HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

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

Equity Bottom-Up

After an underperforming 1H20, <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> has rapidly caught up with the industry in its unit sales performance. Sales of wheel loaders and excavators for 10M20 now achieved a 5% and 14% growth, respectively, compared with -2.6% and -11.2% respectively in 1H20, suggesting powerful pick-up in the last several months. Growth in products including forklifts and road rollers has also boosted all product categories to positive growth in 10M20.We forecast 2H20 core earnings will grow 20.5% YoY (vs. -6.4% YoY in 1H20), but its share price now only trades on 0.8x P/B, exactly at historical average. Such multiple looks low relative to a projected ROE of 19%, the highest in the last five years. We also see its Rmb0.61/share of net cash (or 32% of share price) comfortably sustaining its 54% payout ratio, leading to an attractive 11.5% dividend yield.

After an underperforming 1H20, Lonking Holdings (3339 HK) has rapidly caught up with the industry in its unit sales performance. Sales of wheel loaders and excavators for 10M20 now achieved a 5% and 14% growth, respectively, compared with -2.6% and -11.2% respectively in 1H20, suggesting powerful pick-up in the last several months. Growth in products including forklifts and road rollers has also boosted all product categories to positive growth in 10M20.We forecast 2H20 core earnings will grow 20.5% YoY (vs. -6.4% YoY in 1H20), but its share price now only trades on 0.8x P/B, exactly at historical average. Such multiple looks low relative to a projected ROE of 19%, the highest in the last five years. We also see its Rmb0.61/share of net cash (or 32% of share price) comfortably sustaining its 54% payout ratio, leading to an attractive 11.5% dividend yield.  

Lonking (3339 HK): Rapid Catch-Up in Unit Sales, Further Backed by Attractive Yield

China's construction and infrastructure machinery sector maintained an encouraging momentum in Sep and close out 3Q20 with strengths. We see no signs of slowing down despite the rapid recovery in 2Q20. Sales of excavators and wheel loaders rose 64.8% YoY and 16.3% YoY in Sep, respectively; which is the strongest growth in the last two months. This is a reflection of the increase in infrastructure investments after the massive special purpose bonds issued by the local governments in the last four months.We expect the rise in infrastructure spending and recovery in export demand to drive the industry's positive outlook in the next 12 months, benefiting names including <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>, <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> 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 H (1157 HK)</a>.  Backed by an undemanding 0.82x P/B, catch up in unit sales and attractive dividend yield of 10.7%, Lonking <a href="https://www.smartkarma.com/entities/lonking-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3944:1" rel="noopener"></a>stands out with particular favourable risk-return payoff, in our view.

China's construction and infrastructure machinery sector maintained an encouraging momentum in Sep and close out 3Q20 with strengths. We see no signs of slowing down despite the rapid recovery in 2Q20. Sales of excavators and wheel loaders rose 64.8% YoY and 16.3% YoY in Sep, respectively; which is the strongest growth in the last two months. This is a reflection of the increase in infrastructure investments after the massive special purpose bonds issued by the local governments in the last four months.We expect the rise in infrastructure spending and recovery in export demand to drive the industry's positive outlook in the next 12 months, benefiting names including Lonking Holdings (3339 HK), Sany Heavy Industry (600031 CH), Xcmg Construction Machin A (000425 CH) and Zoomlion Heavy Industry H (1157 HK).  Backed by an undemanding 0.82x P/B, catch up in unit sales and attractive dividend yield of 10.7%, Lonking stands out with particular favourable risk-return payoff, in our view.

China Construction Machinery: No Sign of Slowing Down

Share price 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> has fallen by 31.7% from its intra-day peak before the 1H20 result announcement to the current level of HK$2.05 due to its underperformance against peers in unit sales. However, with its P/B valuation returning to just 0.76x now, below the historical average of 0.8x, we believe value has started to emerge with improved risk-return payoff. We suggest getting back into this counter for potentially better-than-expected 2H20 result.We have already seen Lonking's unit sales of excavators and forklifts picked up against the industry in Jul and Aug. Also, there is no further widening of its underperformance in wheel loader sales. In our view, the improvement in sales volume will reflect positively in its gross margin in 2H20. Lonking maintain its excellent financial position, with net cash forecast to reach Rmb2.7bn by end-FY20, or 34% of the current market cap. Having such solid cash balance, we expect it to maintain its FY19 dividend payout ratio of 54% in FY20.  With the fall in share price, its FY20 dividend yield has now returned to a compelling 11.6%.

Share price of Lonking Holdings (3339 HK) has fallen by 31.7% from its intra-day peak before the 1H20 result announcement to the current level of HK$2.05 due to its underperformance against peers in unit sales. However, with its P/B valuation returning to just 0.76x now, below the historical average of 0.8x, we believe value has started to emerge with improved risk-return payoff. We suggest getting back into this counter for potentially better-than-expected 2H20 result.We have already seen Lonking's unit sales of excavators and forklifts picked up against the industry in Jul and Aug. Also, there is no further widening of its underperformance in wheel loader sales. In our view, the improvement in sales volume will reflect positively in its gross margin in 2H20. Lonking maintain its excellent financial position, with net cash forecast to reach Rmb2.7bn by end-FY20, or 34% of the current market cap. Having such solid cash balance, we expect it to maintain its FY19 dividend payout ratio of 54% in FY20.  With the fall in share price, its FY20 dividend yield has now returned to a compelling 11.6%. 

Lonking (3339 HK): Back in Again Supported by Improved Risk-Return Payoff

<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>'s 6.2% YoY growth in profit in 1H20 is mostly boosted by a 56.4% YoY gains from investment in financial assets. Excluding this, earnings have declined by 6.4% YoY. There is mild contraction in gross margin (-0.4pp YoY) as sales value for most product categories have declined YoY. While the 1H20 result is not very disappointing, it compared unfavourably against its construction machinery peers. Fundamentally, we still like its exposure to the government's massive infrastructure spending and strong financial position (net cash equals to 27% of share price). Also, its unit sales have already gathered pace in the last two months. However, the market may take some time to observe if Lonking can catch up its unit sales with peers. As a result, we believe there is opportunity to pick up the stock at a lower price, possibly close to the historical average P/B of 0.8x, or around HK$2.15-2.20 level. At the moment, it trades on 0.98x.

Lonking Holdings (3339 HK)'s 6.2% YoY growth in profit in 1H20 is mostly boosted by a 56.4% YoY gains from investment in financial assets. Excluding this, earnings have declined by 6.4% YoY. There is mild contraction in gross margin (-0.4pp YoY) as sales value for most product categories have declined YoY. While the 1H20 result is not very disappointing, it compared unfavourably against its construction machinery peers. Fundamentally, we still like its exposure to the government's massive infrastructure spending and strong financial position (net cash equals to 27% of share price). Also, its unit sales have already gathered pace in the last two months. However, the market may take some time to observe if Lonking can catch up its unit sales with peers. As a result, we believe there is opportunity to pick up the stock at a lower price, possibly close to the historical average P/B of 0.8x, or around HK$2.15-2.20 level. At the moment, it trades on 0.98x. 

Lonking (3339 HK): 1H20 Fuelled by Investment Income but Core Profit Down

China

Lonking Holdings Ltd. designs, manufactures and sells wheel loaders and infrastructure machinery in the People's Republic of China.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Lonking Holdings (3339 HK)

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

Lonking (3339 HK): Rapid Catch-Up in Unit Sales, Further Backed by Attractive Yield

Lonking has a rapid leap in unit sales in Sep and Oct, driving positive growth across all product categories in 10M20, vs. declines in 1H20. ROE of...

Osbert Tang, CFA

China Construction Machinery: No Sign of Slowing Down

Both excavator and wheel loader sales are good in Sep and show no sign of slowing down. We believe China construction machinery industry will stay...

Osbert Tang, CFA

Lonking (3339 HK): Back in Again Supported by Improved Risk-Return Payoff

Share price of Lonking Holdings (3339 HK) has fallen by 29.7% from its peak before the 1H20 result announcement to

Osbert Tang, CFA

Lonking (3339 HK): 1H20 Fuelled by Investment Income but Core Profit Down

Lonking Holdings (3339 HK)'s 6.2% YoY growth in profit in 1H20 is mostly boosted by a 56.4% YoY gains from investment in financial assets....

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)