Better-than-expected excavator sales volume in Nov According to the ChinaConstruction Machinery Association (CCMA), 13,822 excavators were sold in Chinaduring Nov, up 107.4% YoY and better than market expectation of 10,000 units. Novsales volume was also much higher than Oct’s 10,541 units. Total excavator salesvolume during 11M17 reached 126,298 units, up 99.2% YoY. We expect this to reach140,000 units in
Investment Strategy: Winners and losers of the US tax bill
6% earnings growth on rising SG&A ratio and soft JVs contribution
In Hong Kong and China, we believe the US tax bill will have a positive impact on export-orientedcompanies, transportation firms, companies with meaningful income from the US, and producers ofcommodities such as aluminum and copper, given increasing US demand. On the other hand, wehave seen sector rotation in the US with investors snapping up financials and consumer names,which should benefit more from the tax bill, and selling of tech stocks, which should benefit less andhave higher valuations. This will likely put pressure on TMT stocks in Hong Kong. We believe theHong Kong market outlook remains promising.
SAIC Motor released its 1H17results after market close on 29August. Thecompany’s 1H17net revenue grew by 13.0% YoY to RMB393.0bn, on the backof 5.8% growth in vehicle sales volume to 3.2m units during the period.Meanwhile, SAIC’s 1H17gross profit grew by 18.6% YoY to RMB51.6bn with62.3bps YoY gross profit margin improvement, possibly due to decent sales fornew local brand models such as Roewe RX5SUV, Roewe i6, MG ZS, andBaojun 510, in our view. However, with 1) 21.1% YoY increase in SG&Aexpenses and 2) only 3.7% YoY increase in profit contribution from itsJVs/associates, 1H17net profit only increased 6.0% YoY to RMB16.0bn. On aquarterly basis, SAIC’s 2Q17net profit reached RMB7.7bn, implying an 8.0%YoY growth (-6.8% QoQ due to seasonality), on 8.9% YoY increase (8.3% QoQdrop) in vehicle sales. 2Q17JVs’ earnings was down 3.9% YoY on 5.6% salesgrowth at Shanghai-Volkswagen (SVW) and SAIC-GM (SGM).
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,mainly driven by FAI and the replacement cycle.
Investment Strategy: Market likely to remain weak before the year-end, but fundamentalsremain strong
Deutsche Bank view – stable earnings growth outlook; Hold on valuation
Lonking’s sales volume grew at a faster rate of 67.5% in Nov Lonking’s constructionmachinery sales volume rose by 67.5% YoY, compared with 46.8% in Oct. Excavatorsales 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’smarket share continues to expand. Meanwhile, forklift sales volume grew at a faster rateof 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.
Although yesterday’s market decline was sharper than expected, there is still downside risk as theimminent US tax reform approval and the surge in the HK HIBOR rate will have a negative impacton the HK market. If the market correction is due to political and geopolitical risk, it is likely to betemporary in nature, and given the better fundamentals now than during previous corrections, wewould expect a smaller market correction of up to 10% from the peak (but a bigger correction for topperformers), and would consider this an opportunity to buy at lower levels.
SAIC’s 1H17net profit accounts for 45% of DBe and 44% of Bloombergestimates. We consider the results in line as 1H15/1H16net profits account for47-48% of full year net profits. Going forward, we expect 2H17E salesmomentum to further ease on a higher base, but we still expect stable salesand earnings growth with more new SUV rollouts going forward. All in all, weenvision a stable earnings growth trajectory for SAIC, with full-year growth inSVW and SGM, driven by new models, and strong Roewe local brand sales.This should support the company’s generous dividend payout. We have a Holdrating on SAIC on fair valuation, and have our target benchmark at 9.0xFY17/18E P/E, which is about one standard deviation above the company'shistorical trading average. This is justified, in our view, as we expect SAIC toachieve a three-year EPS CAGR of 8% in FY16-19E.
Lonking’s forklifts segment likely to maintain momentum According tomanagement, its new forklift manufacturing plant in Yingxi with capacity of 15,000 unitsper year (equivalent to 58% of current capacity) will begin operation by the end of thismonth. Given that its current manufacturing facility is operating at full capacity, the newcapacity will help to spur extra momentum for Lonking next year.
Geely Auto (175HK, Buy): Nov monthly sales hit new sales high
Lonking’s 2017 results likely to beat expectations During 11M17, sales volume ofloaders, 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 whileloader and road roller growth was broadly in line with our estimates. Meanwhile, thecompany raised its ASP for loaders by ~7% in Oct, which will have a positive impact on4Q17 results. We estimate revenue/net profit will increase by 66%/81% in 2017, whilethe market expects revenue/net profit to rise by 52%/75%. We believe it is highly likelythat Lonking’s 2017 results will beat market expectation.
Geely’s sales rose 37.9% YoY and 12.9% MoM during Nov, hitting another record high on peakseason strength and higher demand for the company’s SUV models. SUV sales were up 95.7% YoYand 14.3% MoM, and accounted for 49% of total sales during 11M17, a proportion that has risencontinually this year. The company’s sedan segment also maintained steady growth. 2018will be akey year for the company, with five new launches under the Geely brand and contribution from Lynk& Co. We think the company’s sales will remain strong in 2018.
Reiterate Buy on Lonking Lonking’s recent weak stock performance was mainly due toconcerns about Nov sales volume in China, particularly for heavy-duty trucks, for whichweak sales figures were announced a few days ago. We believe the strong Novexcavator sales volume should help to ease market concerns. The stock is currentlytrading as 10.6x 2018E P/E; we maintain our Buy rating and target price of HK$4.30.
Pharmaceutical: First BE test products approved by the CFDA, positive for CSPC Pharma
Sino Biopharma announced yesterday its registration approval of Tenofovir Disoproxil Fumarate fortreatment of HBV, the first generic drug to complete bioequivalence studies. We see this as positivefor leading domestic companies such as CSPC Pharma as the government has been advancingbioequivalence studies for domestic generics. CSPC Pharma has three generics pending approvalin the near term. The company’s stock was down yesterday without any change in growth infundamentals. We continue to expect the sector to outperform in early 2018, and favor largepharmas, TCM names and CRO players.
Construction Machinery: Nov excavator sales volume beats expectations; maintain Buy onLonking
Excavator unit sales rose 107.4% YoY during Nov, exceeding expectations and also up on Oct.11M17sales were up 99.2% YoY. We expect the sales recovery to continue in 2018, mainly drivenby FAI and the replacement cycle. Although Lonking has not announced its Nov sales volume yet,we believe its sales growth will continue to outperform peers. We believe the strong Nov excavatorsales volume should help to ease market concerns that led to its recent weak stock performance.We maintain our Buy rating and TP of HK$4.30.