HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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

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

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

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Investor sentiment in the Industrials sector is turning positive after a multi-year decline among active Asia Ex-Japan fund managers.Average allocations in the Industrials sector fell from a peak of 11.4% in mid-2011 to a low of just 4.82% in July of last year.  Since that trough, allocations have started to increase, with today's levels of 5.46% the highest since late 2019.We highlight 7 companies that have attracted new investment in the early stages of the reallocation towards the Industrials sector.

Investor sentiment in the Industrials sector is turning positive after a multi-year decline among active Asia Ex-Japan fund managers.Average allocations in the Industrials sector fell from a peak of 11.4% in mid-2011 to a low of just 4.82% in July of last year.  Since that trough, allocations have started to increase, with today's levels of 5.46% the highest since late 2019.We highlight 7 companies that have attracted new investment in the early stages of the reallocation towards the Industrials sector.  

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.

China

SANY Heavy Industry Co., Ltd manufactures and markets construction and engineering machinery and related parts. The Company produces and sells concrete pumps, concrete pump vehicles, road rollers, pavers, and other related products. Sany Heavy Industry markets its products worldwide.

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

Sany Heavy Industry (600031 CH)

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

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

Asia Ex-Japan: Industrials Rotation

Investor sentiment in the Industrials sector is turning positive after a multi-year decline among active Asia Ex-Japan fund managers.

Steven Holden

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)