1H17 NPAT +149% YoY to RMB498m which was well abovemarket expectation due to strong sales and margin expansion.
Strong sales likely to continue into 1H18 and operatingleverage would benefit earnings growth.
Maintain Buy rating, increase TP to HKD3.5 (vs HKD3 prior)based on PBV method, implying 22% upside.
Momentum is your friend in 2H17: Chinese construction machinery industry hasundergone a significant recovery in sales volume from a low base and we think 2H17will remain strong. Lonking reported stronger than expected 1H17 financial results onthe back of increased equipment sales and margin expansion on favourable productmix and operating leverage. Revenue increased by 73.3% in 1H17 to RMB4.5bnwhile NPAT increased by 149.4% to RMB498mn as the equipment sales continuedthe solid recovery that began in 2H16. Gross profit margins increased materially forwheel loaders, excavators and rollers while rising raw material prices hit grossmargins for forklift. Favourable product mix for wheel loader (52.6% of total revenue)helped the blended ASP increase as well as the gross profit margin expansion. Thecompany overall gross profit margin increased from 23.6% in 1H16 to 27.2% in 1H17.The company’s operating cash flow was positive in 1H17 despite an increase inaccounts receivable and management expects further improvement in 2H17.
High utilization and limited production capacity expansion plan: The company isoperating at above 100% utilization rates for all four product lines meaning they areworking almost two shifts per day for all the products instead of the usual one shiftper day. Management announced plans to increase the forklifts production capacityby 15,000 units to a total of c26,000 units. However there are no plans to increasethe capacity for other product lines.
Maintain Buy with a higher TP of HKD3.5: Lonking has continued to capturemarket share in all four product categories including loaders, excavators, forklifts androllers. We maintain our Buy rating on the stock because we think stronger-thanexpectedindustry sales could see continued positive earnings for the company. Weincrease our target price to HKD3.50 (vs HKD3.00 previously) based on 1.7x(unchanged) FY18e book value (vs FY17e book value previously). Our target priceimplies 22% upside to the current share price.