Substantial increase in net profit for 1H17 due to strong sales and cost management.
Chinese construction activity holding up and could benefit construction machinery demand in 2H17
Reiterate Buy, no change to earnings and TP of HKD3 which implies 28.2% upside
Strong operating leverage from strong sales: The company issued a positive
profit alert after market close on 22 June. Based on the preliminary financialperformance for May 2017 YTD and product sales thus far in June, the companyexpects to record a substantial increase in net profit for 1H17. We expect 1H17 netprofit to increase by 73% YoY to Rmb345m. While the positive profit alert may beexpected by the market given the strong positive earnings revision over the last 6months, we think Chinese construction activity is holding better than anticipatedwhich could support capital goods demand in 2H17. Chinese constructionindustry sales have been tracking ahead or in line with our forecast for May 2017YTD; excavator industry sales were up 100% YoY and wheel loader was up 26%YoY. Lonking also appears to be gaining market share in the wheel loader productso far in 2017. Moreover we only expect a modest EBIT margin increase to 10.8% in2017 versus 10.1% which could be conservative.
Maintain Buy and HKD3.00 TP; FY17 earnings risk remains on the upside: OurFY17 net profit forecast of Rmb612m is about 6% above Bloomberg consensus. Wethink earnings risk remains on the upside in 2H17 due to positive operating leverageof the company from strong product sales. The significant improvement in earningsalso indicates the company’s dividend yield should increase to 3.4% in 2017 basedon 50% payout ratio. We think the company could consider a special dividend ratherthan investing surplus cash in financial products with financial institutions.