Core operating recovery continues, while FX headwinds disrupt profits; Lonking Holdings upgraded to "Buy"
AI summary card
Core operating recovery continues, while FX headwinds disrupt profits; Lonking Holdings upgraded to "Buy"
Goldman Sachs is positive on China's machinery sector, supported by the domestic replacement cycle and resilient emerging-market exports, with Weichai Power, Sinotruk, Zhejiang Dingli, First Tractor and Lonking Holdings as top picks.
- Construction machinery and heavy-duty trucks continue to grow on replacement demand, while tractors enter a recovery inflection point in 2026 after three years of decline.
- Emerging-market exports are strong, led by Africa and South America; the Middle East turned positive year-on-year in June after pressure in the second quarter.
- Sany Heavy Industry, Hengli Hydraulic and Zhejiang Dingli, which have high US dollar exposure, may be adversely affected by FX movements.
- Lonking Holdings benefits from the domestic loader recovery and emerging-market exports. Its valuation is attractive, prompting an upgrade from "Neutral" to "Buy".
Report interpretation
Overview
This report previews 2Q26 and 1H26 results for companies covered in China's machinery sector and revises industry forecasts and earnings expectations based on year-to-date domestic demand and export data. Goldman Sachs believes core operating performance is broadly strong, but unfavorable FX movements will result in divergent net-profit performance across companies.
Core views
Domestically, construction machinery and heavy-duty trucks are in a replacement-demand-driven recovery cycle, while tractors have confirmed an inflection point after three years of decline. Overseas, construction machinery exports remain strong, heavy-duty truck and tractor exports are accelerating, and emerging-market demand offsets some of the slowdown in Southeast Asia. Among companies, Goldman Sachs favors Weichai Power, which benefits from AIDC capital expenditure; Sinotruk and Lonking Holdings, which benefit from strong emerging-market exports and attractive valuations; as well as First Tractor and Zhejiang Dingli, which are at an early stage of recovery.
Analysis framework
Industry-association sales data, export tracking, product mix, regional demand, company earnings previews and valuation adjustments are combined to update revenue, profit, EPS and 12-month target prices for covered companies.
Methodology notes
Enterprise value, cash flow and return-on-capital valuation
Lonking Holdings uses a target-price framework based on EV/GCI and CROCI, with 2026E/27E EV/DACF target multiples as the primary valuation basis.
Discounted forward P/E
Hengli Hydraulic is valued based on 2030E EPS and a 30x exit P/E, discounted to mid-2027 using an 11% cost of equity.
Domestic sales, exports, product mix and FX jointly drive earnings
Industry sales and regional export trends are used to update revenue and profit forecasts, with FX effects incorporated into net-profit assessments.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Weichai PowerTop pick
- Strengths
- Benefits from the recovery in heavy-duty trucks, improved LNG and electric heavy-duty truck mix, and expansion of its AIDC power-generation business; the AIDC power-generation business is expected to account for 44%/52% of 2027E/2028E earnings.
- Weaknesses
- The traditional heavy-duty truck business is cyclical, and the target valuation multiple has been lowered.
- Comparison
- Goldman Sachs believes its AIDC growth assumptions are above market consensus.
- Risks
- A weakening heavy-duty truck cycle, lower-than-expected AIDC demand, FX effects and valuation multiple compression.
- SinotrukTop pick
- Strengths
- Benefits from strong emerging-market exports and gross-margin improvement driven by a better export mix.
- Weaknesses
- Unfavorable FX movements cause profit growth to lag revenue growth.
- Comparison
- Compared with the risk of slower domestic demand, overseas demand, particularly in Africa and South America, offers stronger support.
- Risks
- Slower exports, FX volatility and deterioration in the global trade environment.
- Lonking HoldingsUpgraded to Buy
- Strengths
- Benefits from the domestic loader recovery, emerging-market exports, attractive valuation and higher shareholder returns.
- Weaknesses
- Loader demand remains affected by macroeconomic and cyclical factors.
- Comparison
- The shares trade at less than 8x P/E and at an approximately 20% discount to book value, versus expected ROE of around 12%.
- Risks
- Higher steel costs, weakening domestic demand, intensified competition and lower-than-expected loader exports.
- Zhejiang DingliTop pick
- Strengths
- An inflection point in domestic aerial work platform demand, product-mix upgrading, differentiated overseas competition and electrification advantages.
- Weaknesses
- It has high US dollar exposure, and unfavorable FX movements in the second quarter may offset core profit growth.
- Comparison
- Its premium boom products and vertically integrated capabilities provide competitive advantages versus domestic peers.
- Risks
- Global trade restrictions, FX volatility, overseas demand and changes in rental rates.
- First TractorTop pick
- Strengths
- Benefits from the domestic tractor-demand inflection point, high-horsepower product upgrades and export growth.
- Weaknesses
- Second-quarter net-profit growth may be constrained by the absence of one-off gains.
- Comparison
- High-horsepower tractor growth significantly outpaces other industry power segments.
- Risks
- Declining agricultural commodity prices, a weaker-than-expected domestic-demand recovery and slower export demand.
- Sany Heavy IndustryNeutral view
- Strengths
- Improving domestic cycle, expanding emerging-market share and stronger free-cash-flow generation.
- Weaknesses
- Valuation rerating is already relatively well advanced, while overseas gross margins are sensitive to the RMB exchange rate.
- Comparison
- Valuation relative to history and global peers already reflects substantial recovery expectations.
- Risks
- Volatility in global construction activity, market share, steel prices, FX and the trade environment.
- Hengli HydraulicNeutral view
- Strengths
- High barriers in hydraulic components, with non-excavator applications, linear actuators and humanoid-robot components providing long-term growth opportunities.
- Weaknesses
- The market has already priced in relatively optimistic expectations for new businesses and a cyclical recovery in the core business.
- Comparison
- The target valuation is above the average trading level over the past three years, reflecting expectations for new-business expansion.
- Risks
- Global mobile-machinery demand, new-product development progress, humanoid-robot shipments and the trade environment.
Key data
- Growth in domestic excavator sales for construction machinery2Q26 YoY +36%All tonnage segments recorded double-digit year-on-year growth.
- Growth in domestic aerial work platform sales2Q26 YoY +27%Sales turned positive in April 2026 after consecutive declines since 3Q23.
- Growth in domestic heavy-duty truck sales2Q26 YoY approximately +20%LNG heavy-duty trucks grew 27% year-on-year, while electric heavy-duty truck penetration rose to 38%.
- Growth in heavy-duty truck exports2Q26 YoY +49%Africa and South America grew approximately 70% year-on-year, while the Middle East returned to positive growth in June.
- Growth in medium- and high-horsepower tractor production2Q26 YoY +22%High-horsepower tractors grew 41% year-on-year, with their share rising to a record 37%.
- Growth in medium- and high-horsepower tractor exports2Q26 YoY +40%High-horsepower tractor exports grew 56% year-on-year.
- Weichai Power net-profit forecast2Q26E YoY +38%Includes a one-off gain from the partial disposal of its Ballard Power equity stake.
- Sinotruk net-profit forecast1H26E YoY +21%Revenue growth is strong, but unfavorable FX movements weigh on profit growth.
- Lonking Holdings net-profit forecast1H26 YoY +20%Earnings growth is expected to be relatively favorable.
- Lonking Holdings target priceHK$3.70Raised from HK$3.00, implying 25% upside.
Impact & implications
Industry forecast upgrades mainly reflect the domestic recovery and better-than-expected exports. Domestic demand is expected to continue recovering in 2H26 but with differentiated momentum due to high comparables, while exports should remain resilient. At the earnings level, improved product mix and higher export exposure should support gross margins, but companies with high US dollar exposure face FX loss risks.
Risks
- Exchange-rate volatility between the RMB and major foreign currencies, particularly pressure on profits at companies with high US dollar exposure.
- Domestic replacement demand, infrastructure and property activity, and macro-policy support being weaker than expected.
- Slower emerging-market export growth or weaker demand in regions such as the Middle East and Southeast Asia.
- Rising prices for steel and other raw materials eroding profit margins.
- Deterioration in the global trade environment, or escalating tariffs and trade restrictions.
- Intensifying industry competition and product pricing pressure.
What to watch
- 2Q26 and 1H26 results to be released by covered companies at the end of August, and the actual impact of FX gains and losses on net profit.
- 2H26 domestic sales performance for excavators, loaders, aerial work platforms and heavy-duty trucks against high comparables.
- Electric heavy-duty truck penetration, LNG heavy-duty truck sales and changes in diesel prices.
- Export orders and changes in regional demand in Africa, South America, the Middle East and Southeast Asia.
- The sustainability of high-horsepower tractor demand, agricultural commodity prices and export growth.
- Weichai Power's AIDC power-generation business orders and earnings contribution, as well as Lonking Holdings' loader demand and profit margins.