Equity Research | Construction Machinery Dec 11, 2017

Construction Machinery Sector

Nov sales volume beats expectation

Better-than-expected excavator sales volume in Nov According to the China Construction Machinery Association (CCMA), 13,822 were sold in China during Nov, up 107.4% YoY and better than market expectation of 10,000 units. Nov Dominic Chan, CFA, FRM sales volume was also much higher than Oct’s 10,541 units. Total excavator sales SFC CE No. APP609 volume during 11M17 reached 126,298 units, up 99.2% YoY. We expect this to reach [email protected] 140,000 units in 2017. +852 3719 1218 Strong sales driven by replacement demand As stated in our 2018 outlook report,

construction machinery sales are recovering, a trend that we expect to continue in 2018, GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers mainly driven by FAI and the replacement cycle. 189 Des Voeux Road Central Hong Kong ’s sales volume grew at a faster rate of 67.5% in Nov Lonking’s construction machinery sales volume rose by 67.5% YoY, compared with 46.8% in Oct. Excavator sales volume continued to outperform peers, with growth surging 145.5% YoY, compared with the market average of 107.4% YoY. The figures show the company’s market share continues to expand. Meanwhile, forklift sales volume grew at a faster rate of 81.4%, exceeding our expectation. Wheel loader sales volume increased by 35.1% YoY, we believe in line with market expectation, whereas road rollers slowed to 25% YoY.

Lonking’s forklifts segment likely to maintain momentum According to management, its new forklift manufacturing plant in Yingxi with capacity of 15,000 units per year (equivalent to 58% of current capacity) will begin operation by the end of this month. Given that its current manufacturing facility is operating at full capacity, the new capacity will help to spur extra momentum for Lonking next year.

Lonking’s 2017 results likely to beat expectations During 11M17, sales volume of loaders, excavators, forklifts and road rollers grew by 65.1%, 127.1%, 53% and 43.9% YoY respectively. Excavator and forklift growth was higher than we had expected while loader and road roller growth was broadly in line with our estimates. Meanwhile, the company raised its ASP for loaders by ~7% in Oct, which will have a positive impact on 4Q17 results. We estimate revenue/net profit will increase by 66%/81% in 2017, while the market expects revenue/net profit to rise by 52%/75%. We believe it is highly likely that Lonking’s 2017 results will beat market expectation.

Reiterate Buy on Lonking Lonking’s recent weak stock performance was mainly due to concerns about Nov sales volume in China, particularly for heavy-duty trucks, for which weak sales figures were announced a few days ago. We believe the strong Nov excavator sales volume should help to ease market concerns. The stock is currently trading as 10.6x 2018E P/E; we maintain our Buy rating and target price of HK$4.30.

Sector Recommendations Company Ticker Rating Price Target 2017E EPS 2018E EPS 2017E 2018E 2017E 2018 (HK$) price (Rmb) (Rmb) PE P/E P/B P/B Lonking 3339 HK Buy 2.89 4.3 0.20 0.24 13.1 10.6 1.49 1.39 Haitain Int'l 1882 HK NR 22.50 NR 1.28 1.46 15.0 13.1 2.87 2.50 1157 HK NR 3.10 NR 0.17 0.16 15.7 16.5 0.53 0.52 Int'l 631 HK NR 1.17 NR 0.08 0.09 13.2 11.4 0.47 0.46 Sources: Company data, Bloomberg, GF Securities (Hong Kong)

Sector note Dec 11, 2017

Figure 1: Excavator sales volume in China (units) Figure 2: Loader sales volume in China (units)

Sources: CCMA, Wind, GF Securities (Hong Kong)

Figure 3: Forklift sales volume in China (units) Figure 4: Road roller sales volume in China (units)

Sources: CCMA, Wind, GF Securities (Hong Kong)

Figure 5: Lonking’s P/E band Figure 6: Lonking’s P/B band

8.00 14 7.00

12 6.00

10 5.00

4.00 8

3.00 6 25x 2.00 20x 4 15x 1.00

2 10x - 5x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 -1.00

-2.00

1/3/2010 1/3/2015 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2016 1/3/2017 P/BV -2 SD -1 SD Average +1 SD +2 SD

Sources: Bloomberg, GF Securities (Hong Kong) estimates

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Sector note Dec 11, 2017

Figure 7: Valuation comparison

EPS EPS CAGR P/E ratio P/B ratio Ticker Company Name Currency Price 2016 2017E 2018E 2016 2017E 2018E 2016 2017E 2018E Market Cap (USD m) HK peers 3339 hk equity LONKING HOLDINGS LTD HKD 2.89 0.13 0.22 0.27 45% 22.48 13.06 10.62 1.48 1.49 1.39 1589.75 1157 hk equity ZOOMLION HEAVY INDUSTRY - H HKD 3.1 - 0.20 0.19 - - 15.66 16.49 0.54 0.53 0.52 4576.71 38 hk equity FIRST TRACTOR CO-H HKD 3.09 0.26 0.29 0.25 -3% 27.27 10.69 12.46 0.55 0.53 0.51 799.09 1882 hk equity HAITIAN INTERNATIONAL HLDGS HKD 22.5 1.13 1.50 1.72 23% 16.77 14.98 13.08 3.09 2.88 2.51 4568.64 631 HK equity SANY HEAVY EQUIPMENT INTL HKD 1.19 - 0.09 0.10 - - 13.11 11.30 0.48 0.47 0.45 451.81 2039 HK equity CHINA INTERNATIONAL MARINE-H HKD 13.66 0.16 1.04 1.23 174% 18.86 13.17 11.15 1.21 1.18 1.10 6779.62 3899 HK equity CIMC ENRIC HOLDINGS LTD HKD 5.31 - 0.29 0.42 - 58.59 18.59 12.75 1.64 1.49 1.35 1320.91 Average 28.79 14.18 12.55 1.28 1.22 1.12 A shares peers 600031 ch equity SANY HEAVY INDUSTRY CO LTD-A CNY 8.63 0.03 0.37 0.52 308% 36.11 27.34 19.68 2.64 2.63 2.38 9995.82 600169 ch equity INDUSTRY CO-A CNY 3.53 ------2.23 - - 1379.60 600262 ch equity INNER MONGOLIA NORTH HAULE-A CNY 22.83 0.12 - - - 115.16 - - 3.72 - - 578.38 600761 ch equity CO LTD-A CNY 10 0.62 0.81 0.93 22% 17.11 14.69 12.88 1.66 1.45 1.32 1124.33 600815 ch equity XIAMEN XGMA MACHINERY CO L-A CNY 4.19 ------7.55 - - 605.86 000157 ch equity ZOOMLION HEAVY INDUSTRY S-A CNY 4.25 - 0.21 0.23 - 28.29 24.12 22.01 0.87 0.85 0.84 4576.47 000425 ch equity XCMG CONSTRUCTION MACHIN-A CNY 3.68 0.04 0.16 0.21 147% 32.17 27.25 20.77 1.25 1.23 1.16 3982.51 000528 ch equity GUANGXI LIUGONG MACHINERY-A CNY 7.89 0.05 0.42 0.61 246% 27.63 22.44 15.26 0.98 0.97 0.93 1346.98 Average 42.74 23.17 18.12 2.61 1.43 1.32 International peers cat us equity CATERPILLAR INC EUR 143.86 23.50 49.36 61.22 61% 27.44 22.75 18.34 5.48 5.07 4.41 85587.15 de us equity DEERE & CO EUR 151.58 52.62 62.98 74.77 19% 24.47 18.80 15.84 5.10 4.27 3.59 48702.18 tex us equity TEREX CORP USD 46.32 - 9.90 17.22 - 43.74 36.56 21.02 2.81 3.08 2.70 3895.51 6326 jp equity KUBOTA CORP USD 2092.5 7.63 7.97 8.70 - 18.04 18.33 16.80 2.07 2.01 1.85 23039.39 6301 jp equity KOMATSU LTD USD 3740 8.63 12.84 16.31 37% 20.23 20.55 16.18 2.17 2.09 1.93 32610.05 6501 jp equity HITACHI LTD USD 850.6 3.44 4.77 5.41 25% 14.45 12.42 10.94 1.31 1.27 1.16 36374.41 6395 jp equity TADANO LTD USD 1776 6.73 6.86 8.41 12% 21.25 18.43 15.03 1.57 1.52 1.41 2081.17 Average 24.23 21.12 16.31 2.93 2.76 2.44 Sources: Bloomberg, GF Securities (Hong Kong) Note: Updated as of Dec 8, 2017

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Sector note Dec 11, 2017

Rating definitions

Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10%

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