The reported results in the third quarter continued to exceed expectations, the gross profit margin and market share remained high, and the share of the big round continued to optimize: in the first three quarters of 2020, the company achieved a total operating income of 6.463 billion yuan, an increase of 24.39% over the same period last year, and a net profit of 478 million yuan, an increase of 580.71% over the same period last year. The net cash flow from operating activities was 770 million yuan, an increase of 530.56% over the same period last year. Among them, the operating income in the third quarter was 2.346 billion yuan, an increase of 32.57% over the same period last year, and the net profit was 154 million yuan, an increase of 205.23% over the same period last year. The comprehensive gross profit margin of the product was 20.12%, which increased 5.4pct over the same period last year, and both gross profit margin and net profit margin remained high. In terms of sales, the company's large and medium drag sales continued to be higher than the industry average, with a market share of 24.3% in the first half of the year, an increase in 1.64pct compared with the same period last year, according to the Agricultural Machinery Industry Association. The sharp increase in the company's performance is mainly due to 1) the industry sales continued to improve. According to the data of the National Bureau of Statistics, the output of large and medium-sized wheel towing increased by 32.55% in the third quarter compared with the same period last year. 2) the company continues to optimize the product structure, the proportion of high value-added large wheel towing sales increased, L series 140-160 horsepower tractors sales increased significantly, large and medium trailer market share increased. 3) continuously promote the optimization of procurement cost, and the comprehensive procurement cost will be further reduced.

Benefit from intensive agriculture, outflow and aging of rural labor force, upward movement of horsepower, long-term benefits for the leading wheel towing industry, continuous promotion of research and development, continuous improvement of product competitiveness, and stable leading position of tractors: according to demographic yearbook data over the years, the proportion of rural labor force aging (45-64 years old) rose from 25.4% in 2010 to 29.8% in 2018. 44% of the rural working population are over 45 years old, and the number of agricultural workers has dropped by nearly 20% from 689 million in 2009 to 552 million in 2019. Taking into account the statistical impact of migrant workers, the proportion of young workers actually employed in rural areas may be even lower. Agriculture is changing from "small farmers" to large agricultural households, cooperatives, small farms, large farms and so on. According to the "High quality Development Plan of New Agricultural operators and Service subjects (2020-2022)" of the Ministry of Agriculture and villages, it is pointed out that the completion of 1 million family farms in 2022 will also guarantee the demand for large and medium-sized agricultural machinery and promote the upward movement of tractor demand. Long-term benefit to the industry leader of wheel towing in China and Dalian. The company invested 250 million yuan in R & D in the first three quarters, basically the same as the same period last year. The company steadily promoted key R & D projects such as power shift, national fourth tractor, CVT continuously variable transmission control, intelligent layout of agricultural machinery products, a full range of wheel tractors and crawler tractors, high, middle and low horsepower sections of non-road power machinery products, and the most complete manufacturing system of core components in the domestic tractor industry. It has the manufacturing ability of core parts of tractors such as car body, castings and forgings, engines, gears, etc., and has a stable position in the industry.

The basic market of maintaining stability in agriculture, as the basic guarantee of the internal circulation of the economy, both food security and price expectations have increased, the holding of large and medium-sized wheel towing has dropped to the low level in recent years, and the peak period of scrapping of large and medium-sized ships is expected to bring a renewal cycle. in the future, the industry is expected to continue to be better than market expectations: agricultural modernization, as the basic guarantee of economic circulation, has been paid more attention by the state, and a number of policies have been issued to strengthen the basic agricultural market. The subsidy for cultivated land fertility protection is expected to allocate 120.485 billion yuan in 2020, which will bring greater positive support to the industry in the hard constraints of the farming red line, land circulation and the expectation of rising food prices, and the industry has rebounded slightly after nearly four years of downturn. at the same time, there are signs that more small and medium-sized enterprises have withdrawn from the market, and the amount of wheeled drag in medium and large enterprises has dropped to a low in recent years. The gap between annual report waste and annual new sales has led to a decline in the number of large and medium-sized wheel trailers, which is under pressure. it is estimated that the number of large and medium-sized wheel trailers will be about 5.9 million in 2020 and 6.7 million in 2017. considering the expected update peak and other factors, based on the judgment that the prosperity of the agricultural machinery industry begins to pick up, the industry may continue to pick up in the next few years. According to the data of the National Bureau of Statistics, the towing output of large and medium-sized ships from July to September was 77600, an increase of 32.55 percent over the same period last year, of which the growth rate of large ships was 87.51 percent. Next year, the industry is expected to continue to be better than the market expected.

Investment suggestion: based on the judgment that the prosperity of the agricultural machinery industry is expected to pick up and the company's management improvement in grasping reform to promote efficiency, according to the model, the company's income and gross profit margin are expected to continue to rise, and continue to give a "highly recommended" rating. It is estimated that the operating income from 2020 to 2022 will be 7.192 billion yuan, 8.775 billion yuan and 10.37 billion yuan, and the net profit will be 489 million yuan, 597 million yuan and 749 million yuan, respectively. The EPS was 0.46,0.58,0.76 yuan respectively, and the corresponding PE was 23 times, 19 times and 15 times respectively.

Risk hints: the support policies such as agriculture and agricultural machinery subsidies are lower than expected, the industry competition intensifies the risk, the reform effect is not as expected, the impact of public health emergencies, the risk of substantial increase in the cost of materials and components, statistical errors, forecast parameters, assumptions are not as expected, and so on.