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Lonking Holdings Limited

Lonking is a leading supplier of construction machinery based in China. It manufactures wheel loaders (48% of 2021 revenues), forklifts (26%), excavators (14%), road rollers (1%), and others (11%).

It is the market leader in wheel loaders and in the top three by market share in forklifts.

Short-term prospects are poor in China’s construction industry. Further, the company faces intense competition. Management have intimated that profits will decline by over 50% in the six months to 2022.

The track record reveals excellent growth in revenues and profits but the industry has apparently entered a period of stability (at best) and future growth cannot be extrapolated at similar rates. The company reported revenues of 13.7b rmb (FY20: 12.9b), ebitda of 1.2b (FY20: 1.9b), and net profits of 1.3b (FY20: 2b).

Profit margins were lower in FY21 due to sharply rising steel and raw material costs as well as a reduction in customer spend in the excavator segment.

The balance sheet is strong, with net cash of over 1.4b. The net current asset value (a proxy for liquidation value) stood at 7b (including short-term investment products and non-current cash deposits). Tangible equity stood at 10.2b.

In this industry, collection of receivables (including long-term receivables) totaling 3.7b could come under pressure in a deteriorating operating environment.

The common stock is currently selling for under 5.8b, which is at ~20% discount to net current asset value and 4.5x FY21 earnings.

We were attracted to the generous payouts of profits in recent years averaging over 50% of earnings. The most recent dividend, though lower than last year, aggregated 765m – yielding 13% at market.

Though the largest revenue generator, wheel loaders, may enter a period of stagnation, the company expects to invest more into the growing forklift segment (which caters to the logistics and warehouse industries) – particularly in its transition from traditional forklifts to electric models.

Considering the larger picture, it’s unlikely that the current bleakness will be permanent. The construction industry is vital to China’s GDP and past behavior indicates the regime’s preference for stable economic growth including at least moderate infrastructure spending and the availability of affordable housing. In addition, construction machinery inventory will require constant replacement to keep up with the latest regulatory standards.

The investor at the current price isn’t paying anything for future prospects – and is obtaining a quality operation with a shareholder-oriented management at less than liquidation value.

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