China's Longgong sales are picking up, valuations are low, and the profit rate is high
China Longgong (3339) mainly manufactures and distributes wheel loaders, rollers, excavators, forklifts and other infrastructure equipment, and is one of the top five construction machinery manufacturers in mainland China. Benefiting from product updates, the mainland construction machinery industry entered a recovery period last year, and the group also achieved excellent results.
As of the end of December 2018, the Group's annual net profit increased 9.4% year-on-year to RMB 1.14 billion, operating volume increased 32% to RMB 11.87 billion, and gross profit increased 13.9% to RMB 2,725 billion. Gross margin fell 3.6 percentage points to 23.0% during the same period, mainly due to higher prices for raw materials such as steel and tires, and an increase in overall cost due to upgrades of some products to improve product quality. Not to mention, as steel prices have declined somewhat, it is expected that cost pressure will ease, and gross margin is expected to remain flat this year.
Driven by mainland policies, investment in infrastructure has steadily rebounded, which has led to strong growth in sales of various products. Longgong's wheel loaders are the main focus. Sales revenue of this product increased 28% to RMB 61.54 billion last year, accounting for about 52%; revenue from the ZL50 series increased 32% to RMB 5.44 billion; revenue from the ZL30 series increased 17% to RMB 439 million; and revenue from mini wheel loader production increased 9.8% to RMB 224 million.
In recent years, excavators have been very popular in the market and are widely used in various infrastructure projects. Revenue from excavator sales surged 59% to RMB 2,111 billion, accounting for about 18%. The Group will accelerate the upgrading of excavator products to meet customer needs and at the same time make the products more competitive.
As the mainland increases investment in infrastructure, stabilizes overall economic growth, and is replaced by industry entry and renewal, the market demand for construction machinery continues, and the business climate is expected to continue. The Group will solidify its leading position in core products, expand its excavator business, increase its market share, and increase investment and product development efforts in the forklift business to expand market sales volume and influence.
The Group's performance performance last year was far better than that of its peers. The Mainland's macro-policy tone was also more relaxed than last year. The outlook for the industry is promising. Longgong's current valuation is not high. This year's estimated price-earnings ratio is only 6.6 times, which is nearly half lower than the average of the past 5 years, which is about 12.9 times lower. Coupled with the dividend rate of 8.4%, the current value ratio is very high.
According to Bloomberg Communications's comprehensive market analysis, China Dragon Industrial is expected to make a profit of RMB 0.340, 0.348 and 0.357 yuan per share in 2019, 2020 and 2021, providing a target price of HK$3.0 for 12 months, which is equivalent to the predicted price-earnings ratio of 7.5 times this year. The rating is “neutral preference”.
