HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

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China's construction machinery industry concluded 2020 with very solid sales growth of 56.4% for excavators and 10.2% for wheel loaders in Dec. Even on the back of the COVID-19 disruption early in the year, full-year growth still reached 39% and 6%, respectively. While domestic sales continued to hover at high levels in the month, we witnessed a pick up in the export momentum in Dec versus Nov.
In our view, the solid demand growth will extend well into FY21 as overseas demand strengthens and domestic demand sustains their boost by infrastructure investments. We believe outlook for <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> continue to be encouraging in 2021 after a marvelous 2020.
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China's construction machinery industry concluded 2020 with very solid sales growth of 56.4% for excavators and 10.2% for wheel loaders in Dec. Even on the back of the COVID-19 disruption early in the year, full-year growth still reached 39% and 6%, respectively. While domestic sales continued to hover at high levels in the month, we witnessed a pick up in the export momentum in Dec versus Nov.
In our view, the solid demand growth will extend well into FY21 as overseas demand strengthens and domestic demand sustains their boost by infrastructure investments. We believe outlook for Sany Heavy Industry (600031 CH), Xcmg Construction Machin A (000425 CH), Zoomlion Heavy Industry H (1157 HK) and Lonking Holdings (3339 HK) continue to be encouraging in 2021 after a marvelous 2020.


China Construction Machinery: Good to the Last Drop

In this Insight, we review our three best trades - <a href="https://www.smartkarma.com/entities/cosco-shipping-energy-tran-h" target="_blank" data-smartkarma-citation="entities:646:1" rel="noopener">Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK)</a>, <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> and <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> - in 2020. Based on our calls, these trades generated at least 42%, 37.5% and 81.6%, respectively, in this year, without staying 100% of the time in the market.As for 2021, we believe the current levels for <a href="https://www.smartkarma.com/entities/cosco-shipping-energy-tran-h" target="_blank" data-smartkarma-citation="entities:646:1" rel="noopener">Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 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> are still attractive in building new positions, while for <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a>, we will wait for a pull-back to HK$12.0-13.0 levels before we re-establish our position.

In this Insight, we review our three best trades - Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK), Lonking Holdings (3339 HK) and SITC International (1308 HK) - in 2020. Based on our calls, these trades generated at least 42%, 37.5% and 81.6%, respectively, in this year, without staying 100% of the time in the market.As for 2021, we believe the current levels for Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK) and Lonking Holdings (3339 HK) are still attractive in building new positions, while for SITC International (1308 HK), we will wait for a pull-back to HK$12.0-13.0 levels before we re-establish our position. 

Our Three Best Trades in 2020! and How Will We Position for 2021?

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

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

China's issuance of special purpose bonds (SPB) reached a record of Rmb2.4trn in 1H20, an overwhelming 73% YoY growth. At least 59% of the proceeds are to be invested in infrastructure and related sectors, with transport infrastructure being the largest category with a 26% share. In our view, such massive investment will support the earnings of the construction related companies in 2H20 when such funds filter through to the real economy in the form of end-product demand.We expect the construction materials, infrastruture construction companies and construction machinery sectors to benefit from such investments. Many of these stocks have underperformed the market sharply YTD and are trading at depressed valuations of single-digit or even low single-digit levels. In our view, potential earnings upside will serve as a catalyst for a catch up in their share prices over the next six months.

China's issuance of special purpose bonds (SPB) reached a record of Rmb2.4trn in 1H20, an overwhelming 73% YoY growth. At least 59% of the proceeds are to be invested in infrastructure and related sectors, with transport infrastructure being the largest category with a 26% share. In our view, such massive investment will support the earnings of the construction related companies in 2H20 when such funds filter through to the real economy in the form of end-product demand.We expect the construction materials, infrastruture construction companies and construction machinery sectors to benefit from such investments. Many of these stocks have underperformed the market sharply YTD and are trading at depressed valuations of single-digit or even low single-digit levels. In our view, potential earnings upside will serve as a catalyst for a catch up in their share prices over the next six months. 

China Infrastructure: Record Special Purpose Bonds Issuance to Drive Construction Sectors in 2H20

China

Lonking Holdings Limited is a major manufacturer and distributor of construction machinery, including wheel loaders, excavators, road rollers, forklifts, motor graders, and skid steer loaders. The company also develops and produces core components such as gearboxes, torque converters, axles, and hydraulic components. It was founded in 1993 and is headquartered in Shanghai, China.

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Lonking (3339 HK)

China Construction Machinery: Good to the Last Drop

Strong unit sales of excavators (+56.4%) and wheel loaders (+10.2%) in Dec and recovery in export momentum suggested a positive trend for the start...

Osbert Tang, CFA

Our Three Best Trades in 2020! and How Will We Position for 2021?

We review our three best trades in 2020 which generated returns of at least 42%, 37.5% and 81.6%, respectively; and we lay out our strategy for the...

Osbert Tang, CFA

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

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

China Infrastructure: Record Special Purpose Bonds Issuance to Drive Construction Sectors in 2H20

China's issuance of special purpose bonds (SPB) reached a record of Rmb2.4trn in 1H20, an overwhelming 73% YoY growth. At least 59% of the proceeds...

Osbert Tang, CFA

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