HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

For FY20, <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 managed to reduce its sales growth gap against industry in its key product categories when compared with 1H20. This will support the company to deliver a growth in core profit for the full-year as guided after the interim result, reversing the trend of a declining core profit in 1H20. Assuming it to maintain its payout ratio, the stock now sits on 9.9% dividend yield with a high ROE of 19.1%.As for FY21, Lonking's outlook is robust as it expects a strong leap in excavator sales and good recovery in export momentum, driven primarily by better fixed asset investment for infrastructure and resurgence in overseas economies. With minimal capex for next 2 years, it will continue to accumulate cash on the back of sound profitability - we see sound FCF yield of 19% for current year.

For FY20, Lonking Holdings (3339 HK) has managed to reduce its sales growth gap against industry in its key product categories when compared with 1H20. This will support the company to deliver a growth in core profit for the full-year as guided after the interim result, reversing the trend of a declining core profit in 1H20. Assuming it to maintain its payout ratio, the stock now sits on 9.9% dividend yield with a high ROE of 19.1%.As for FY21, Lonking's outlook is robust as it expects a strong leap in excavator sales and good recovery in export momentum, driven primarily by better fixed asset investment for infrastructure and resurgence in overseas economies. With minimal capex for next 2 years, it will continue to accumulate cash on the back of sound profitability - we see sound FCF yield of 19% for current year. 

Lonking (3339 HK): Company Suggests Robust Outlook for 2021

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

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

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

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

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): Company Suggests Robust Outlook for 2021

Lonking successfully narrowed sales growth gap against industry in FY20 and painted a robust picture for product demand in FY21. Strong net cash is...

Osbert Tang, CFA

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

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

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

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