HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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

We do not think a slower reported industry excavator and wheel loader sales growth in Apr is a concern to <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>. In fact, the slowdown to 2.5% and 9% YoY, respectively, compared with 85% and 67% YoY in 1Q21, is primarily driven by high base for comparison a year ago as pandemic restrained demand is released.Relative to Apr 2019, the Apr 2021 unit sales still grew by impressive levels of 63.9% and 44.7%, respectively, providing us comfort on the health of underlying demand. Meanwhile, it is encouraging to see the sustained strength in export despite the continued negative impacts of COVID-19 outside China. We still expect a promising year for Lonking in FY21, and its valuation metrics remain very undemanding.

We do not think a slower reported industry excavator and wheel loader sales growth in Apr is a concern to Lonking Holdings (3339 HK). In fact, the slowdown to 2.5% and 9% YoY, respectively, compared with 85% and 67% YoY in 1Q21, is primarily driven by high base for comparison a year ago as pandemic restrained demand is released.Relative to Apr 2019, the Apr 2021 unit sales still grew by impressive levels of 63.9% and 44.7%, respectively, providing us comfort on the health of underlying demand. Meanwhile, it is encouraging to see the sustained strength in export despite the continued negative impacts of COVID-19 outside China. We still expect a promising year for Lonking in FY21, and its valuation metrics remain very undemanding.  

Lonking (3339 HK): Is There a Slowdown in the Industry? Our Answer Is No.

Demand for construction machinery stayed very resilient in Mar, with 60% YoY growth for industry excavator sales and 53% growth for wheel loader. These figures concluded an extremely solid 1Q21 in the history of the industry, as sales was up 85% and 60.7% for the quarter. We believe <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 a direct beneficiary of the good momentum.Initial figures from Lonking suggested that the company is tracking closely the industry sales for excavator but outperformed on wheel loader sales significantly in 1Q21. This reversed the trend of underperformance in last year, and the market should take this positively. In our view, at 5.3x PER, 1.1x P/B and 11.3% dividend yield for FY21, together with an ROE of 21.5% and net cash of HK$0.90/share, who can afford not to take a look on Lonking?

Demand for construction machinery stayed very resilient in Mar, with 60% YoY growth for industry excavator sales and 53% growth for wheel loader. These figures concluded an extremely solid 1Q21 in the history of the industry, as sales was up 85% and 60.7% for the quarter. We believe Lonking Holdings (3339 HK) is a direct beneficiary of the good momentum.Initial figures from Lonking suggested that the company is tracking closely the industry sales for excavator but outperformed on wheel loader sales significantly in 1Q21. This reversed the trend of underperformance in last year, and the market should take this positively. In our view, at 5.3x PER, 1.1x P/B and 11.3% dividend yield for FY21, together with an ROE of 21.5% and net cash of HK$0.90/share, who can afford not to take a look on Lonking?

Lonking (3339 HK): 1Q21 Industry Figures Blown Through the Roof

<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 logged a revival in earnings performance in 2H20 with a 34.6% YoY growth, accelerating from just 6.2% in 1H20. This is backed by the resurgence in sales growth for all its major products, with excavator and forklift being the best ones. It declared a final DPS of HK$0.33, translating into an attractive dividend yield of 12.2%.We saw Lonking stepping into FY21 positively - government's infrastructure spending will continue to support construction machinery demand, and industry sales already pointed to excellent demand in 2M21. We expect net cash will reach HK$0.90/share by end-FY21, 33% of the share price, and its 4.4x PER and 0.89x P/B are just too cheap for a quality company that expects to earn ROE of 21.4% in this year.

Lonking Holdings (3339 HK) has logged a revival in earnings performance in 2H20 with a 34.6% YoY growth, accelerating from just 6.2% in 1H20. This is backed by the resurgence in sales growth for all its major products, with excavator and forklift being the best ones. It declared a final DPS of HK$0.33, translating into an attractive dividend yield of 12.2%.We saw Lonking stepping into FY21 positively - government's infrastructure spending will continue to support construction machinery demand, and industry sales already pointed to excellent demand in 2M21. We expect net cash will reach HK$0.90/share by end-FY21, 33% of the share price, and its 4.4x PER and 0.89x P/B are just too cheap for a quality company that expects to earn ROE of 21.4% in this year.

Lonking (3339 HK): Rock Solid at 12.2% FY20 Dividend Yield, Still with Lots of Net Cash

Thematic (Sector/Industry)

Jan excavator and wheel loader sales surged 97.2% YoY and 52.4% YoY, respectively, kicking off the year with a solid momentum. While a low base has partly contributed to the surge, this is not the entire reason as we found underlying demand very encouraging. Domestic market maintained its strength, and export sales growth rate has also improved against Dec 2020. All in all, the initial figures point to a robust year in 2021.Commencement of massive infrastructure projects and good order book of engine and equipment suppliers suggest continuation of the impressive growth pace in 1H21. Despite an 18.8% rise in share price YTD, <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 still trading on just 5.2x PER and an attractive 10.4% dividend yield for FY21F, and we see the stock stay appealing.

Jan excavator and wheel loader sales surged 97.2% YoY and 52.4% YoY, respectively, kicking off the year with a solid momentum. While a low base has partly contributed to the surge, this is not the entire reason as we found underlying demand very encouraging. Domestic market maintained its strength, and export sales growth rate has also improved against Dec 2020. All in all, the initial figures point to a robust year in 2021.Commencement of massive infrastructure projects and good order book of engine and equipment suppliers suggest continuation of the impressive growth pace in 1H21. Despite an 18.8% rise in share price YTD, Lonking Holdings (3339 HK) is still trading on just 5.2x PER and an attractive 10.4% dividend yield for FY21F, and we see the stock stay appealing. 

China Construction Machinery: An Excellent Start for a Sustained Uptrend in This Year

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): 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

Lonking (3339 HK): Is There a Slowdown in the Industry? Our Answer Is No.

We do not interpret the slowdown in Apr excavator and wheel loader sales as a reflection of weaker underlying demand. Instead, this is primarily...

Osbert Tang, CFA

Lonking (3339 HK): 1Q21 Industry Figures Blown Through the Roof

While industry construction machinery sales are strong, the more important message is that Lonking has been tracking well against the figures and...

Osbert Tang, CFA

Lonking (3339 HK): Rock Solid at 12.2% FY20 Dividend Yield, Still with Lots of Net Cash

Lonking's good performance in 2H20 should extend into this year, and its net cash will accumulate to 33% of share price by end-FY21. Assuming the...

Osbert Tang, CFA

China Construction Machinery: An Excellent Start for a Sustained Uptrend in This Year

Excavator and wheel loader sales growth rates reached a monthly high in Jan since Jan-2018, suggesting excellent demand momentum. Lonking is an...

Osbert Tang, CFA

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