Domestic tractor cycle inflection emerges; exports and product upgrades support First Tractor's structural growth

Overview

This report summarizes the key views from Goldman Sachs after attending First Tractor's on-site analyst meeting with management. The core conclusion is that China's agricultural tractor industry is approaching a cyclical recovery inflection point, with the company already seeing revenue repair ahead of the industry; exports continue to significantly outperform the market despite a complex geopolitical environment; and the product mix is steadily upgrading toward higher horsepower, higher value-added, hilly and mountainous machinery, and new energy agricultural equipment. These factors together support Goldman Sachs' maintenance of a Buy rating on First Tractor.

Core views

First, the domestic cycle is improving, and management expects China tractor demand to grow 5-8% yoy in 2026, driven by better farmer profitability, a rebound in agricultural product prices, and policy support. Second, First Tractor's recovery is ahead of the industry: 1Q26 revenue grew about 4% yoy, while industry sales still fell in the high single digits, implying market share gains. Third, exports were a major positive surprise, with 1Q26 export sales up 40% yoy, above the industry's 18% growth, and Latin America, CIS, and Southeast Asia are key regions with mid-tier barriers to entry. Fourth, product upgrades, overseas channels, and service capability investments are expected to support the company's move toward a global first-tier tractor manufacturer over the next five years.

Analysis framework

The report primarily analyzes management meeting notes, operating discussions following 2025 and 1Q26 results, industry cycle trends, export regional structure, competitive landscape, product mix upgrades, and Goldman Sachs' valuation framework. On valuation, Goldman Sachs combines near-term and long-term estimates: near-term value is derived from 2026E EPS and a 10.5x target P/E, while long-term value is derived from 2030E EPS and a 12x target P/E, discounted to end-2026 at a 9.5% cost of equity.

Methodology notes

• Valuation methodAverage of near-term and long-term valuation

  The target price is the average of short-term 2026E EPS valuation and long-term 2030E EPS discounted valuation.

  The H-share 12-month target price of HK$13.00 comes from averaging near-term and long-term valuations: the near-term uses 2026E EPS and a 10.5x target P/E; the long-term uses 2030E EPS and a 12x target P/E, discounted to end-2026 at a 9.5% cost of equity.

• Valuation methodA/H premium adjustment

  The A-share target price is based on the H-share valuation with an A/H premium applied.

  The 12-month A-share target price of Rmb19.50 includes a 63% A/H premium, which the report says is broadly in line with the weighted average A/H premium for China's industrial sector over the past six months.

• Research frameworkGS Factor Profile

  Goldman Sachs compares stocks using growth, financial return, valuation multiples, and a composite metric.

  Growth is based on forward sales, EBITDA, and EPS growth; financial return is based on ROE, ROCE, and CROCI; valuation multiples are based on P/E, P/B, P/D, EV/EBITDA, EV/FCF, and others; the composite metric is the average of growth, financial return, and inverse valuation multiples.

• M&A frameworkM&A Rank

  Goldman Sachs rates the probability of a covered company becoming an M&A target on a 1 to 3 scale.

  1 means high probability, 2 means medium probability, and 3 means low probability. The report chart shows First Tractor's M&A Rank is 3, so M&A factors are not important to the target price.

Asset mapping & comparison

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

• First Tractor (H) / 0038.HK

  Core coverage name; Goldman Sachs maintains a Buy rating and gives a 12-month H-share target price of HK$13.00.

  Strengths

  Domestic demand recovery is ahead of the industry; export sales are growing strongly; positioning in mid-tier overseas markets is clear; 20-30% price advantage versus European and U.S. brands; export product gross margin is about 5 percentage points higher than domestic; forecasts for net cash and free cash flow yield are improving.

  Weaknesses

  The industry remains cyclical; overseas expansion requires sustained investment in brand, technology, and service capabilities; some consolidated earnings may be diluted by the trading business; high-end overseas markets still have technological barriers.

  Comparison

  Versus the industry, the company already achieved yoy growth in 1Q26 while the industry still declined; versus European and U.S. brands, the company's price is lower but performance is close; versus Indian brands, the company is moving toward a higher-end positioning.

  Risks

  Crop prices underperform expectations, adverse changes in agricultural equipment subsidy policy, intensifying competition, weaker-than-expected product upgrade execution, slower-than-expected localization of key components, and slower-than-expected overseas expansion.

• First Tractor (A) / 601038.SS

  The A-share listed security of the same company; Goldman Sachs gives a 12-month target price of Rmb19.50.

  Strengths

  Shares the same domestic recovery, export growth, and product upgrade logic; the A-share target price incorporates the A/H premium for China's industrial sector.

  Weaknesses

  A-share valuation is affected by fluctuations in the A/H premium and may be higher than the corresponding H-share valuation.

  Comparison

  The A-share target price includes a 63% A/H premium; the chart shows the A-share current price is Rmb13.71, implying 42.2% upside.

  Risks

  In addition to company-specific fundamental risks, there are also risks from A/H premium compression and changes in A-share market risk appetite.

Key data

• H-share target priceHK$13.00/share12-month target price; current price HK$8.76, implying 48.4% upside.
• A-share target priceRmb19.50/share12-month target price; current price Rmb13.71, implying 42.2% upside.
• Domestic industry demand guidance5-8% yoy growth in 2026Management believes 2026 is a clear inflection point for China's tractor industry.
• First Tractor 1Q26 growth+4% yoyThe company's revenue has already returned to positive yoy growth, while the industry still declined during the same period.
• 1Q26 export sales growth+40% yoyMaterially above the industry's roughly +18% export growth.
• Latin America export shareabout 30%Latin America has become the second-largest market, behind CIS at 31-32%.
• Price discount vs. European and U.S. brands20-30%Management believes the company's performance is close to that of European and U.S. brands, but its price is materially lower.
• Export product gross margin gapabout 5 percentage points higherAt the product level, export gross margin is higher than domestic, but consolidated margin is diluted by the trading business.
• 2026E revenueRmb12,591.4mnGoldman Sachs forecast.
• 2028E EPSRmb1.31Goldman Sachs forecasts EPS to rise from Rmb0.72 in 2025 to Rmb1.31 in 2028E.

Impact & implications

The report is positive for First Tractor: if domestic cycle recovery, export channel expansion, and product upgrades are all realized, the company's revenue, profitability, and cash flow may continue to improve. The higher product gross margins in overseas business and the value-for-money advantage in mid-tier markets may help the company re-rate from a China domestic cyclical stock to a more globally oriented agricultural machinery manufacturer with growth characteristics. However, the target price still depends on variables such as crop prices, policy subsidies, overseas expansion execution, and premium product penetration.

Risks

• Agricultural product prices are weaker than expected, affecting farmers' purchasing power and tractor demand.
• Government subsidies for agricultural equipment change unfavorably.
• Competition intensifies in domestic or overseas markets, compressing pricing and margins.
• Product mix upgrade execution falls short of expectations.
• Localization of key components progresses more slowly than expected.
• Overseas market expansion progresses more slowly than expected, or is constrained by geopolitics, channels, and service capabilities.

What to watch

• Whether China's tractor industry demand in 2026 delivers the expected 5-8% yoy growth.
• Whether First Tractor can continue to grow revenue and sales faster than the industry.
• Whether the strong export momentum after 1Q26 can continue in Latin America, CIS, Southeast Asia, and Europe.
• Whether the export gross margin advantage can translate into sustained profitability improvement at the consolidated level.
• Whether hilly and mountainous machinery and new energy agricultural equipment can generate scaled revenue.
• Whether the company will implement higher dividends, buybacks, or interim dividends to enhance shareholder returns.
• The pace and return on overseas capex, brand building, technology investment, and service network construction.