Medium-term performance high growth, in line with expectations

In the first half of 2017, China Longgong achieved operating income of 4.53 billion yuan, an increase of 73.3 percent over the same period last year; net profit of 500 million yuan, a substantial increase of 149.3 percent over the same period last year; and earnings per share of 0.12 yuan. The company does not pay interim dividends.

Sales of main products are growing rapidly.

Under the background of the remarkable rebound in the construction machinery industry and the strong demand for products, the sales of the company's main products increased significantly in the first half of the year. In the first half of the year, the company's wheel loader revenue was 2.39 billion yuan, up 82.7 percent over the same period last year; excavator revenue was 680 million yuan, up 108.5 percent; road roller revenue was 70 million yuan, up 94.2 percent; crane forklift revenue was 960 million yuan, up 54.6 percent over the same period last year; other income was 440 million yuan, up 35.2 percent over the same period last year.

Significant improvement in profitability

The company's comprehensive gross profit margin in the first half of the year was 27.2%, up 3.6 percentage points from the same period last year, while the net profit margin reached 11.0%, up 3.4 percentage points from the same period last year. The significant improvement of the company's profitability, in addition to the scale effect, but also benefited from the increase in the settlement price of the third standard products, the increase in overall procurement by the group, the increase in the share of forklifts, the continuous strengthening of internal management and other factors.

Since the second half of 2016, the domestic construction machinery market has gradually come out of the situation of continuous decline in sales for many years, and the sales of various categories of products have increased rapidly. In the first half of 2017, the industry sold 75068 excavators, up 100.5 percent from the same period last year; 45048 loaders, up 35.1 percent; 9625 road rollers, up 50.6 percent; and 243000 forklifts, up 34.2 percent from the same period last year. In the first half of the year, the sales growth rate of excavators, loaders, road rollers and forklifts is higher than that of the industry, and the market share increases, which shows the good competitiveness of the company's products. In the second half of the year, with the improvement of the base, the growth rate of industry sales will decline compared with the same period last year, but the high growth in absolute value will continue, and the company's sales will maintain rapid growth throughout the year.

Maintain the "overweight" rating

We expect the company's income from 2017 to 2019 to be 7.87 billion, 8.86 billion and 9.77 billion yuan respectively, the net profit to be 860 million, 1.02 billion and 1.17 billion yuan respectively, and the EPS to be 0.20,0.24,0.27 yuan respectively. The company's profit upward trend is clear, raising the company's target price to HK $3.00, corresponding to 13 times PE in 2017, maintaining the "overweight" rating.

Risk hint: industry recovery is not as expected, overseas market expansion risk, exchange rate risk