20210210-招银国际-中国龙工-03339.HK-Recovery_of_wheel_loader_sales__Proxy_of_metal_prices__U_G_to_BUY_5页_1mb

Lonking (3339 HK) Company Update Summary

Core Content and Key Points

Lonking, a major player in the wheel loader market with a 22% market share in H1 2020, is experiencing a positive shift in its business outlook, leading to an upgrade from Sell to BUY. The main reasons for this upgrade are:

• Strong Wheel Loader Sales: In January 2020, wheel loader sales increased by +52% YoY to 8.9k units, indicating robust demand from infrastructure and mining sectors.
• Rising Non-Ferrous Metal Prices: The recent increase in prices for non-ferrous metals like copper and aluminum is expected to positively impact Lonking's valuation and earnings, as its share price historically correlates with these metal prices.
• Equity Market Recovery: The improved performance of the equity market is anticipated to boost the return of Lonking's investment products.

Key Financial Highlights

Earnings Summary (YE 31 Dec)

Financial Year	Revenue (RMB mn)	YoY Growth (%)	Net Income (RMB mn)	EPS (RMB)	YoY Growth (%)
FY18A	11,868	32.0	1,144	0.267	9.4
FY19A	11,744	-1.0	1,643	0.384	43.7
FY20E	12,243	4.3	1,518	0.355	-7.6
FY21E	12,909	5.4	1,547	0.361	1.9
FY22E	12,915	0.0	1,568	0.366	1.4

Key Ratios (YE 31 Dec)

Metric	FY18A	FY19A	FY20E	FY21E	FY22E
Gross Margin (%)	23.0	23.9	22.6	22.5	22.4
EBITDA Margin (%)	13.3	18.6	16.7	15.9	15.8
EBIT Margin (%)	10.4	15.7	13.9	13.3	13.1
Net Profit Margin (%)	9.6	14.0	12.4	12.0	12.2
ROE (%)	14.4	19.0	16.2	15.6	14.8
Current Ratio (x)	3.1	3.1	3.1	3.2	3.3

Valuation and Target Price

• Target Price (TP): Revised from HK$2.22 to HK$4.01, a +41% increase.
• Valuation Methodology: Based on SOTP (Sum of the Parts).
  • Core Business (9x 2021E P/E): Estimated fair value per share is RMB3.34.
  • Investment Products (1x historical P/B): Estimated fair value is RMB0.62.
• Current Price: HK$2.85.
• Dividend Yield: 8-9% in 2020E-21E.

Key Catalysts and Downside Risks

Positive Catalysts

• Strong machinery sales data.
• Recovery in mining capital expenditures (capex).
• Rising non-ferrous metal prices.

Downside Risks

• Potential market share loss due to competition in the excavator segment.
• Structural weakness in wheel loader demand.
• Investment loss in equity products.

Share Performance and Market Data

Metric	Value (HK$)
Market Cap (mn)	12,198
52-Week High/Low	3.00 / 1.90
Total Issued Shares (mn)	4,280

Shareholding Structure

Holder	Percentage
Li San Yim	56.0%
GIC	7.0%
Others	37.0%

Analyst and Ratings

• Analyst: Wayne Fung, CFA.
• Ratings:
  • BUY: Potential return of +15% over next 12 months.
  • HOLD: Return between +15% to -10%.
  • SELL: Potential loss of >10%.

Summary of Financial Projections

• Core Net Profit for 2020E-22E is revised up by 4-13%.
• Revenue Growth is expected to be +7.3% for 2020E-22E.
• Investment Product Performance is expected to be positive with rising equity market returns.

Conclusion

Lonking's recent performance, particularly in wheel loader sales and the positive correlation with non-ferrous metal prices, has led to a BUY rating. The revised target price reflects a more optimistic outlook on its core business and investment products. While there are risks, including competition and potential investment losses, the upward trend in earnings and dividend yield make it an attractive investment opportunity.