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Lonking Holdings (3339 HK) Summary

Core Content

Lonking Holdings (3339 HK) is a Hong Kong-listed company in the industrials sector, with a current share price of HKD1.50 and a target price of HKD2.00 (+33%). The company's market capitalization is HKD6.4B, and its average daily trading volume is USD2M. The company's main business segments include wheel loaders, excavators, forklifts, and road rollers, with a focus on construction and infrastructure.

Main Points

• Earnings Performance:

  • FY13 earnings grew by 216.9% YoY to CNY480m, slightly below both the forecast and market consensus.
  • The underperformance was attributed to a 199% surge in other losses, primarily due to impairment of loans receivables.
  • Despite this, operational performance was strong, with all key metrics beating expectations.
  • Final DPS of HKD0.065 (46% payout ratio) exceeded the forecast.

• Revenue Growth:

  • FY13 revenue increased by 3.3% YoY to CNY8,157.5m, aligning with forecasts.
  • Wheel loader and forklift segments showed strong growth, with revenue increases of 3.1% and 20% respectively.
  • Excavators declined by 30% YoY, as expected.
  • 2M14 revenue surged by 56.3% YoY, indicating a solid start for the year.

• Impairment Outlook:

  • Impairment charges are expected to decline as the proportion of excavators in the sales mix continues to decrease.
  • Management expects a reduction in impairment charges for FY14, factoring in CNY179.6m (-25% YoY).
  • The company is shifting its focus away from excavators to other segments, which should improve financial performance.

• Valuation Metrics:

  • Lonking is currently trading at 9x PE and 0.7x PB for FY14F, which is at the low end of its historical range.
  • The company's earnings growth is expected to be 18.5% YoY for FY14 and 26% YoY for FY15, despite a revision in forecasts.
  • The target price of HKD2.00 is based on an unchanged 12x target PE multiple, reflecting confidence in the recovery trend.

• Financial Health:

  • Inventory days and receivable days decreased, indicating better working capital management.
  • Gearing fell from 51% in FY12 to 30% in FY13, and is expected to drop further to 24% in FY14.
  • Free cash flow has remained strong, with over CNY1b annually from FY11 to FY13 and expected to continue in FY14-16.

• Future Outlook:

  • Management is optimistic about FY14 performance, expecting positive growth in both top and bottom lines.
  • The company is targeting a 30% YoY increase in export sales.
  • Gross margin may decline slightly due to rising raw material and component prices, but operating margins are expected to improve due to lower impairment and cost control.

Key Information

• Market Capitalization: HKD6.4B
• Share Price: HKD1.50
• Target Price: HKD2.00 (+33%)
• Dividend Yield: Expected to increase to 7.4% in FY16.
• Earnings Growth:
  • FY14: 18.5% YoY
  • FY15: 26.0% YoY
  • FY16: 18.2% YoY
• Gearing: 30% in FY13, expected to fall to 24% in FY14.
• Capex: Reduced to CNY160m in FY14, a 49% decrease from FY13.
• Major Shareholders:
  • LI SAN YIM: 56%
  • GIC Pte Ltd.: 6%
  • Lazard Asset Management LLC: 1%

Key Drivers

• Solid growth in wheel loader and forklift sales.
• Lower finance costs.
• Increased export sales.
• Improved operational efficiency and working capital management.
• Reduction in impairment charges due to declining excavator sales.

Peer Comparison

• Lonking's valuation is lower than its peers, but this is seen as a reflection of its current financial situation rather than a sign of poor performance.
• The company is expected to outperform its peers in FY14 due to its growth momentum and cost control strategy.

Conclusion

Despite a 9% miss in earnings forecasts for FY13, Lonking is expected to show strong recovery in FY14 with a 18.5% YoY earnings growth. The company's focus on reducing exposure to excavators and improving operational efficiency is seen as a positive trend. The target price of HKD2.00 is based on a 12x target PE multiple, reflecting the analyst's confidence in the company's recovery and growth potential.