The Zhitong Finance App learned that on April 9, seven departments including the Ministry of Industry and Information Technology recently jointly issued the “Implementation Plan to Promote Equipment Renewal in the Industrial Sector”, which proposes that by 2027, the scale of investment in equipment in the industrial sector will increase by more than 25% compared to 2023. The penetration rate of digital R&D and design tools and the numerical control rate of key processes of industrial enterprises above scale will exceed 90% and 75%, respectively. The plan mentions speeding up the replacement of outdated and inefficient equipment. The focus is on promoting the industrial mother machine industry to update machine tools, etc. that have been in service for more than 10 years; the agricultural machinery industry updates flexible shearing, molding, welding, manufacturing and production technology and equipment; and the construction machinery industry updates hydraulic presses, bending machines, old process production lines, and online inspection equipment.

Overall, China's industrial sector has large equipment scale and sufficient potential for renewal. Yu Xiaohui, director of the China Academy of Information and Communication Technology, said that at the end of 2023, the assets of industrial enterprises above the scale of China had already exceeded 167 trillion yuan, leading the world in terms of ownership of various critical equipment. For example, industrial robots accounted for one-third of the world's new installed capacity and more than half of the world's total installed capacity. Fan Meng, director of the Industrial Investment Research Office of the Planning Institute of the China Electronics and Information Industry Development Research Institute, said that according to historical data estimates, China's industrial equipment investment accounts for more than 70% of the entire society's equipment investment, and is an important force in equipment renewal. According to this estimate, the annual scale of equipment renewal in China's industrial sector is about 4 trillion yuan.

Among them, an industrial mother machine, also called a machine tool, is a device for manufacturing equipment, a machine for manufacturing machines. Machine tools are basically the same as fixed asset investment in the whole society. General equipment such as machine tools is an investment product in the midstream industry. Its growth momentum is driven by downstream demand, and the machine tool sector is the first to benefit under the guidance of large-scale equipment renewal policies.

According to information, the life cycle of machine tools is 8 to 10 years, and the high point of the last cycle was from 2011 to 2014. Therefore, there is currently a high demand for domestic stock replacement. Everbright Securities pointed out that with the advent of the 10-year replacement cycle, China's machine tool industry is expected to usher in large-scale replacement demand.

Haitong Securities pointed out that the machine tool industry is expected to recover as the central government encourages a new round of equipment renewal combined with new productivity catalysis, as well as the potential demand for stock machine tool updates. In addition, it is recommended to focus on overseas opportunities for domestic machine tools and related applications of mid-range and high-end models in emerging fields (robotics, 3C).

In terms of agricultural machinery, Dongwu Securities released a research report stating that in terms of the 5 trillion equipment renewal campaign, agriculture ranked second among the seven major areas to focus on. Looking ahead to 2024, the adverse factors of demand overruns caused by all three countries are expected to completely subside. Under the stimulus of a new round of subsidies, demand for renewal and replacement will be stimulated, and industry demand is expected to rise.

Furthermore, construction machinery will directly benefit from equipment updates. A number of people in the construction machinery industry chain said that promoting large-scale equipment upgrades can stimulate potential demand for equipment updates and is expected to accelerate the upgrading of construction machinery and equipment. Also, from the perspective of the equipment update cycle, many machinery and equipment have now reached the point of a new round of cycle updates.

Excavators, loaders, forklifts and cranes, and pavement machinery are the five most sold categories in the construction machinery industry. Currently, there are no general domestic regulations requiring the scrapping of overage construction machinery, and the number of construction machinery products continues to grow. According to estimates by relevant agencies, the standard holdings of excavators, loaders, forklifts, and rollers in China 2 and below were 388,000, 362,000, 757,000, and 34,000 units, respectively, accounting for 19.79%, 37.84%, 13.35%, and 23.78% of the total holdings in 2023, which is 4.2, 6.4, 1.0, and 5.3 times the actual domestic demand in 2023, respectively.

Zheshang Securities released a research report saying that in 2023, the performance of leading construction machinery companies began to rise at an inflection point, driven by exports. Domestic demand is expected to bottom out in 2024, and overseas can be expected. The bank said it expects the domestic replacement cycle of about 5 years to begin in 2025 and an upward cycle of continuous improvement overseas. China's leading construction machinery company will gradually become a global leader with comprehensive cost performance advantages.

In addition, the industrial equipment renewal implementation plan also involves production equipment such as aviation, photovoltaics, power batteries, biofermentation, etc., and key industries such as petrochemicals, pharmaceuticals, ships, and electronics. Recently, GF Securities said that there is huge demand for equipment replacement in various domestic industries. If the central and local government support policies are followed up after the fourth meeting of the Central Committee on Finance and Economics, the flexibility is expected to exceed expectations. The investment ideas are proposed to focus on three directions: (1) the general equipment industry, which directly benefits, it is recommended to focus on machine tools, injection molding machines, etc. that account for a high proportion of replacement needs; (2) the downstream long-term capital expenditure is insufficient. It is recommended to focus on mining equipment, coal machines, ships, rail transit equipment and oil services; (3) Transportation equipment with upgraded industrial structures, it is recommended to focus on natural gas cards, etc. forklifts.

Related concept stocks:

Tsugami Machine Tool China (01651): The company is mainly engaged in the manufacture and sale of CNC high-precision machine tools. The company mainly supplies a series of TSUGAMI brand CNC high-precision machine tools to manufacturers in various industries such as IT and electronic products, automobiles, medical equipment, pneumatic components manufacturing, and construction machinery. The company's CNC high-precision machine tools can be roughly divided into five major product categories, namely precision automatic lathes, precision turret lathes, precision machining centers, precision grinders, and precision wire rolling machines. The company sells its products in domestic and international markets.

Chongqing Electromechanical (02722): The company is one of China's leading manufacturers in the CNC machine tool industry. The company has three major products, CNC lathes, special machine tools, and automated manufacturing units all over the country, and is exported to North and South America, the Middle East and Southeast Asia.

First Tractor Co., Ltd. (00038): First Tractor Co., Ltd. announced the results for the year ended December 31, 2023. The group achieved total operating income of RMB 11.534 billion, a year-on-year decrease of 8.2%, and net profit attributable to shareholders of listed companies of 997 million yuan, an increase of 46.39% over the previous year. Basic earnings per share were $0.8873. It is proposed to distribute cash dividends of 0.3194 yuan per share (tax included) to all shareholders. In the power machinery business, the company's national four diesel engine products were recognized by the market due to their good operating performance and stable performance. They sold 151,100 diesel engines throughout the year, of which 82,500 units were exported, an increase of 7.69% over the previous year.

Sany International (00631): The company is one of the few domestic enterprises that can provide “excavation, mining and transportation” complete coal machine equipment. Currently, the mining equipment field mainly covers coal roadway drilling equipment, underground and surface mining transportation equipment and engineering, and non-ferrous metal mining equipment.

Zhonglian Heavy Industries (01157): In early April, Citigroup released a research report stating that it slightly raised its profit forecast for this year by 1% and raised its target price from HK$6.4 to HK$6.6, to reflect the continued positive business prospects of Zoomlion Heavy Industries, but it is expected that this year's accounts receivable and inventory impairment amounts will be similar to last year, or even lower than last year's level of 884 million yuan. According to the report, the company's management expects China's construction machinery demand to remain flat this year or achieve a low year-on-year increase in units. However, at the same time, it was reiterated that confidence in export revenue growth remains strong, mainly due to more mature direct sales channels and smart digital systems that can better capture terminal demand. In view of the above stable fundamentals and high dividend rates, Zoomlion Heavy Industries is still Citi's first choice in the construction machinery industry.

Sinotruk (03808): According to the latest data obtained by the First Commercial Vehicle Network, in March 2024, China's heavy truck market sold about 109,000 vehicles (invoicing caliber, including exports and new energy), up 82% from February, a slight decrease of 6% from 115,000 vehicles in the same period last year, with a net decrease of about 6,000 vehicles. Among them, in the March market “qualifying”, Sinotruk won the championship with 29,000 vehicles, and its market share reached 28.4%, continuing its strong performance.