1H16 results in line with expectation

Longji Machinery announced 1H16 results: revenue was Rmb764mn, up 6.7% YoY; net profit attributable toshareholders was Rmb38.67mn, up 3.8% YoY, or Rmb0.10 per share. Recurring net profit rose 36.6% YoY toRmb39.35mn, in line with our expectation.

Trends to watch

Gross margin improved as cost fell amid stronger procurement control and high-margin products'

contribution increased. In 1H16, Longji's gross margin expanded 2.6ppt HoH to 18% because: 1） stronger controlover procurement enhanced control over operating cost; and, 2） rising revenue contribution from high-margin brakehubs and brake discs boosted gross profit, optimized product mix, drove up gross margin and lifted profitability.

Overseas business contribution rose amid RMB depreciation; financial expenses fell sharply. Overseasbusiness' revenue contribution rose to 65% in 1H16 because: 1） RMB depreciation drove up exports; 2） high-marginoverseas business boosted integrated gross margin. In 1H16, financial expenses dived 91.7% because interestexpenses tumbled amid falling interest rates.

To expand high-end brake disc project and enter high-end OEM market via private placement. Longjiannounced plans to raise Rmb600mn to expand its high-end brake disc project, whose net profit may reachRmb64.38mn after completion. We believe the project should help Longji enter the high-end overseas OEM market andallow Longji to realize full coverage in OEM and AM markets at home and abroad.

Earnings forecast

1H16 results are in line with our expectation. We maintain our earnings forecasts for 2016/2017.

Valuation and recommendation

The stock is trading at 72x 2016e P/E. We maintain our BUY rating and Rmb17 target price, implying 32.09%upside room from the current price.

Risks

Cheyian.com remains stuck in loss.