1H12 earnings: Below expectation, with EPS falling by 76%Lonking reported 1H12 earnings after market close. Revenue/EPS fell by44%/76% y-y, worse than our expectations of 39%/61% and Bloombergconsensus of 33%/54%. Our earnings forecasts and TP are underreview. Key highlights from 1H12 earnings include the following: Decline of ASPsIn 1H12, wheel-loader and excavator (accounted for 68%/11% revenue)ASPs were CNY199k/244k, down 10%/29%. While the decline in wheelloaderASP was largely due to a deteriorating sales mix, Lonking cut itsexcavator ASP again in 1H12. In 2H11, Lonking cut its excavator ASP bymore than 10% y-y.

Margin squeezed due to volume effectsIn 1H12, gross margin/operating margin were 20.7%/11.9%, down from25.3%/16.6% in FY11 and 26.2%/18.6% in 1H11. Because fixed costremains mostly unchanged, the sharp decline in sales volume effectivelyincreased fixed cost covered per machine, and squeezed margin.

Balance sheet remains healthy, but risks are emergingReceivables declined by 5% y-y in 1H12, indicating that tightened salespolicies related to financing sales are taking effect. The convertible bondto be matured in August 12 was placed under early redemption. In 1H12,the net debt ratio was 53%, down from 57% in FY11. However, equityattributable to shareholders declined by 1% from FY11, the first declinesince the company’s IPO. We believe that there are increasing risks ofimpairment to shareholders’ equity.

Conference call at 10AM HKT, 29 AugLonking will hold a post-result conference call at 10AM HKT on 29August; Tel 800964979 (from HK), password Lonking.

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