2016 earnings preannounced to decline 13% YoYXinjiang Machinery Research Institute preannounced that its 2016 revenue would fall 28% YoY to Rmb1.79bn and itsnet profit would decline 13% YoY to Rmb260mn, missing market expectations.

Trends to watch

Earnings dragged by agricultural machinery. The lower-than-expected earnings in 2016 was mainly caused bythe decline in agricultural business due to: 1） reduced subsidies for the purchase of agricultural machinery in 2016; 2）emission standard upgrade in 2016; 3） higher cost due to the new emission standard; 4） lower corn prices and lessplanted area.

Future Aerospace to maintain high growth. With the defense business being the key growth driver, FutureAerospace met its earnings promise in 2016 and will likely maintain strong momentum in 2017. In addition to expandingthe defense market, it also started deployment in the international subcontracting of civil airplanes and domestic largeaircraft market. In the long turn, it will benefit from the strong demand for aerospace equipment in China.

Emerging business expansion. The company will work with the China Academy of Space Technology to develop andproduce satellites and will independently develop the satellite operation business. It will likely fill the gap of thehigh-throughput satellite broadband business in China thanks to its strong team and industrial experience.

Valuation and recommendation

Considering the lower-than-expected agricultural machinery business, we cut 2016/17e earnings by 31%/6% toRmb260mn/Rmb479mn and set 2018e earnings at Rmb693mn. Considering the adjustment to ourearnings forecast, we cut our TP by 23% to Rmb17, implying 60x 2017e for the military business and20x P/E for agricultural machinery. Maintain BUY.

Risks

Intensified competition in the agricultural machinery sector; expansion of the defense business disappoints.