The wow factor in China's construction machinery sector – According to datafrom China Construction Machinery Business Online （CMBOL） Chinese excavatorvolume sales increased dramatically in February 2017, +297% y-o-y. This reflects thesolid construction activity in the country's property and infrastructure sectors. ForJanuary and February 2017, the total number of excavators sold amounted to 19,014units, up 188% y-o-y. This was similar to the number of units sold in 2012. While weare expecting strong excavator sales in 1H17 in China, the growth so far has beenwell beyond our expectation. 2Q17 is usually the peak season for machinery sales soit is conceivable that we could continue to see stronger-than-expected sales volumegrowth over the next few months. Our current estimate for total excavator sales inChina in 2017e is 82,982 units, or a growth rate of 18% y-o-y. Actual sales forJanuary and February already amount to 19,014 units, or approximately 23% of ourfull-year estimate. We forecast excavator sales to account for about 14% of Lonking'sFY17e revenue.
　　Going from strength to strength – Our FY17e EPS forecast is about 12% aboveBloomberg consensus. We expect to see positive earnings revisions by the Streetgiven the company's strong product sales. We also expect Lonking to become netcash flow positive in 2017 as a result of strong operating cash flow generation. Wemaintain our Buy rating on the stock because we think the stronger-than-expectedindustry sales could see continued positive earnings for the company. Our TP ofHKD2.60, which implies 19.8% upside from current levels, is based on 1.4x PB,which is in line with its historical average since 2011.
　　Key downside risks: Pressure on average selling price, increased second-handmachine supply to hold back new machine sales, and increased competition in wheelloader and fork lift product. Depreciation of RMB against USD could increase itsfinance cost of USD-denominated debt.