the next three years will be stable, but it will still generate over 20% of ROE and sit on net cash (including financial investments) equals to over 60% of its current share price. Our projections suggested the Lonking is trading on attractive 4.2x PER, 0.84x P/B and 14.3% dividend yield for FY21.

We spoke with Lonking Holdings (3339 HK) following its recent share price weakness. Operationally, sales volume for 5M21 stayed very solid, with wheel loader and forklift well ahead of the industry growth rates. May figures are, however, weaker than industry, but we do not think this is a concern. Moreover, for 5M21, its forklift sales already reached more than 55% of its full-year target, suggesting better-than-expected performance in this booming segment.It is true that higher cost will erode 1H21 percentage gross margin, but the strong volume growth, price increase and cost containment measures should limit the impact on the overall gross profit. We think earnings growth for the next three years will be stable, but it will still generate over 20% of ROE and sit on net cash (including financial investments) equals to over 60% of its current share price. Our projections suggested the Lonking is trading on attractive 4.2x PER, 0.84x P/B and 14.3% dividend yield for FY21.

Lonking (3339 HK): Streaming Ahead Despite Turbulence

We do not think a slower reported industry excavator and wheel loader sales growth in Apr is a concern to <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>. In fact, the slowdown to 2.5% and 9% YoY, respectively, compared with 85% and 67% YoY in 1Q21, is primarily driven by high base for comparison a year ago as pandemic restrained demand is released.Relative to Apr 2019, the Apr 2021 unit sales still grew by impressive levels of 63.9% and 44.7%, respectively, providing us comfort on the health of underlying demand. Meanwhile, it is encouraging to see the sustained strength in export despite the continued negative impacts of COVID-19 outside China. We still expect a promising year for Lonking in FY21, and its valuation metrics remain very undemanding.

We do not think a slower reported industry excavator and wheel loader sales growth in Apr is a concern to Lonking Holdings (3339 HK). In fact, the slowdown to 2.5% and 9% YoY, respectively, compared with 85% and 67% YoY in 1Q21, is primarily driven by high base for comparison a year ago as pandemic restrained demand is released.Relative to Apr 2019, the Apr 2021 unit sales still grew by impressive levels of 63.9% and 44.7%, respectively, providing us comfort on the health of underlying demand. Meanwhile, it is encouraging to see the sustained strength in export despite the continued negative impacts of COVID-19 outside China. We still expect a promising year for Lonking in FY21, and its valuation metrics remain very undemanding.  

Lonking (3339 HK): Is There a Slowdown in the Industry? Our Answer Is No.

Even with an extremely strong sales performance in this year, the excavator industry is still expecting promising outlook for 2021, with the projected sales growth ranging between 5% and 20%.  The positive tone of the industry should bode well for China's construction machinery sector in next year - <a href="https://www.smartkarma.com/entities/sany-heavy-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:20183:1" rel="noopener">Sany Heavy Industry (600031 CH)</a>, <a href="https://www.smartkarma.com/entities/xcmg-construction-machin-a" target="_blank" data-smartkarma-citation="entities:426:1" rel="noopener">Xcmg Construction Machin A (000425 CH)</a>, <a href="https://www.smartkarma.com/entities/zoomlion-heavy-industry-h" target="_blank" data-smartkarma-citation="entities:7817:1" rel="noopener">Zoomlion Heavy Industry H (1157 HK)</a> and <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>.As for Nov, excavator sales growth sustained the powerful trend with a 68% YoY increase, driven partly by a recovery in export momentum. Wheel loader sales have moderated lightly to 7.4% in the month, but remained ahead of the 11M20 growth rate of 5.8%. We like Lonking's quality management and sound financial position. The stock now trades on attractive 4.8x PER, 0.81x P/B and 11.3% yield for FY20, with net cash amounting to 31% of its market cap.

Even with an extremely strong sales performance in this year, the excavator industry is still expecting promising outlook for 2021, with the projected sales growth ranging between 5% and 20%.  The positive tone of the industry should bode well for China's construction machinery sector in next year - Sany Heavy Industry (600031 CH), Xcmg Construction Machin A (000425 CH), Zoomlion Heavy Industry H (1157 HK) and Lonking Holdings (3339 HK).As for Nov, excavator sales growth sustained the powerful trend with a 68% YoY increase, driven partly by a recovery in export momentum. Wheel loader sales have moderated lightly to 7.4% in the month, but remained ahead of the 11M20 growth rate of 5.8%. We like Lonking's quality management and sound financial position. The stock now trades on attractive 4.8x PER, 0.81x P/B and 11.3% yield for FY20, with net cash amounting to 31% of its market cap.

China Construction Machinery: Industry Players Expressed Bullish Outlook for 2021

China Specialist, Auto and Industrial Specialist

Victoria Li

We estimate China's heavy machinery sector sales turn weaker in 2019E because<ul>
<li>Incremental demand on main machines, excavators, loaders, heavy duty trucks, etc, would remain weak given the leading indicator - yoy growth of China's planned investment on newly started projects in Infrastructure sector - remain negative at -28.1% in 8M2018. Recent positive policy tone set on infrastructure is not strong enough to change the weakness.</li>
<li>Current up-cycle, which is driven by the replacement demand from machines sold since 2008, is going to end next year. Considering annual sales in 2018 for excavators might go above 200,000 units, higher than that of 2011.  It is very likely that China's excavator sales volume 2019E would be flattish, without a boost from incremental demand.</li>
</ul>Long-term buyers shall avoid related stocks, although their valuation look attractive after recent market pullback. Zoomlion (1157.HK) has the highest valuation among peers, which could be a short target.

We estimate China's heavy machinery sector sales turn weaker in 2019E because
Incremental demand on main machines, excavators, loaders, heavy duty trucks, etc, would remain weak given the leading indicator - yoy growth of China's planned investment on newly started projects in Infrastructure sector - remain negative at -28.1% in 8M2018. Recent positive policy tone set on infrastructure is not strong enough to change the weakness.
Current up-cycle, which is driven by the replacement demand from machines sold since 2008, is going to end next year. Considering annual sales in 2018 for excavators might go above 200,000 units, higher than that of 2011.  It is very likely that China's excavator sales volume 2019E would be flattish, without a boost from incremental demand.
Long-term buyers shall avoid related stocks, although their valuation look attractive after recent market pullback. Zoomlion (1157.HK) has the highest valuation among peers, which could be a short target.

China Heavy Machinery-Back to Doldrums in 2019

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: Better Trajectory for 2H21

We are positive on the 2H21 outlook of construction machinery industry, driven by potential accelaration in China's infrastructure spending and...

Osbert Tang, CFA

Lonking (3339 HK): Streaming Ahead Despite Turbulence

Lonking achieved good volume growth for wheel loader and forklift in 5M21, and we think price increase, volume growth and cost containment can...

Osbert Tang, CFA

Lonking (3339 HK): Is There a Slowdown in the Industry? Our Answer Is No.

We do not interpret the slowdown in Apr excavator and wheel loader sales as a reflection of weaker underlying demand. Instead, this is primarily...

Osbert Tang, CFA

China Construction Machinery: Industry Players Expressed Bullish Outlook for 2021

Industry expectation of 5-20% growth in excavator sales in 2021 is bullish to China's construction machinery sector; and while not the largest...

Osbert Tang, CFA

China Heavy Machinery-Back to Doldrums in 2019

We estimate China's heavy machinery sector sales turn weaker in 2019E because Incremental demand on main machines, excavators, loaders, heavy duty...

Victoria Li

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