1~3Q16 results in line

Longji announced 1~3Q16 results: revenue was Rmb1.073bn, down 2.13% YoY; net profit attributable to shareholderswas Rmb53mn, up 3.38% YoY, or Rmb0.14/share. Recurring net profit was Rmb53mn, up 28.81% YoY.

Trends to watch

Gross margin rose significantly in 3Q16 and financial cost control was effective. In 3Q16, revenue wasRmb309mn, down 19% YoY, mainly because product prices fell along with raw material prices. But gross margin rose3.7ppt YoY thanks to cost control and product structure adjustment, and gross profit grew 5%. In addition, financialexpenses fell 94% YoY in 3Q16, as interest expense decreased due to repayment of bank loans. With the completion ofrights issue, financial costs are expected to be further controlled.

The company will continue to benefit from renminbi depreciation and HDT recovery and is expected tomaintain stable growth for the full year. Export business accounts for >50% of the company’s revenue, and itsoverseas revenue will benefit from renminbi depreciation in the medium/long term. The recovery of the HDT market isalso positive to its revenue, and the boost will be seen along with the control of raw material prices and adjustment ofproduct structure. Its full-year net profit forecast range is Rmb55.5mn~Rmb72.2mn, implying 0~30% growth.

Considering 1~3Q16 results, the pressure in 4Q16 is relatively small. Stable growth can be maintained for the full year.

A R&D agreement was signed to accelerate the upgrading of product technology. The company signed aR&D agreement with the China Academy of Machinery Science & Technology in August. The two companies plan to setup a high-end manufacturing research institute to develop lightweight composite materials and multi-phase compositereinforced materials etc. This will promote the upgrading of the company’s product technology. The aluminum-basedcomposite disc that will be launched in the future is expected to become a new earnings growth driver.

Earnings forecast

We maintain our earnings forecast for FY2016/2017.

Valuation and recommendation

The stock is trading at 71x 2016e P/E. Maintain our BUY rating and Rmb17.00 target price, implying 31.89% upside.

Risks

Further decline of raw material prices; continued loss in Internet of Vehicles business.