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The company is one of the leading enterprises in China's loader industry.

Xiamen Engineering Co., Ltd. is one of the important listed companies in the field of construction machinery in China. at present, loaders account for about 60% of the company's main business, and about 16% in the domestic market, slightly lower than Liugong and Longgong, ranking third in the industry. In terms of scale, the company is in the second tier position in the industry. Due to the decline in the growth rate of investment in fixed assets in China compared with the same period last year, the decline in investment in the real estate sector due to policy pressure has led to a decline in the purchasing power of construction machinery downstream. The growth rate of major products such as cranes, excavators and loaders in the field of construction machinery in China has declined year-on-year since 2011, and showed negative growth in the first three quarters of 2012. The company's performance fell significantly in the first three quarters, in line with market expectations.

At present, the company has upgraded the full range of loaders III, D series of hydraulic excavators and successfully developed 40 ton new products, forming a full range of products from 4T-40T; at the same time, launched telescopic fork loaders, a new generation of slip loaders, micro hydrostatic loaders, milling machines and other new products.

The company's earnings fell in the first three quarters, but at a relatively moderate pace.

The decline in the company's net profit in the first three quarters is relative to the decline in operating income, while the two data of most enterprises in the industry are quite different, mainly due to the sale of shares in Societe Generale securities held by the company in the first three quarters, resulting in investment income as high as 3.88, 9.2 billion yuan, an increase of 1735.07% over the same period last year.

The company's real gross profit margin in the first three quarters was 13.1%, down from 15.5% in the same period in 2011; and due to the increase in short-term borrowing and the issuance of corporate bonds, the financial expenses were 179077353.95 yuan, an increase of 94.45% compared with the same period last year. The company's accounts receivable totaled 5.276 billion yuan, an increase of 60.48% over the same period last year. Although the increase is large, the absolute and relative values of the data are small compared with other companies in the industry. However, the company's sales expenses totaled 360013581.78 yuan, down 41.85% from the same period last year, indicating that the company adopted a conservative policy during the industry downturn and effectively protected itself.

The company issued 1.5 billion yuan of corporate bonds in the first half of the year, effectively improving the company's cash flow.

Due to the decline in sales growth in the construction machinery industry, the company appropriately adjusted its credit sales policy and increased its receivables. The net operating cash flow of the company in 2011 and the first three quarters of 2012 was-1.31088 billion yuan and-1.02584 billion yuan respectively, resulting in tight cash flow of the company. The company has successfully issued corporate bonds, which can effectively alleviate the tight cash flow of the company and ensure that the company can smoothly tide over the trough of the industry. The issuance of corporate bonds also adjusts the corporate debt structure and appropriately increases medium-and long-term debt financing, which effectively reduces the liquidity risk of the company.

Profit forecast.

We believe that the company is one of the important construction machinery companies in China, because the construction machinery industry is in a downturn, which affects the company's income, but the company has successfully issued corporate bonds and has the ability to tide over the industry trough steadily. We expect the company's EPS in 2012, 2013 and 2014 to be 0.49 yuan, 0.51 yuan and 0.61 yuan respectively, corresponding to PE 12.5x, 11.9x and 10.02x respectively. We downgrade the company to "neutral" with a target price of 6.89 yuan.