China Specialist, Auto and Industrial Specialist

Victoria Li

Thematic (Sector/Industry)

The exceptional 2020 is about to end. We expect China's construction machinery sales to record a new high for FY2020. However, would China's construction machinery sector continue growing at the same fast pace in 2021E? Probably not!
<ol>
<li>We believe excavators replacement demand probably peak this year.</li>
<li>Infrastructure demand might decline yoy in 2021E.</li>
<li>Property construction demand would turn weak soon, with the new starts of property floor space trends down.</li>
</ol>
<a href="https://www.smartkarma.com/entities/sany-heavy-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:20183" rel="noopener">Sany Heavy Industry (600031 CH)</a> would be affected first as its earnings mainly come from early stage machines. <a href="https://www.smartkarma.com/entities/zoomlion-heavy-industry-h" target="_blank" data-smartkarma-citation="entities:7817" rel="noopener">Zoomlion Heavy Industry H (1157 HK)</a> earnings growth is overtaking Sany's and might slow down in 2H2021. We suggest to switch from Sany Heavy to Zoomlion.

The exceptional 2020 is about to end. We expect China's construction machinery sales to record a new high for FY2020. However, would China's construction machinery sector continue growing at the same fast pace in 2021E? Probably not!

We believe excavators replacement demand probably peak this year.
Infrastructure demand might decline yoy in 2021E.
Property construction demand would turn weak soon, with the new starts of property floor space trends down.

Sany Heavy Industry (600031 CH) would be affected first as its earnings mainly come from early stage machines. Zoomlion Heavy Industry H (1157 HK) earnings growth is overtaking Sany's and might slow down in 2H2021. We suggest to switch from Sany Heavy to Zoomlion.

China Construction Machinery: Risks Rise in 2021E

Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

We deliver this via advisory services, strategic planning, opportunity analysis/sourcing, as well as solution implementation. 

Whilst, we create intellectual discipline and operational leverage for your projects or daily activities, our ultimate objective is to empower whilst enhancing your decision making. 

Strategic Knowledge and Solutions

Cross Asset Strategy

Q3 delivered marked underperformanceOur Q3-2020 Small-Mid Cap High-Risk list of stocks produced an average price increase of 0.3%. In comparison, the MSCI Asia Pacific Index posted an increase of 6.3% over the same period. 15 stocks appear in our Q4 2020 screen, versus 21 in Q3 2020. As we highlighted in the previous three quarters, we are specifically on the watch for the risk of deteriorating credit metrics during 2020. This screen presents names which are worthy of investigation as they present with fundamentals which are at risk.

Q3 delivered marked underperformanceOur Q3-2020 Small-Mid Cap High-Risk list of stocks produced an average price increase of 0.3%. In comparison, the MSCI Asia Pacific Index posted an increase of 6.3% over the same period. 15 stocks appear in our Q4 2020 screen, versus 21 in Q3 2020. As we highlighted in the previous three quarters, we are specifically on the watch for the risk of deteriorating credit metrics during 2020. This screen presents names which are worthy of investigation as they present with fundamentals which are at risk.

Screening the Silk Road: Q4 2020 High Risk Names to Avoid

HK/China Equity Long-Short

Osbert Tang, CFA

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

Time to remove the upper market cap limit as risk increases.<ul>
<li>
Our screen from this quarter onwards is for all stocks<a href="applewebdata://17FB2464-550F-48C5-BBBA-E248B1412D29#_ftn1" target="_blank" rel="noopener">[1]</a> above a market capitalisation of US$500m as we now encounter possibly one of the riskier periods in our market history. With this in mind, we have removed our Small-Mid Cap focus (US$500m-US$10bn market capitalisation) from our screens. </li>
<li>
21 stocks appear in our Q3 2020 screen. The average stock rank in our list has maintained a ranking of 63.5 points compared to 68 in Q2 2020 placing the stocks lower in the second quartile of the market, suggesting deteriorating fundamentals and a strong possibility of lagging performance.</li>
<li>
As we highlighted in Q1, watch for the risk of deteriorating credit metrics over 2020: In Q3, the Altman Z score is at a market-cap-weighted 1.44 times, versus 1.31 in Q2. Whilst marginally improved, since earnings continue to be adjusted by analysts and there is limited visibility of their bottoming, the potential for a lower Z score in Q4 2020 and H1 2021is increased.</li>
</ul>

Time to remove the upper market cap limit as risk increases.

Our screen from this quarter onwards is for all stocks[1] above a market capitalisation of US$500m as we now encounter possibly one of the riskier periods in our market history. With this in mind, we have removed our Small-Mid Cap focus (US$500m-US$10bn market capitalisation) from our screens. 

21 stocks appear in our Q3 2020 screen. The average stock rank in our list has maintained a ranking of 63.5 points compared to 68 in Q2 2020 placing the stocks lower in the second quartile of the market, suggesting deteriorating fundamentals and a strong possibility of lagging performance.

As we highlighted in Q1, watch for the risk of deteriorating credit metrics over 2020: In Q3, the Altman Z score is at a market-cap-weighted 1.44 times, versus 1.31 in Q2. Whilst marginally improved, since earnings continue to be adjusted by analysts and there is limited visibility of their bottoming, the potential for a lower Z score in Q4 2020 and H1 2021is increased.


Screening the Silk Road: Q3 2020 High Risk Names to Avoid

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

Zoomlion Heavy Industry Science & Technology Co., Ltd. is a Chinese manufacturer primarily engaged in the research, development, manufacturing, and sales of high-tech equipment, including construction machinery, agricultural machinery, and environmental industry equipment. Its key products encompass cranes, excavators, concrete machinery, and tractors. The company was founded in 1992 and is headquartered in Changsha, Hunan, China.

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Zoomlion (1157 HK)

China Construction Machinery: Risks Rise in 2021E

We expect China's construction machinery sales to record a new high for FY2020. However, would China's construction machinery sector continue...

Victoria Li

Screening the Silk Road: Q4 2020 High Risk Names to Avoid

Our Q3 screen delivered 600bps of under performance. With volatility is set to increase as we head into H1 2020, which stocks are most at risk in...

David Lepper

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

Screening the Silk Road: Q3 2020 High Risk Names to Avoid

Time to remove the upper market cap limit as risk increases. Our screen from this quarter onwards is for all stocks[1] above a market...

David Lepper

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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