China Specialist, Auto and Industrial Specialist

Victoria Li

Equity Bottom-Up

Zoomlion Heavy Industry H / Equity Bottom-Up

YTD, Zoomlion's share price is up 18%, but has lagged  Sany Heavy's (600031.CH) 35% and its own A-share's 19.8%.  We believe this has happened mainly due to Zoomlion's relatively lagging earrings recovery since 2018. However, as we expected, Zoomlion's earnings recovery accelerated in 2Q2020 with market demand moving onwards to late cycle products. In 2Q2020, Zoomlion reported a 90% yoy growth of net profit, vs. 78% yoy growth of Sany's.Moreover, Zoomlion plans to use most of the proceeds from A-share private placement on excavator and related components. It plans to gain market share in excavators and targets to be one of Top 5 suppliers in 5 years. As we've seen, local excavator brands successfully gained market shares from global leaders in the past few years and improved sector concentration. This strengthens our conviction that Zoomlion's excavators would take some market share from smaller players and this will be an earnings driver in the next few years.We believe Zoomlion would outperform Sany Heavy in 2H2020, especially after A-share placement adjustment.

YTD, Zoomlion's share price is up 18%, but has lagged  Sany Heavy's (600031.CH) 35% and its own A-share's 19.8%.  We believe this has happened mainly due to Zoomlion's relatively lagging earrings recovery since 2018. However, as we expected, Zoomlion's earnings recovery accelerated in 2Q2020 with market demand moving onwards to late cycle products. In 2Q2020, Zoomlion reported a 90% yoy growth of net profit, vs. 78% yoy growth of Sany's.Moreover, Zoomlion plans to use most of the proceeds from A-share private placement on excavator and related components. It plans to gain market share in excavators and targets to be one of Top 5 suppliers in 5 years. As we've seen, local excavator brands successfully gained market shares from global leaders in the past few years and improved sector concentration. This strengthens our conviction that Zoomlion's excavators would take some market share from smaller players and this will be an earnings driver in the next few years.We believe Zoomlion would outperform Sany Heavy in 2H2020, especially after A-share placement adjustment.

Zoomlion (1157.HK): Time to Switch from Sany into Zoomlion

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

MSCI Emerging Markets Index / Technical Analysis

The MSCI EM index (local currency) remains in an uptrend and is testing all-time highs set in January 2018 near 65,800; as long as the index is above 60,000 we are constructive from a price perspective.  China (CSI 300, MSCI China) continues to offer many attractive setups and accounts for the vast majority of today’s recommendations. Taiwan (TAIEX) continues to be worthy of an overweight within the EM universe, while South Korea (KOSPI) and India (SENSEX) display improving price and RS trends -- add exposure.

The MSCI EM index (local currency) remains in an uptrend and is testing all-time highs set in January 2018 near 65,800; as long as the index is above 60,000 we are constructive from a price perspective.  China (CSI 300, MSCI China) continues to offer many attractive setups and accounts for the vast majority of today’s recommendations. Taiwan (TAIEX) continues to be worthy of an overweight within the EM universe, while South Korea (KOSPI) and India (SENSEX) display improving price and RS trends -- add exposure.

HK/China Equity Long-Short

Osbert Tang, CFA

<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

Benefiting from China's escalated infrastructure spending, <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> witnessed a pickup in its key product sales in Jun (+60-80% YoY for excavator, road roller and forklift) as demand continued to recover. However, dragged by the weak start in this year, its 1H20 units sales are running behind that for the industry as reported by the CCMA, with wheel loader sales down 15% and excavator off 10%. YTD, including a DPS of HK$0.25, the stock has returned 38.5%, outperforming key market indices by material margins. It now trades on 1.07x P/B, +1SD above the 5-year average. We believe this has significantly reflected its growth outlook, but we have concern on potential negative knee-jerk reaction from the market on its below-industry unit sales in 1H20. We suggest taking profit on this counter before the interim result release in late-Aug. Note that this is a short-term call and we would look to add back at lower level as it remains a key beneficiary of China's infrastructure investment.

Benefiting from China's escalated infrastructure spending, Lonking Holdings (3339 HK) witnessed a pickup in its key product sales in Jun (+60-80% YoY for excavator, road roller and forklift) as demand continued to recover. However, dragged by the weak start in this year, its 1H20 units sales are running behind that for the industry as reported by the CCMA, with wheel loader sales down 15% and excavator off 10%. YTD, including a DPS of HK$0.25, the stock has returned 38.5%, outperforming key market indices by material margins. It now trades on 1.07x P/B, +1SD above the 5-year average. We believe this has significantly reflected its growth outlook, but we have concern on potential negative knee-jerk reaction from the market on its below-industry unit sales in 1H20. We suggest taking profit on this counter before the interim result release in late-Aug. Note that this is a short-term call and we would look to add back at lower level as it remains a key beneficiary of China's infrastructure investment. 

Sany's share price is up 43% from its  March lows during China's Covid-19 lockdown. Nonetheless, we still see upside from here, driven by market consensus upgrades and valuation re-rating. Share price momentum could come with 1H 2020E financial results at the earliest.In 1H2020E, Sany Heavy's excavator sales increased by 24.2% yoy, with 25.5% of market share.  With new infrastructure projects starts continuing to accelerate, China's excavator sales growth could go above 30% yoy in 2020E. As a result, we estimate Sany's earnings growth in 2020E could be above 25% yoy, vs. 18.9% growth in Bloomberg consensus estimates.Current valuation stands at 13x P/E 2020E based on Bloomberg consensus, vs. its global peers' average of 15x. We believe Sany's valuation multiple still has upside when market expectation on its earnings raised.

Sany's share price is up 43% from its  March lows during China's Covid-19 lockdown. Nonetheless, we still see upside from here, driven by market consensus upgrades and valuation re-rating. Share price momentum could come with 1H 2020E financial results at the earliest.In 1H2020E, Sany Heavy's excavator sales increased by 24.2% yoy, with 25.5% of market share.  With new infrastructure projects starts continuing to accelerate, China's excavator sales growth could go above 30% yoy in 2020E. As a result, we estimate Sany's earnings growth in 2020E could be above 25% yoy, vs. 18.9% growth in Bloomberg consensus estimates.Current valuation stands at 13x P/E 2020E based on Bloomberg consensus, vs. its global peers' average of 15x. We believe Sany's valuation multiple still has upside when market expectation on its earnings raised.

Sany Heavy (600031.CH) - Digging Out Growth and Market Share

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.

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Sany Heavy Industry (600031 CH)

Zoomlion (1157.HK): Time to Switch from Sany into Zoomlion

Since January, Zoomlion's share price rose by

Victoria Li

Remain Overweight EM Relative To EAFE

The MSCI EM index (local currency) remains in an uptrend and is testing all-time highs set in January 2018 near 65,800; as long as the index is...

Vermilion Research

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

Lonking (3339 HK): Trim on Prudence

Benefiting from China's escalated infrastructure spending, Lonking Holdings (3339 HK) witnessed a pickup in its key product sales in Jun (+60-80%...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Zoomlion (1157.HK): Time to Switch from Sany into Zoomlion

Since January, Zoomlion's share price rose by

Victoria Li

Remain Overweight EM Relative To EAFE

The MSCI EM index (local currency) remains in an uptrend and is testing all-time highs set in January 2018 near 65,800; as long as the index is...

Vermilion Research

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

Lonking (3339 HK): Trim on Prudence

Benefiting from China's escalated infrastructure spending, Lonking Holdings (3339 HK) witnessed a pickup in its key product sales in Jun (+60-80%...

Osbert Tang, CFA

Sany Heavy (600031.CH) - Digging Out Growth and Market Share

Sany's share price is up 43% from its March lows during China's Covid-19 lockdown. Nonetheless, we still see upside from here, driven by market...

Victoria Li