Lonking’s net profit grew 19% YoY to RMB1.96bn, substantially exceeded our / consensus estimate by 29%/ 32%. The surprise came from the net investment gain of ~RMB577mn (versus our forecast of ~RMB250mn). Excluding the investment gain, the profit from the core business grew 8% to RMB1.37bn, 8% above our core profit estimate, due to better-than-expected excavator sales. We revise up Lonking’s net profit forecast in 2021E-22E by 11-12% (20-21% above consensus), due to higher assumptions on excavator sales. We lift our SOTP-based TP to HK$4.29 from HK$4.01. Lonking proposed HK$0.33 dividend per share, implying 12% yield at the current price. Maintain BUY.
- 2020 results highlights. Revenue grew 10% YoY to RMB12.9bn, mainly driven by 4%/14%/14% growth of wheel loader / excavator / forklift. Gross margin slightly dropped 0.5ppt YoY to 23.4%. Lonking generated a net investment gain of RMB577mn in 2020, due to strong equity market. Proposed dividend of RMB1.17bn is higher than the operating cash inflow of RMB1.07bn. Dividend payout ratio is 60.6%, up slightly from 59.4% in 2019.
- Strong recovery in 2H20. In 2H20, revenue from excavator surged 59% YoY, a sharp improvement from a decline of 9% in 1H20, suggesting improvement in management execution. Wheel loader revenue grew 14% YoY in 2H20, much better than the 4% YoY decline in 1H20. Report net profit / core net profit in 2H20 grew 35% YoY / 25% YoY.
- Strong machinery sales in 2M21 for the industry as a whole. According to CCMA, sales volume of wheel loader / excavator by major players grew 76% YoY / 150% YoY in 2M21. We believe the robust downstream demand to continue and we believe strong industry data in Mar will serve as near term catalyst.
- Downside risks: (1) Market share loss due to strong competition in the excavator segment; (2) structural weakness in wheel loader demand; (3) investment loss due to weak equity market.
