China September Construction Machinery Sale: No Signs Of Picking Up

Lonking lost its leading position to rival Liugong in wheel-loader market share. Lonking's wheel loader sale to the domestic market fell -17% y/y, outpacing that of rival Liugong, which saw only -9% decline during the month. Lonking also lags behind Liugong YTD with volume down -6% while vs. Liugong's -5.5% drop. Competition is certainly a factor. With the overall market still seeing severe slowdown, domestic competitors have been undercutting Lonking. Profitability will also be in question as Lonking increases opex spending to keep pace with that of its competitors, including Shandong Lingong and Xiamen XGMA. In the near-term, I expect competitive pressure to stay and profitability to remain low.

End-year of the year outlook is not too optimistic with construction machinery sale expected to remain soft given the overall macro environment. Lower housing starts, softness in the property market and lower than expected fixed asset investment will likely to weigh in on Lonking in the near-term. Judging the YTD weakness in the commodities market, I do not expect mining activities to pick up in the back-end of the year to offset the weakness in the construction market. Finally, high inventory level is another issue and heavy discount may be necessary to adjust the inventory. China Construction Machinery Association released September wheel-loader sales data that showed ongoing weakness in demand for heavy construction equipment. Total sale declined -24% y/y, underpinning the 7th consecutive month of decline, with most of the weakness coming from the domestic market that saw sale down -26% y/y. Export was not as bad but still declined -17% y/y. YTD sales volume is down -9% y/y, which highlights the headwind facing China's construction and property sector. I reiterate my bearish view on Lonking (OTCPK:LKHLY). In addition, I am also bearish on the iShares China Large-Cap ETF (NYSEARCA:FXI) given the near-term weakness of China's construction sectorengine.

Summary

·         September construction machinery sale down -24% y/y driven by domestic market.

·         Lonking lost its leading position to rivals on higher competition.

·         Bearish on Lonking and the iShares China Large-Cap ETF.

While the 4% dividend yield may look attractive at this price point, the near-term uncertain makes me question the sustainability of the dividend. I reiterate my bearish view on Lonking and recommend investors to sell FXI.

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