Investment Highlights

A bellwether in China’s joint bearing industry. As a kind of specialbearings featured relatively large load and great impact resistance, jointbearings are widely used in the heavy-duty trucks (HDT), constructionmachinery, aerospace, and etc., and enjoy a vast global market of aboutUS$1.5-2.0bn. Longxi Bearing is the largest Chinese joint bearingmanufacturer and exporter with solid advantages in R&D and productionmanagement. Recognized by key customers including Caterpillar, theCompany was honored with Caterpillar’s SQEP certification in 2012,and its competitive edges accumulated over years are hard to bereplicated in the short run.

High-end bearings for aviation and defense use will become newgrowth drivers. We forecast that annual demand for joint bearings inthe Chinese aviation and defense sectors will exceed Rmb1bn, and thatthe rate of homemade bearings will increase year by year. After years ofaccumulation, the Company has won three field certifications for thedefense products. The aviation joint bearing R&D and maintenanceproject undertaken by the Company has been approved ofestablishment by competent department, making the Company a majorChinese developer of aviation joint bearing. The Company has inked aframework agreement for setting up a joint R&D center together withShenyang Aircraft Design and Research Institute, and aviation anddefense joint bearing business is expected to become a new growthdriver over the next few years.

Domestic demand for traditional joint bearings is recovering, andoverseas sales will continue to grow. The Company secures ~70%share in the domestic downstream engine market of traditional jointbearings. According to forecast of CITIC Securities Research Machineryand Auto Sectors teams, HDT and construction machinery sectors willsustain 5-8% and 12% CAGR over the next few years, which will helpthe Company’s domestic sale to grow steadily; seizing the opportunity ofoverseas industry chain transfer, the Company places its focus ontapping overseas main engine plants in the fields of HDT, constructionmachinery, and oil cylinder. Among the more than 30 multinationalcorporations under its in-depth tracking, 12 have placed batch orders orembarked on eligible supplier second-party review. Export from theCompany currently represents ~30% of these customers’ demand, andit is forecasted to sustain a rapid growth.

Potential risks. (i) Slower-than-expected demand recovery of domesticand foreign downstream sectors; (ii) Slower-than-expected marketexpansion of new products for such fields as aviation and defense; and(iii) sharp swings of raw materials prices.

Earnings forecast, valuation and investment rating. Without factoring in the impact of privateplacement, we project 2012E/13E/14E net profit attributable to shareholders of the listed company to beRmb98mn/130mn/178mn, implying 2012E/13E/14E EPS of Rmb0.33/0.43/0.59, and a CAGR of 17.5%during 2011-2014E. According to the average 22x 2013E PE for comparables, we set our target price atRmb9.51 per share, and initiate with a “BUY” rating.