China machinery-sector recovery and export resilience continue; Lonking upgraded to Buy

Overview

This report previews 2Q/1H26 results for covered China machinery companies and adjusts sector forecasts and company earnings expectations based on year-to-date domestic demand and export data. Goldman Sachs believes core sector operations remain strong, but FX headwinds will affect reported profits for some companies.

Core views

Domestically, construction machinery and heavy-duty trucks are in a recovery cycle, while tractors reached an inflection point in 2026 after three years of decline. Overseas, emerging-market demand continues to support exports, with Africa and South America standing out and the Middle East improving in June. At the company level, Weichai benefits from AIDC power-generation operations and a better product mix; Sinotruk and Lonking benefit from emerging-market exports; and First Tractor and Dingli benefit from their respective early-stage recovery cycles.

Analysis framework

The report combines industry-association sales volumes, regional export trends, product mix, company earnings previews and valuation roll-forwards to adjust 2026–2028 earnings forecasts and 12-month target prices.

Methodology notes

• Industry cycle analysisDemand and replacement-cycle analysis

  Uses domestic sales volumes, replacement demand, product penetration and export performance by region to assess the stage of the construction machinery, heavy-duty truck and tractor cycles.

  Construction machinery and heavy-duty trucks are in the later stages of recovery, while tractors are entering an early recovery; a high base could slow domestic growth in the second half.

• Valuation methodsEV/DACF, EV/GCI and discounted P/E

  Uses valuation multiples related to cash flow and return on capital, while discounting forward earnings.

  Lonking is valued using EV/DACF; Hengli uses discounted forward P/E; and some companies derive target prices using EV/GCI and DACF multiples.

Asset mapping & comparison

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

• Lonking

  Buy, upgraded rating

  Strengths

  Benefits from domestic loader recovery, emerging-market exports, relatively attractive valuation and strong shareholder returns.

  Weaknesses

  Loader demand remains cyclical, and valuation multiples have been reduced due to the cycle stage.

  Comparison

  Viewed as one of the names with the highest total-return potential within China construction machinery coverage.

  Risks

  Rising raw-material costs such as steel, weaker-than-expected domestic demand, intensified competition and slower loader exports.

• Weichai Power

  Buy preference

  Strengths

  LNG heavy-duty trucks, AIDC power-generation operations and an improved product mix support growth; 2026–2028 EPS forecasts are raised by 1%–17%.

  Weaknesses

  Valuation multiples for traditional businesses have declined, and the late stage of the heavy-duty truck cycle may limit valuation expansion.

  Comparison

  Its AIDC power-generation earnings assumptions are more optimistic than market consensus.

  Risks

  Slowing heavy-duty truck demand, FX volatility and weaker-than-expected AIDC business development.

• Sinotruk

  Buy preference

  Strengths

  A leader in China heavy-duty truck exports, benefiting from emerging-market demand and an improving export product mix.

  Weaknesses

  Adverse FX may cause net profit growth to lag revenue growth.

  Comparison

  Relative to other heavy-duty truck companies, it has more prominent export exposure and emerging-market benefits.

  Risks

  Weaker overseas demand, FX volatility, deterioration in the trade environment and a high domestic heavy-duty truck base.

• Zhejiang Dingli Co Ltd.

  Buy preference

  Strengths

  Recovering aerial work platform demand, strong advantages in electrification and premiumization, and robust overseas competitiveness.

  Weaknesses

  High US dollar exposure means FX headwinds may weigh on near-term net profit.

  Comparison

  Compared with domestic peers, it has advantages in aerial work platform technology, vertical integration and supply-chain management.

  Risks

  Weaker global construction activity, intensified industry competition, lower-than-expected US market penetration and escalating trade restrictions.

• First Tractor

  Buy preference

  Strengths

  The tractor-sector inflection point is clear, with a higher mix of high-horsepower products driving improvements in gross margin and EBIT.

  Weaknesses

  The absence of one-off gains may limit year-on-year net profit growth in 2Q26.

  Comparison

  Benefits from the early stage of agricultural machinery recovery after a three-year downturn.

  Risks

  Falling agricultural commodity prices, weaker-than-expected domestic demand and waning export momentum.

Key data

• 2Q26 domestic excavator sales growth+36% YoYAll tonnage segments achieved double-digit year-on-year growth.
• 2Q26 domestic heavy-duty truck sales growthApproximately +20% YoYLNG heavy-duty trucks grew 27%, while electric heavy-duty trucks nearly doubled.
• 2Q26 electric heavy-duty truck penetration38%Above 28% in 2025.
• 2Q26 heavy-duty truck export growth+49% YoYAfrica and South America grew by about 70%, while the Middle East resumed year-on-year growth in June.
• 2Q26 medium- and high-horsepower tractor production growth+22% YoYHigh-horsepower tractor production grew 41%.
• 2026 heavy-duty truck export forecast+30% YoYForecast raised, mainly reflecting stronger-than-expected demand in South America and Africa.
• Lonking target price and potential returnHKD 3.7; 25% upsideCombined with a 6%–7% dividend yield, total return potential exceeds 30%.

Impact & implications

Improving sector demand and strong exports support revenue growth and earnings recovery, but FX volatility may prevent operational improvements from fully flowing through to net profit. Investment focus should be on companies with emerging-market export exposure, improving product portfolios, attractive valuations or positions in early-stage recoveries.

Risks

• RMB fluctuations against major foreign currencies may adversely affect profits at companies with high overseas revenue exposure.
• Domestic replacement demand and infrastructure- and property-related activity may be weaker than expected.
• Emerging-market export demand may slow or the global trade environment may deteriorate.
• Rising raw-material prices such as steel may compress margins.
• Intensifying industry competition and escalating overseas trade restrictions.

What to watch

• The actual impact of FX gains and losses on net profit in 2Q/1H26 results.
• Whether Middle East demand can continue improving after turning positive in June.
• Export growth of heavy-duty trucks and construction machinery to Africa and South America.
• Electric heavy-duty truck penetration, LNG heavy-duty truck demand and the magnitude of diesel heavy-duty truck declines.
• High-horsepower tractor demand, agricultural commodity prices and export orders.
• Lonking loader demand, margins and delivery of shareholder returns.