Number one document favors agricultural machinery, PE of only 6 times for the first tractor (00038) ushered in a revaluation.

This year's Central No. 1 Document was released later than in previous years, but it was more lively. After DeepSeek drove a technical bull market in the Hong Kong stock market, liquidity reached a turning point. Signals such as policies, performance, and technology all have the potential to attract incremental funds into the market, and this may bring investment opportunities to the agricultural equipment sector. It was reported that on February 23, the Central No. 1 Document for 2025, "Opinions of the Communist Party of China Central Committee and the State Council on Further Deepening Rural Reform and Solidly Promoting Comprehensive Rural Revitalization," was released. The document first proposed "new agricultural production forces," advocating for the promotion of high-quality development of agricultural machinery and equipment and the replacement of old agricultural machinery. In addition, it supports the development of Jiangsu Nonghua Intelligent Agriculture Technology and the expansion of technology applications such as artificial intelligence, data, and low-altitude scenarios. In fact, every year's Central No. 1 Document focuses on key areas and receives favor from policies and capital. For example, in 2024, the focus was on rural power grids and rural distributed new energy, while this year's focus is on developing new production forces, with agricultural equipment and artificial intelligence as the core of development. The day after the document was released, stocks in the agricultural equipment sector such as First Tractor (00038), Weichai Power (02338), and ZOOMLION (01157) all surged on high volume. However, this rally lacked sustainability, and in the following days, there was a consolidation with reduced volume, playing out a "cry wolf" scenario. However, as one of the leading agricultural equipment companies, First Tractor's PB (price-to-book ratio) is less than 1, and its PE (price-earnings ratio) is only 6. Will this year's Central No. 1 Document lead to a reevaluation? Policy-driven, expanding the agricultural machinery market It is expected that this Central No. 1 Document will stimulate demand for agricultural equipment, especially agricultural machinery, from three main dimensions: promoting the replacement of old agricultural machinery, enhancing cooperation in agricultural technology to drive innovation, and creating new market opportunities for the deployment of intelligent agricultural equipment. For example, Weichai Power's integration of DeepSeek and AI may accelerate the implementation of AI in agriculture, further expanding the market. The immediate effect of the replacement of old machinery is the focus of this policy. In support, the Ministry of Agriculture and Rural Affairs, the National Development and Reform Commission, the Ministry of Finance, and the State Grain and Material Reserves Administration have jointly issued a notice on the implementation of the 2025 agricultural machinery scrappage and renewal subsidy policy, calling for the continued implementation of the policy to promote the renewal of old machinery and accelerate the adjustment of the agricultural machinery structure. In recent years, government departments at all levels have introduced industry policies to encourage the mechanization of agricultural production, aiming to accelerate the modernization of agriculture. Promoting the replacement of old machinery and the development of new quality agricultural production are not just stimulating consumption policies, but also in line with goals such as promoting the improvement of crop yields and farmer income. In terms of market size, data shows that the annual value of agricultural machinery updates in China is as high as 300 billion RMB, reflecting a significant market potential. Tractors are the main machinery in agriculture, and they are classified based on power and drive system into large (over 100 horsepower), medium (25-100 horsepower), and small (below 25 horsepower) tractors. In recent years, tractor production and sales have been declining overall, but the demand for large tractors has seen growth. As of 2023, the national tractor ownership stood at approximately 21.13 million units. As a leading tractor manufacturer in China, First Tractor produces a range of products, including wheeled tractors, crawler tractors, diesel engines, and various components. The company has maintained a leading position in the domestic market for large and medium tractors, with its wheeled tractor sales ranking second in the industry in 2023. In terms of revenue, over 90% of First Tractor's revenue comes from agricultural machinery, mainly tractors. Before 2022, the company's agricultural machinery business maintained double-digit compound growth rates. In 2023, due to the impact of emission standard transitions, demand declined, affecting revenue. However, in 2024, revenue growth recovered. If the first-half growth rate is sustained, the full-year revenue could reach 11 billion RMB. Overall, the company's tractor production and sales are on an upward trend. Comparing with its counterparts in the Hong Kong stock market, such as Weichai Power and ZOOMLION, both companies have a lower proportion of revenue from their agricultural equipment business, according to their financial reports for the first half of 2024, accounting for less than 10%. Weichai Power's agricultural equipment business is mainly operated by its subsidiary Weichai Levo, which produces tractors and other agricultural machinery products. Levo's performance follows a similar trend to First Tractor, but with a larger scale and a leading revenue growth rate in 2024. In the first half of the year, Levo's overall agricultural machinery sales volume grew by 17% year-on-year, ranking first in the industry. ZOOMLION's agricultural equipment business includes a variety of products, including tractors, corn harvesters, rice harvesters, and rice seeders. While its scale is smaller compared to the other two companies, its revenue has seen rapid growth in recent years, with a leading growth rate in 2024. In the first half of the year, its agricultural machinery sales volume reached.The increase is expected to exceed 112%, and it is forecasted to maintain a doubling growth rate throughout the year.Compared to the other two, the impact of tractor products on the performance of FIRST TRACTOR is the largest, but the performance is relatively lackluster. In fact, in recent years, the company has been consistently clearing inefficient assets and focusing on its core business. Since 2017, it has completed the disposal of assets such as LuoYang Forklift Co., Ltd., handling company, and Xinjiang Equipment Company, and is planning to transfer its shares in ZYBANK by 2024. However, the sale was terminated in December because no suitable buyer was found. At the same time, the company is actively reducing costs and improving efficiency, with operating expenses continuously decreasing. In the first three quarters of 2024, the operating expense ratio was 3.69%, a decrease of 0.7 percentage points compared to the previous year and 1.6 percentage points compared to 2022. With multiple drivers, there is potential for revaluation. FIRST TRACTOR is striving to improve its operational quality and has made significant changes in personnel. Since the end of 2024, there have been frequent changes in its management team. For example, in December 2024, Kang Zhifeng resigned as CFO and was replaced by Liu Bin. In January 2025, Chairman Li Xiaoyu resigned and Zhao Weilin was elected as the new chairman. The changes in management mean that significant business and market strategies will be implemented. However, investors still have concerns. On one hand, the growth rate of 2024 performance is lower than that of its peers, and profitability is under pressure. On the other hand, there is a large degree of uncertainty in the subsequent strategy after the management changes. Since October last year, funds have been continuously selling off, with the current decline reaching nearly 40%. However, FIRST TRACTOR is also generous in dividends, with a stable dividend payout ratio exceeding 30% since 2020, according to Oriental Choice data. FIRST TRACTOR is at the bottom of its valuation, with limited downside potential and policy stimulation to boost performance. Most broker research reports are positive about the company. BoHai Securities' research report believes that benefiting from favorable policies such as agricultural machinery subsidies and equipment upgrades, tractor demand is expected to be fully released. The company is increasing its efforts to explore the markets of Central Asia and the Caucasus while actively expanding overseas markets, and its market share in the tractor market is expected to continue to grow. In summary, benefiting from the Central No. 1 Document, the agricultural equipment industry is ushering in a new demand cycle under multiple policy measures. Stocks in the sector are seeing investment opportunities, and as one of the industry leaders, FIRST TRACTOR has a significant impact on performance. Its business recovery and cost reduction efficiency are also evident, with generous dividends, new management expectations, and potential revaluation. With its current undervaluation, the company still has the potential for revaluation.