Lonking Holdings

HONG KONG

Long drive to diversification
W e initiate coverage on Lonking Holdings with a Neutral rating and a target price of HK$2.90. W e like the company’s strategy of moving into the excavator market, which is a high-growth segment, albeit a competitive one. Its wheel loader business is growing steadily in a stable, competitive environment that is dominated by several domestic producers. The company’s future growth rate should be subdued compared to previous years as a result.

Focused on earth-moving machinery market

3339 HK

Neutral
HK$2.73

Price 21 Oct 11
12-month target
Upside/Downside
Valuation

HK$
%
HK$

2.90
6.2
2.90

- PER

GICS sector
Capital Goods
Market cap
HK$m
11,685
30-day avg turnover
US$m
6.5
Market cap
US$m
1,502
Number shares on issue m 4,280
Investment fundamentals
Year end 31 Dec
Revenue
EBIT
EBIT growth
Reported profit
EPS rep
EPS rep growth
PER rep
Total DPS
Total div yield
ROA
ROE
EV/EBITDA
Net debt/equity
P/BV

2010A 2011E 2012E 2013E m 12,020 14,316 16,692 19,605 m 2,322 2,538 2,810 3,158
% 140.1
9.3
10.7
12.4
m 1,766 1,843 1,986 2,213
Rmb
0.41
0.43
0.46
0.52
% 120.7
4.4
7.7
11.4
x
5.4
5.2
4.8
4.3
Rmb
0.13
0.11
0.12
0.13
%
5.8
4.8
5.2
5.8
%
20.0
17.4
16.1
15.3
%
39.1
31.4
27.2
24.8 x 4.8
4.4
4.1
3.7
%
55.5
25.2
-4.7
-6.2 x 1.8
1.5
1.2
1.0

Source: FactSet, Macquarie Research, October 2011
(all figures in Rmb unless noted)

Lonking has been producing wheel loaders for nearly 18 years and has built an extensive distribution network. The company’s future strategy is to stay focused on the earth-moving machinery market, growing its excavators business by leveraging off its brand recognition and distribution network and the overlapping end-customer base. From 2007 to 2010, its excavators