HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>While valuations 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> do not appear expensive, there is a risk that the 2H23 earnings outlook is weaker than expected. This opens room for disappointment.</li>
<li>There is no sign that domestic sales have picked up and Jul-Aug was still down significantly. Meanwhile, the strong export in 1H23 has not sustained in the last two months. </li>
<li>The weaker A-share market so far in 2H23 also does not bode well for investment gains, which are important contributors to the impressive earnings rebound in 1H23.</li>
</ul>


While valuations for Lonking Holdings (3339 HK) do not appear expensive, there is a risk that the 2H23 earnings outlook is weaker than expected. This opens room for disappointment.
There is no sign that domestic sales have picked up and Jul-Aug was still down significantly. Meanwhile, the strong export in 1H23 has not sustained in the last two months. 
The weaker A-share market so far in 2H23 also does not bode well for investment gains, which are important contributors to the impressive earnings rebound in 1H23.


Lonking (3339 HK): Between a Rock and a Hard Place

<ul>
<li>After a poor FY22, 1H23 will stay challenging 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>. However, we expect pick-up in business momentum going forward, and export is a major growth driver.</li>
<li>Gross margin rebounded HoH and YoY in 2H22, and Lonking maintained good operating cost control. Recovery of equity market suggests potential big positive swing in investment income. </li>
<li>Including investment portfolio, 92% of the current market capitalisation is net cash, providing solid downside buffer. Its 6.5x PER, 9.2% yield and 0.52x P/B are very attractive valuations.</li>
</ul>


After a poor FY22, 1H23 will stay challenging for Lonking Holdings (3339 HK). However, we expect pick-up in business momentum going forward, and export is a major growth driver.
Gross margin rebounded HoH and YoY in 2H22, and Lonking maintained good operating cost control. Recovery of equity market suggests potential big positive swing in investment income. 
Including investment portfolio, 92% of the current market capitalisation is net cash, providing solid downside buffer. Its 6.5x PER, 9.2% yield and 0.52x P/B are very attractive valuations.


Lonking (3339 HK): Back to Attractive Zone

<ul>
<li>Share price 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> has seen muted reaction to weak industry figures recently but it is still unexciting in near-term, based on our catch-up with the company. </li>
<li>It has underperformed industry sales volume in 5M22 across all product categories, with that for wheel loader behind 4pp and excavator by 10pp. Forklift sales were down 18% YoY. </li>
<li>Both gross margin and investment income are set to contract in this year, making it highly likely to see significant earnings downgrade after 1H22 result announcement in Aug. </li>
</ul>


Share price of Lonking Holdings (3339 HK) has seen muted reaction to weak industry figures recently but it is still unexciting in near-term, based on our catch-up with the company. 
It has underperformed industry sales volume in 5M22 across all product categories, with that for wheel loader behind 4pp and excavator by 10pp. Forklift sales were down 18% YoY. 
Both gross margin and investment income are set to contract in this year, making it highly likely to see significant earnings downgrade after 1H22 result announcement in Aug. 


Lonking (3339 HK): Not Out of the Woods Yet

China Everbright Environment Group / Equity Bottom-Up

China Everbright Environment Group (257 HK)

<ul>
<li>China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.</li>
<li>NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.</li>
<li>Both <a href="https://www.smartkarma.com/entities/china-everbright-environment-group-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a> and <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> are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.</li>
</ul>


China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.
NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.
Both China Everbright Environment (257 HK) and China Communications Construction (1800 HK) are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.


Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

<p>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.</p><p>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.</p>

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.

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)

Lonking (3339 HK): Between a Rock and a Hard Place

Lonking's valuations are not too expensive, but 2H23 earnings may disappoint. Domestic sales have not improved, strong export in 1H23 not...

Osbert Tang, CFA

Lonking (3339 HK): Back to Attractive Zone

We turned bullish on Lonking on 17 Apr, and since then, the stock has performed well. It has just issued a positive profit alert with 91-158% YoY...

Osbert Tang, CFA

Lonking (3339 HK): Not Out of the Woods Yet

Lonking may disappoint the market by wide margin when it reports 1H22 result in Aug. Sales of its key product categories have been behind the...

Osbert Tang, CFA

Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

We see local governments' special purpose bonds issuance and uses for 4Q21 and 1Q22 to benefit environmental and infrastructure construction...

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Lonking (3339 HK): Between a Rock and a Hard Place

​Lonking's valuations are not too expensive, but 2H23 earnings may disappoint. Domestic sales have not improved, strong export in 1H23 not...

Osbert Tang, CFA

Lonking (3339 HK): Back to Attractive Zone

We turned bullish on Lonking on 17 Apr, and since then, the stock has performed well. It has just issued a positive profit alert with 91-158% YoY...

Osbert Tang, CFA

Lonking (3339 HK): Not Out of the Woods Yet

Lonking may disappoint the market by wide margin when it reports 1H22 result in Aug. Sales of its key product categories have been behind the...

Osbert Tang, CFA

Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

We see local governments' special purpose bonds issuance and uses for 4Q21 and 1Q22 to benefit environmental and infrastructure construction...

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's valuations are not too expensive, but 2H23 earnings may disappoint. Domestic sales have not improved, strong export in 1H23 not...