What’s changed? While we believe wheel loader, Lonking’s key product, will continue to be threatened by small-size excavators, we expect the impact will be less than what we expected as we see several near term positive factors: (1) strong wheel loader sales in Jan (+56% YoY) suggested strong demand from infrastructure and mining activities; (2) the recent strong non-ferrous metal prices will boost Lonking’s valuation as Lonking’s share price has historically been correlated with metal prices; (3) recent good performance of equity market will help boost the return of Lonking’s investment products. We revised up Lonking’s core net profit in 2020E-22E by 4-13%, after revising up the sales volume of all products, and raised our TP from HK$2.22 (7x 2020E P/E) to HK$4.01 (SOTP). Current price offers 8-9% dividend yield in 2020E-21E. Upgrade to BUY from Sell.
- Surprising strong wheel loader sales in Jan. According to CCMA, sales volume of wheel loader by major players grew 52% YoY to 8.9k units in Jan. The figure is stronger than our expectation even taking into consideration of the low base effect (early CNY in 2020). We believe the strong growth reflected the solid infrastructure construction and a potential recovery mining activities. Lonking, the largest player in wheel loader market with solid presence (22% market share in 1H20), is set to benefit from the strong demand.
- A beneficiary of rising non-ferrous metal price. We expect Lonking will benefit from the recent strong performance of non-ferrous metal price, as demand for wheel loader, with high exposure in mining segment, will likely be driven by the potential increase in spending on mining projects. Historically, Lonking’s share price moved in tandem with the price of copper and aluminum (Figure 4 & 5).
- Key catalysts: (1) strong machinery sales data; (2) recovery of mining capex.
- Downside risks: (1) market share loss due to strong competitors in the excavator segment; (2) structural weakness in wheel loader demand; (3) investment loss.
