FY16 NPAT increased 296% YoY to Rmb462m, well ahead ofthe market’s and our expectations
Strong sales should continue into 1H17 which would benefitprofitability. Aiming to gain market share in 2017.
Maintain Buy rating, no change to earnings or TP of HKD2.60,+16% implied upside
The post-results management conference call will be held at 10am on 29 March.Lonking ends 2016 with a roar: FY16 NPAT increased 296% YoY to Rmb462m,well ahead of our forecast of Rmb344m and market expectations of Rmb315m.Revenue of Rmb5,146m exceeded expectations by 6.6% due to strong recovery inproduct sales in 2H16. Good control of SG&A expense also saw the company’s EBITgrew 160% YoY to Rmb491m in FY16, and the FY16 EBIT margin increased to 9.5%versus 3.9% in FY15. The company’s construction machinery product salesincreased across the board with the exception of road rollers (down 7.9% YoY toRmb73m or 3% of revenue). The two largest contributors to revenue, wheel loadersand fork lifts, grew 2.3% YoY and 18.8% YoY respectively. The company generateda large foreign exchange gain of Rmb163m before tax due to an increase in Rmbdenominated borrowing. Even if we were to exclude the foreign exchange gain, thecompany’s FY16 results would still be ahead of market expectations. The companymaintained its dividend payout ratio at about 56% for FY16.
Solid construction activity in the property and infrastructure sectors would benefitLonking going into 2017. Industry sales growth for excavators and wheel loaderssoared for Feb 2017 YTD by +188% YoY and +60% YoY. We think the strongproduct sales could continue until 3Q17 due to peak season demand in 2Q and a lowbase.
Positive outlook and aiming for market share gain: Our FY17e EPS forecast isabout 10% above Bloomberg consensus. We expect to see positive earningsrevisions by consensus given the company’s strong product sales. The companyaims to gain market share for its products and sees opportunities in smallerexcavators used in urban areas. Lonking had a net cash balance sheet as at the endof 2016 and we expect positive operating cash flow in 2017. We maintain our Buyrating on the stock because we think the stronger-than-expected industry salesshould see continued positive earnings for the company. Our TP of HKD2.60, whichimplies 16.1% upside from current levels, is based on 1.4x PB, which is in line withthe shares’ historical average since 2011.