Stock Analysis & Valuation First Tractor Company Limited (0038.HK)

• Previous Close: HK$9.15
• Sector Valuation Confidence Level: Moderate

Valuation method	Value, HK$	Upside, %
Artificial intelligence (AI)	28.60	213
Intrinsic value (DCF)	6.04	-34
Graham-Dodd Method	6.20	-32
Graham Formula	10.00	9

Strategic Investment Analysis

Company Overview

First Tractor Company Limited (0038.HK) is a leading Chinese agricultural machinery manufacturer with a legacy dating back to 1955. Headquartered in Luoyang, China, the company operates through three core divisions: Agricultural Machinery, Power Machinery, and Finance. As a key player in the industrials sector, First Tractor specializes in the research, development, manufacturing, and global sale of wheeled and crawler tractors, diesel engines, and related components including castings, forgings, and gearboxes. The company's integrated business model extends beyond equipment manufacturing to include financial services such as loans, finance leasing, and consumer credit specifically tailored for its agricultural customers. With China's ongoing agricultural modernization and food security initiatives, First Tractor occupies a strategic position in serving one of the world's largest agricultural markets. The company's comprehensive product portfolio and nationwide distribution network make it an essential infrastructure provider for China's farming sector, while its growing international presence expands its global footprint in the agricultural machinery industry.

Investment Summary

First Tractor presents a compelling investment case as a dominant player in China's agricultural machinery market, benefiting from government support for agricultural modernization and food security initiatives. The company demonstrates solid financial performance with HKD 11.9 billion in revenue and HKD 922 million net income, supported by strong operating cash flow of HKD 1.2 billion and a healthy cash position. With minimal debt and a sustainable dividend yield, the company maintains financial stability. However, investors should consider exposure to cyclical agricultural demand, competitive pressures from global machinery giants, and potential impacts from China's economic fluctuations. The company's beta of 0.955 suggests moderate market correlation, while its integrated business model combining equipment manufacturing with financial services provides diversified revenue streams. The stock offers exposure to China's essential agricultural sector with established market leadership but faces challenges from technological disruption and international competition.

Competitive Analysis

First Tractor Company Limited maintains a strong competitive position as one of China's leading agricultural machinery manufacturers with several distinct advantages. The company benefits from deep-rooted relationships within China's agricultural sector dating back to its founding in 1955, providing established distribution networks and brand recognition. Its integrated manufacturing capabilities spanning tractors, engines, and components create cost efficiencies and quality control advantages. The company's financial services division provides additional competitive moat by offering tailored financing solutions that competitors without captive finance operations cannot match, particularly important in price-sensitive agricultural markets. First Tractor's focus on products suited to Chinese farming conditions and scales gives it localization advantages over global competitors. However, the company faces intensifying competition from both domestic manufacturers expanding their product ranges and international giants bringing advanced technology and global scale. While First Tractor dominates in traditional tractor segments, it must continuously invest in R&D to keep pace with precision agriculture technologies and alternative power systems being developed by competitors. The company's government connections and understanding of Chinese agricultural policy provide regulatory advantages, but also create dependency on continued state support for agricultural modernization programs. Its competitive positioning remains strongest in mid-range equipment for the Chinese market, while facing challenges in premium segments and international expansion against established global players.

Major Competitors

• Deere & Company (DE): Deere is the global leader in agricultural machinery with superior technology, particularly in precision farming and large-scale equipment. Their strengths include strong brand recognition, extensive R&D capabilities, and global distribution networks. However, Deere faces challenges in cost-competitiveness in price-sensitive markets like China and less tailored products for smaller-scale Asian farming. Compared to First Tractor, Deere dominates the high-tech premium segment but struggles with localization and pricing in emerging markets.
• CNH Industrial N.V. (CNHI): CNH Industrial owns the Case IH and New Holland brands, making it a major global competitor with diverse agricultural equipment offerings. Their strengths include global scale, strong brand portfolio, and established presence in multiple regions. Weaknesses include restructuring challenges and integration issues from various acquisitions. Compared to First Tractor, CNH has broader global reach but less focused presence and understanding of the specific Chinese agricultural market dynamics.
• AGCO Corporation (AGCO): AGCO operates multiple brands including Massey Ferguson, Fendt, and Valtra, providing a diverse product range across different market segments. Strengths include strong brand portfolio and focus on farmer-focused solutions. Weaknesses include smaller scale compared to Deere and challenges in emerging markets. AGCO competes with First Tractor in mid-range equipment but lacks the deep Chinese market penetration and local manufacturing advantages that First Tractor enjoys.
• Weichai Power Co., Ltd. (000338.SZ): Weichai Power is a major Chinese manufacturer of engines and powertrains, competing directly in First Tractor's power machinery segment. Strengths include dominant market position in Chinese engine manufacturing and strong government relationships. Weaknesses include limited agricultural machinery expertise beyond engines. Compared to First Tractor, Weichai focuses more on engine supply while First Tractor offers complete tractor solutions with integrated financial services.
• First Tractor Company Limited (A-shares) (601038.SS): This is the A-share listing of the same company, representing identical operations and competitive position. The dual listing provides different investor access points but does not represent separate competitive entities. Both share the same strengths in Chinese market dominance, integrated manufacturing, and financial services, along with the same challenges facing international competition and technological advancement.
• Nanya Agricultural Machinery Co., Ltd. (2555.TW): Nanya is a regional competitor focused on smaller agricultural machinery for Asian markets. Strengths include understanding of Asian farming practices and cost-effective solutions. Weaknesses include limited scale and technological capabilities compared to larger players. Nanya competes with First Tractor in specific regional markets but lacks the comprehensive product range and financial services integration that strengthen First Tractor's competitive position.
• Nippon Sharyo, Ltd. (5401.T): Nippon Sharyo manufactures railway equipment but has some agricultural machinery operations in Japan. Strengths include Japanese engineering quality and reliability. Weaknesses include limited focus on agricultural machinery and minimal presence in China. Compared to First Tractor, Nippon Sharyo is not a direct competitor in the Chinese market but represents the technological quality standards that Chinese manufacturers must match for export markets.