The Zhitong Finance App learned that Anxin Securities released a research report saying that in the short term, manufacturing demand is weak, and the industry is still in the bottoming out stage. Looking ahead, confidence in the second half of the year is better than in the first half of the year. Macro economic recovery is expected to drive the machine tool industry demand to continue to pick up; in the long run, high-end machine tools+domestic replacement is the main line of long-term investment. Policies have been introduced continuously in recent years, which are expected to help domestic replacement of high-end machine tools. The bank is optimistic about investment opportunities in the domestic machine tool industry chain.

The main views of Anxin Securities are as follows:

Seventeen listed companies, including Guosheng Zhike, Yuhuan CNC, Huazhong CNC, Haitian Precision, Neway CNC, Zhejiang Hydeman, Rifa Precision, Cord CNC, Qinchuan Machine Tool, Shenyang Machine Tool, Huadong CNC, Genesis, Ningbo Jingda, Yawei, Sijin Intelligence, Yujing, and Huachen Equipment, etc. were selected as key targets in the machine tool equipment sector.

2023Q3 Machine tool equipment sector market and business situation summary: performance is divided, and companies with high-end product structures and a relatively high export share have performed better.

1) Market performance: From a fundamental point of view, demand in the machine tool industry was weak in the first three quarters of 2023, the industry is in the bottoming out stage, and the recovery window remains to be seen; from an investment perspective, in addition to general market factors, the sector's internal sector has pulled back about 13.07% from July 3, 2023 under the pressure of “policy implementation, declining theme sentiment” and “the reality of a weak recovery in the manufacturing industry”.

2) Growth aspect: According to sample company statistics, in the first three quarters of 2023, the sector achieved revenue of 19.431 billion yuan, a year-on-year decrease of 1.05%; realized net profit of 1,510 billion yuan, a year-on-year increase of 101.74%; the 2023Q3 machine tool equipment sector achieved revenue of 6.234 billion yuan, a year-on-year decrease of 5.19%; realized net profit of 384 million yuan, an increase of 170.28% year-on-year. The revenue side was under pressure but the decline narrowed from the second quarter, mainly driven by strong demand in the NEV market combined with exports. The growth rate on the profit side is high. On the one hand, due to the low base for the same period last year, machine tool companies have better cost control, and at the same time, non-recurring income has increased. Looking at the split process, the resilience of companies such as Kode CNC, which has high-end machine tools and aerospace downstream, Huazhong CNC, which lays out CNC systems for core components, and Haitian Precision and Neway CNC, which account for relatively high exports, is highlighted. The performance growth rate is higher than the industry average.

3) Profitability: Gross margin continues to be under pressure, and net profit margin has improved. According to sample company statistics, the gross profit margin and net profit margin of the machine tool equipment sector in the first three quarters of 2023 were 25.36%/7.87%, respectively -0.80pct/+4.18pct; 2023Q3 machine tool equipment sector gross margin was 25.80%, -0.29pct, +0.07pct; net profit margin was 6.05%, +14.32pct, and -3.17pct month-on-month. Gross margin was under pressure in the short term, mainly affected by the price war in the middle and low end machine tool industry and low capacity utilization; net interest rates continued to improve, due to the fact that machine tool equipment companies had better cost control capabilities and increased non-recurring earnings such as government subsidies and exchange rates. The cost rate for the machine tool equipment sector in the first three quarters of 2023 was 17.78%, +0.07pct over the previous year. Among them, the sales expense ratio, management expense ratio, financial expense rate, and R&D expense rate were +0.55pct, -0.18pct, -0.37pct, and +0.61pct respectively.

4) Order side: Inventory and contract liabilities remained flat and increased slightly. According to sample company statistics, as of the first three quarters of 2023, contract liabilities+advance accounts in the machine tool sector were 4.646 billion yuan, +0.15% year-on-year; inventory was 13.206 billion yuan, +0.92% year-on-year, a slight increase over the previous year, which is basically in line with changes on the revenue side.

Future market outlook: wait for demand to recover in the short term, and long-term high-end machine tools+domestic substitution drive growth.

1) Macro environment: The industry is in the bottoming out stage, waiting for the recovery in manufacturing demand to drive up demand in the machine tool industry. The manufacturing PMI for October was 49.5%, -0.7pct; according to data from the Machine Tool Industry Association, Japan's total machine tool orders in September fell 11%, orders from China fell 40% year on year, and the economic recovery trend is still uncertain; according to data from the National Bureau of Statistics, metal cutting machine tool production from January to September 2023 was 374,000 units, +9.28% year on year, and metal cutting machine tool production in September 54,000 units, +12.5% year-on-year. For the first time since August 2021, double-digit growth has been achieved.

2) Business tracking: The boom in new energy vehicles and exports continues to +3C, which is expected to drive a continued increase in machine tool demand. ① New energy vehicles: According to data from the China Automobile Association, in September 2023, China's NEV production and sales volume were 858,000 units and 904,000 units, respectively, +16.4% and +27.2%, respectively. From January to September 2023, China's NEV penetration rate was 29.8%, +6.37pct; ② Exports: According to Chinese customs data, the total import and export volume of machine tool imports and exports from January to August 2023 was US$21.30 billion, -4.3% year-on-year. Among them, the import value is 7.49 billion US dollars, -11.6%; the export value is 13.81 billion US dollars, +0.1%; ③ 3C: In August, China's mobile phone shipments were 18 million units, +0.03% year-on-year, and the cumulative shipment volume in January-August was 160 million units, -6.70% year-on-year. As the new cycle of switching gradually begins, China's smartphone market shipment volume is expected to reach an inflection point in the fourth quarter of 2023. At the same time, the penetration rate of new materials such as titanium alloy is expected to spawn new demand for machine tools.

3) Cycle review: Machine tools enter an iterative cycle of updates, and stock replacement demand plays a supporting role. The renewal cycle of machine tools is 8-10 years. In the last round, the output value of China's metal cutting machine tools was high in 2011. In 2021, China's metal cutting machine tool production was 602,000 units, +34.98%, or 70.01% of the 8599,000 units in 2011; in 2022, China's metal cutting machine tool production was 572,000 units, -4.98% over the same period, 72% of the 797,000 units in 2012. The potential for machine tool inventory renewal is yet to be unleashed, underpinning the needs of the machine tool industry.

4) Long-term demand: High-end machine tools+domestic replacement are the general trend, driving the long-term development of the industry. In September 2023, the four departments jointly issued a notice to increase the R&D cost deduction ratio for industrial mother machinery enterprises. For intangible assets that have not formed intangible assets included in current profit and loss, 120% of the actual accrual amount will be deducted before tax on the basis of factual deductions according to regulations; those that have formed intangible assets will be amortized before tax according to 220% of the cost of intangible assets. Recently, the state has frequently introduced autonomous and controllable incentive policies for the machine tool industry chain. It is expected that while reducing the pressure on corporate cash flow, it will also support R&D investment and help the development and growth of domestic high-end machine tools.

It is recommended to focus on:

1) Complete machine tools: Code CNC (688305.SH) is a five-axis high-end machine tool track, which has formed a relatively complete industrial chain, with an autonomy rate of 85% for five-axis machine tools; Qinchuan Machine Tool (000837.SZ) state-owned machine tools have only two fruits. Reforms have given new vitality, and product structure optimization is expected to drive profit margins back; Haitian Precision (601882.SH) and Neway CNC () are leading private enterprises to benefit from overseas exports; it is recommended to focus on Genesis (300083.SZ) and 00Maihao Technology (0025) 95.SZ 688697.SH ) etc.

2) Machine tool components: Huazhong Numerical Control (300161.SZ) is a pioneer in domestic high-end CNC systems, with an autonomy rate of over 80%.

Risk warning:Downward macroeconomic risks, increased competition in the industry, policy progress fell short of expectations, and localized replacement of five-axis machine tools fell short of expectations.