The Lao-shan yung is a very easy wyvern to destroy. This is because he has no attacks against you, you can just accidentally get stepped on or whipped by his tail. The best weapon to destroy him with is called the Obelion
since it's weakest to the Dragon attribute and the sword has a moderate dragon attribute while boasting moderate strength and sharpness. This sword is easily acquired. No, you can't use the Dragonator more than once, wait for the lao-shan to stand up on it's legs and walk towards the fortress before it attacks, fire the dragonator. Before you even get to the fortress, though, get 2 large barrel bomb+'s (supplied in the box) and buy 10 small barrel bombs and 3 large barrel bombs. Set them up in zone 1 while you wait for the lao-shan to appear. Once it's head is above the two wyvern-bombs (large barrel bomb +) set them off (and run away) with a small barrel bomb. Do this again with the large barrel bombs until you're outta bombs. Then go towards it's head and start doing a triangle-circle-triangle combo until it's head is too far away. Then stop, sheath your weapon, catch up to its' head, and then press triangle and start the combo again. Do this until it gets to the fort. Once you get to the fort the lao-shun will probably stand up. While it's coming towards the fort you can use the balista ammo to weaken it when it's on it's feet walking towards you. You can normally get in 5-7 shots depending on how good you are with the Balista cannon. Use the dragonator tactics and dont use all the balista ammo because it'll be able to attack the fort before you do and then you'll have to wait for it to stand up again before you can use the dragonator (by that time it'll be able to take out 10-20% of the fortress) Once you've hit the lao-shan with the dragonator head to the left of the platform where the wall gives way and you can fall down. Fall down and assault the dragons' head until it stands up. Once it does you head back to the "gnads" of the dragon and start whipping out massive combos. Usually you'll stop it from moving forward, which is good. Most people using this method destroy the dragon with 10-30% of the fortress's health remaining. The head of the lao-shan is carvable, along with the body. There's 8-9 carves total (3 from the head and 4 from the body) and start asap because it takes the full minute to get them all in. The second weakness is fire, which means getting a sword with a high fire attribute and attack power, such as the Barbaroi Blade
which can't be obtained until G-ranked quests. Save before departing on this quest so if you fail you can quit and then re-load the game so you have all your stuff.
WARNING! This quest gets extremely boring, especially after failing once. I recommend stopping if you fail and then trying the next day or a few hours later.
A final note: Good luck!
P.S. I'm HR2 and I've got a whole bunch of weapons and armour from 3-7 rareness. I've killed the lao-shan 3 times, and you get better after experience. DON'T FORGET WHETSTONES! (I've learned my lesson with that)