Strong machinery sales and market share gain should supportstrong earnings growth in 2017
　　Revise up 2017 China excavator industry sales to +36% and+32% for wheel loaders; Lonking could do better than industry
Reiterate Buy; increase TP to HKD3 (vs HKD2.60 prior) basedon PBV method, implying 22.4% upside
　　Market share gain and positive earnings momentum to drive share price –Following the company’s whopping 296% YoY increase in FY16 net profit, we expectcontinued strong sales growth in Chinese construction machinery will drive strongearnings growth in 2017. We revise up our Chinese excavator sales volumes to95,641 units or +36% YoY and wheel loader sales volumes to 87,131 units or +32%YoY. We think construction activity for infrastructure development and property, aswell as improving mining activity, will support demand for machinery in 2017.
　　Demand improvement from end users has triggered new demand for constructionmachinery in addition to the normal level of replacement demand. Lonking will focuson market share gains for its major products in 2017, continuing their successachieved in 2016 with an estimated 21.5% loader market share in China versusaround 18.4% in 2015. Overall we forecast the company’s FY17e EPS to increase by32.4% YoY to Rmb0.14 per share, or net profit of Rmb612m, which is about 20%ahead of Bloomberg consensus. We also think there is a likelihood that the companycould issue a positive profit alert for its 1H17 results in August.
　　Recovering ROE justifies premium to historical valuation – The question that iscommonly asked by many investors is how to justify Lonking’s valuation as the stockprice has increased 77% in the last 12 months (vs the HSI +16%). We estimate thecompany’s 2017 ROE will reach 8.6% and 9% in FY18e, compared with the average8.2% achieved since 2011, which supports our view that the stock is likely to trade ata premium to its historical trading band. Thus we have increased our fair value targetPBV to 1.7x which represents a 20% premium over the shares’ historical average PBVof 1.4x. Our new TP of HKD3.00 implies 22.4% upside to the current share price.