High-horsepower tractor strength continues as Goldman Sachs reiterates Buy on First Tractor

Overview

This report is Goldman Sachs’ earnings preview and valuation update for First Tractor’s 2Q 2026 results. The report argues that after an inflection point in 1Q 2026, China’s agricultural tractor market continued to recover, with accelerating growth in medium- to high-horsepower and high-horsepower tractor production, resilient exports, and domestic demand also supported by improving agricultural commodity prices. Goldman Sachs maintains its full-year earnings forecasts for 2026E-2028E and raises its 12-month target prices for A/H shares as the valuation base rolls forward to mid-2027.

Core views

The core view is that First Tractor will benefit from recovering industry demand and product mix upgrade. A higher share of high-horsepower tractors should help improve revenue quality and margins; export markets provide long-term incremental growth potential; and trends of agricultural modernization, tractor upscaling, and smartification are expected to drive the company’s profitability to gradually converge with global peers, thereby supporting valuation rerating. Goldman Sachs reiterates Buy ratings on both A-shares and H-shares.

Analysis framework

The report mainly analyzes industry production, export volumes, implied domestic demand, agricultural commodity prices, company earnings forecasts, and relative valuation. In the short term, the focus is on assessing industry strength in 2Q 2026 and the company’s earnings elasticity; for valuation, it uses an average of near-term and long-term valuation methods and incorporates an A/H premium assumption for A-shares.

Methodology notes

• Valuation methodsP/E and long-term discounted valuation

  Near-term valuation uses a target P/E of 10.5x applied to average 2026E/2027E EPS, while long-term valuation uses a target P/E of 12x applied to 2030E EPS and discounts it back to mid-2027 at a cost of equity of 9.5%.

  The 12-month target price for H-shares of HK$13.9 is derived from the average of near-term and long-term valuation; the A-share target price of Rmb21.3 further incorporates the average 67% A/H premium over the past 6 months.

• Industry strengthProduction and mix tracking

  Uses China’s medium- to high-horsepower and high-horsepower tractor production, export volumes, and implied domestic demand to judge the strength of the industry recovery.

  The rise in the high-horsepower mix to 37% is viewed as a key indicator of product mix upgrade and the company’s profit elasticity.

• Risk frameworkDownside risk identification

  Identifies risks from crop prices, subsidy policies, competition, execution of product upgrades, localization of key components, and the pace of overseas expansion.

  These factors may affect agricultural machinery demand, margins, the pace of valuation rerating, and target price realization.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• First Tractor H-shares 0038.HK

  Direct coverage target

  Strengths

  Benefits from strong high-horsepower tractor demand, export expansion, product mix upgrade, and valuation rerating; target price implies 61.3% upside.

  Weaknesses

  Short-term net profit growth is affected by a high base from one-off gains in 2Q 2025; execution of product upgrades and overseas expansion is required.

  Comparison

  H-share target price raised from HK$13.0 to HK$13.9, versus current price of HK$8.62; valuation is based on the average of near-term and long-term valuation.

  Risks

  Crop prices below expectations, adverse changes in agricultural machinery subsidy policies, intensified market competition, slower-than-expected localization of key components, and slower-than-expected overseas expansion.

• First Tractor A-shares 601038.SS

  A-share coverage target for the same company

  Strengths

  Also benefits from China’s agricultural modernization and the trends of larger and smarter tractors; target price implies 54.5% upside.

  Weaknesses

  The A-share target price includes an A/H premium assumption, so any premium convergence could affect valuation support.

  Comparison

  A-share target price raised from Rmb19.5 to Rmb21.3, versus current price of Rmb13.79; the target price incorporates a 67% A/H premium.

  Risks

  Same as H-shares, while also requiring attention to changes in the A/H premium.

Key data

• 2Q 2026 medium- to high-horsepower tractor production+22% yoyChina industry production; the report says 2Q production reached a record high.
• 2Q 2026 high-horsepower tractor production+41% yoyDriving mix upgrade within the medium- to high-horsepower segment.
• High-horsepower mix37%A record high, nearly double the historical 2Q average of 20%.
• Medium- to high-horsepower tractor export volume+40% yoyAll major markets except Africa recorded double-digit YoY growth.
• High-horsepower tractor export volume+56% yoyShowing stronger momentum for high-horsepower products on the export side.
• Implied domestic demand+16% yoyMeasured as production minus exports; the high-horsepower segment grew 38% YoY.
• Average prices of major crops+5% YTD，10% above last year’s lowThe report views this as an important driver of improving domestic demand.
• 2Q 2026 revenue forecast+25% yoyGoldman Sachs forecast for First Tractor.
• 2Q 2026 gross margin forecast16.8%Up 0.5 percentage points YoY and 0.3 percentage points QoQ.
• 2Q 2026 core EBIT forecast+40% yoyDriven by revenue growth and gross margin expansion.
• 2Q 2026 net profit forecast+6% yoyThe lower growth rate is mainly due to a high base from one-off gains in 2Q 2025.
• H-share target price and current priceHK$13.90 / HK$8.62Implying 61.3% upside, with prices as of the close on July 21, 2026.
• A-share target price and current priceRmb21.30 / Rmb13.79Implying 54.5% upside, with prices as of the close on July 21, 2026.

Impact & implications

If high-horsepower tractor demand, exports, and domestic demand continue, First Tractor’s product mix upgrade will bring higher revenue growth and profit elasticity, and may prompt the market to reassess its earnings quality and long-term growth potential. The report assigns substantial upside to both H-shares and A-shares, implying that Goldman Sachs believes the current share price does not fully reflect the industry recovery, export opportunities, and structural upgrade.

Risks

• Crop prices weaker than expected.
• Adverse changes in government subsidy policies for agricultural equipment.
• Intensifying market competition.
• Execution risk in product mix upgrades.
• Slower-than-expected localization progress of key components.
• Slower-than-expected overseas market expansion.

What to watch

• First Tractor’s planned release of 2Q 2026 results on August 25, 2026.
• Whether China’s monthly production of medium- to high-horsepower and high-horsepower tractors continues to maintain YoY growth.
• Whether the share of high-horsepower tractors within the medium- to high-horsepower segment remains elevated.
• Order and sales trends in export markets, especially major regions outside Africa.
• Trends in major crop prices and their transmission to domestic agricultural machinery demand.
• Changes in agricultural equipment subsidy policies.
• Whether the company’s gross margin, core EBIT, and net profit meet Goldman Sachs’ forecasts.