Lonking Holdings Limited
Lonking (‘company’) is a Hong Kong listed manufacturer of construction
machinery - dealing in wheel loaders (50% of revenues), excavators (20%), forklifts
(20%), components (9%), and road rollers (1%). It generates 95% of its revenues
from mainland China, and 5% from exports.
It is the domestic market leader in wheel loaders (with its flagship
ZL50 model) and holds leading positions in the other product segments.
Covid-19 hit the construction industry but recovered after March due to
the government’s infrastructure investment policy. The company managed well during
this period recording less than a 4% decline in revenues over the previous year
and increasing earnings as a result of cost control measures.
It reported steadily growing sales over the years generating $12.7b in
the last twelve months (2019: $13.3b). Ebitda margins have been reasonably well
maintained in the 14-15% range. Ttm ebitda was $1.9b and consistent with normal
margins. Deducting depreciation and taxes results in normal operating earning
power of $1.2b, which is backed by free cash flows.
The balance sheet was strong with excess cash of $5.4b. $2.4b were
allocated to “wealth management products” issued by Chinese banks and invested
in unlisted equities and valued by indirectly observable inputs.
Management’s recent dividend payouts have averaged 50% of earnings. It
has, however, ventured into unrelated long-term commitments with the excess
cash – investing $0.6m in a private investment fund in 2019 (not counted within
excess cash) – these funds are better returned to shareholders if not required
for the core business.
The stock is selling at $9.2b ($2.14/share), which is less than 5x ebitda or 2x net of excess
cash, and 7x free cash flow. On balance, this appears cheap for a leading company of this kind with
reasonably good growth prospects and fair shareholder orientation - even after
accounting for the unwise allocations into non-core investments.
Notes:
TTM: Trailing Twelve Months
$ represents Hong Kong Dollar