HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>China's construction machinery companies should benefit from the decision of bringing forward infrastructure investments by the Central Economic Work Conference; but the Nov industry figures still showed lacklustre performance.</li>
<li>Excavator sales volume was down 36.6% YoY in the month, with domestic sales even plunged by 51.4%. Wheel loader looks to be better with a lesser YoY decline at 8.5%.</li>
<li>High base and time lag for translating into demand mean unit sales will stay weak over the next few months. We prefer <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> as infrastructure play. </li>
</ul>


China's construction machinery companies should benefit from the decision of bringing forward infrastructure investments by the Central Economic Work Conference; but the Nov industry figures still showed lacklustre performance.
Excavator sales volume was down 36.6% YoY in the month, with domestic sales even plunged by 51.4%. Wheel loader looks to be better with a lesser YoY decline at 8.5%.
High base and time lag for translating into demand mean unit sales will stay weak over the next few months. We prefer China Communications Construction (1800 HK) as infrastructure play. 


China Construction Machinery: Not Seeing the End of the Tunnel Yet

Equity Bottom-Up

Latest industry sales volume for wheel loader and excavator still point to a challenging period for <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> even the stock trades on inexpensive multiples. We think that the tough industry outlook in the near term will keep its valuation depressed, until there is a better YoY volume comparison after 1Q22. Based on industry figures, wheel loader and excavator sales volume was down by 12.3% and 30.6% YoY in Oct, respectively.Domestic market has experienced more significant pressure, and has underperformed overseas market. Even with a sharp rise in special purpose bond issuance by local governments in 3Q21, it will take time to translate into the end-demand. We still consider Lonking a quality company with solid financial position, but it is too early to jump back in. We also see risk of lowering dividend payout ratio on the back of a weaker result in FY21F.

Latest industry sales volume for wheel loader and excavator still point to a challenging period for Lonking Holdings (3339 HK) even the stock trades on inexpensive multiples. We think that the tough industry outlook in the near term will keep its valuation depressed, until there is a better YoY volume comparison after 1Q22. Based on industry figures, wheel loader and excavator sales volume was down by 12.3% and 30.6% YoY in Oct, respectively.Domestic market has experienced more significant pressure, and has underperformed overseas market. Even with a sharp rise in special purpose bond issuance by local governments in 3Q21, it will take time to translate into the end-demand. We still consider Lonking a quality company with solid financial position, but it is too early to jump back in. We also see risk of lowering dividend payout ratio on the back of a weaker result in FY21F.

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

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

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: Not Seeing the End of the Tunnel Yet

While CEWC's decision to accelerate infrastructure investment bodes well for the construction machinery sector, high base and time lag in demand...

Osbert Tang, CFA

Lonking (3339 HK): Still Too Early

Weak industry volume for wheel loader and excavator will continue to weigh on Lonking, despite the retreat in share price and low valuations....

Osbert Tang, CFA

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

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