HK/China Equity Long-Short

Osbert Tang, CFA

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

Thematic (Sector/Industry)

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

<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. 

Total sales of excavators rose 59.9% YoY in Apr, suggesting a very strong pick up in momentum against the 11.6% growth in March. The solid rebound came on the back of the announced price increase in the month. Companies are also seeing production being immediately absorbed by customers, compared with an inventory of more than half month in a normal year.In our view, the key beneficiaries of the industry recovery are <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 Co., (600031 CH)</a> and <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> which are the leaders for the excavator market. Meanwhile, with excavator being the second largest contributor to revenue and profit, <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> will also be a major beneficiary.

Total sales of excavators rose 59.9% YoY in Apr, suggesting a very strong pick up in momentum against the 11.6% growth in March. The solid rebound came on the back of the announced price increase in the month. Companies are also seeing production being immediately absorbed by customers, compared with an inventory of more than half month in a normal year.In our view, the key beneficiaries of the industry recovery are Sany Heavy Industry Co., (600031 CH) and Xcmg Construction Machin A (000425 CH) which are the leaders for the excavator market. Meanwhile, with excavator being the second largest contributor to revenue and profit, Lonking Holdings (3339 HK) will also be a major beneficiary. 

China Construction Machinery: April Excavator Sales up 59.9%

China

XCMG Construction Machinery Co., Ltd. manufactures and markets a variety of construction machinery including road construction machinery, scrapers, concrete mixers and other related products.

XCMG Construction Machinery A (000425 CH)

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XCMG Construction Machinery A (000425 CH)

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): 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

China Construction Machinery: April Excavator Sales up 59.9%

Total sales of excavators rose 59.9% YoY in Apr, suggesting a very strong pick up in momentum against the 11.6% growth in March. The solid rebound...

Osbert Tang, CFA

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