The Zhitong Finance App learned that with the advancement of large-scale equipment renewal policies, domestic demand sales of construction machinery began to correct year on year. China's domestic excavator sales volume in March was 15,188 units, up 9.27% year on year, better than expected; moreover, the market expects domestic demand sales to continue to grow year on year in April. Some brokerage firms said that the construction machinery and equipment renewal cycle may be approaching, and a series of large-scale equipment renewal policies are expected to boost the market recovery. The bottom of the construction machinery industry is marginally rising, and the investment value is gradually showing.

At present, China's construction machinery industry has entered a mature period. The localization rate of the industry is high and the competitive pattern is relatively stable. As an investment-driven industry, policy changes have had a big impact on the construction machinery industry. For example, on April 9, seven departments including the Ministry of Industry and Information Technology jointly issued the “Implementation Plan to Promote Equipment Renewal in the Industrial Sector”, which proposed that by 2027, the scale of investment in industrial equipment would increase by more than 25% compared to 2023. The Ministry of Housing and Construction recently issued the “Notice on the Implementation Plan for Promoting the Renewal of Construction and Municipal Infrastructure Equipment”, which clearly requires the renewal and elimination of excavation, lifting, loading, concrete mixing, elevators, bulldozers and other equipment (vehicles) for more than 10 years, high pollution, high energy consumption, severe aging and wear, and poor technology.

At the same time, construction machinery itself has an inherent need for equipment updates. The industry expects that in the future, 70% to 80% of old equipment will be eliminated, and 20% to 30% of old equipment will generate demand for trade-in.

According to an analysis by Dongwu Securities, the upward cycle for the last round of construction machinery is 2016 to 2020. According to the 8-year service life, 2023 replaces the low life span, and the number of updates will begin to rise year by year starting in 2024. As demand for updates increases and the base figure falls in the second half of 2024, the industry is expected to usher in a new renewal cycle, boosting the recovery of the industry.

Currently, construction machinery is also benefiting from incentives such as increased fixed investment and improved economic data. Looking at the macro level, data shows that according to incomplete statistics, in March 2024, a total of 7,884 projects were started across the country, with a total investment of about 3974.956 billion yuan. The total investment for the first 3 months was about 14.85 trillion yuan. Furthermore, as of February of this year, the National Development and Reform Commission has issued a list of projects to issue additional treasury bonds worth 1 trillion yuan in three batches, and all of the additional treasury bond funds have been implemented to 15,000 specific projects. SDIC Securities said that with the gradual commencement of construction of local projects, infrastructure investment is expected to remain high throughout the year, which will also support demand for construction machinery at that time.

It is worth noting that for domestic construction machinery companies, in recent years, with the improvement of product strength, going overseas has become a natural next step. According to data from the China Construction Machinery Industry Association, from January to February 2024, China's construction machinery import and export trade volume was US$7.856 billion, an increase of 6.3% over the previous year. Among them, imports amounted to US$382.5 million, a year-on-year decrease of 0.33%; exports amounted to US$7.473 billion, an increase of 6.67% year-on-year.

Specifically, Sany Heavy Industries has moved away from a simple product export model and implemented a localized manufacturing layout in the global market. “We have intelligently upgraded our US factories. Next, we will intelligently upgrade our existing factories in Europe and India. Our plant in South Africa is expected to be completed in 2024.” Li Qin, head of Sany Heavy Industries' overseas business headquarters, gave an introduction.

Among them, the “31st South Africa Headquarters” project has broken ground. The base is positioned as a regional manufacturing center, logistics center, and talent center, with an investment of 300 million rand. It is expected to be completed by the end of 2024. At that time, it will be able to produce 1,000 excavators and other construction machinery and equipment every year. In addition, Sany Heavy Industries has also established R&D centers overseas to better explore overseas markets.

Zhonglian Heavy Industries is also stepping up the pace of “going overseas.” In 2023, Zhonglian Heavy Industry's overseas revenue reached 17.905 billion yuan, an increase of 79.2% over the previous year. The share of overseas revenue further increased to 38.04%, a record high. Tao Zhaobo, director of Zhonglian Heavy Industries, said that in 2024, the company will firmly establish the pace of “going overseas”, continue to use a global village mindset to promote overseas transformation, build an overseas business system based on end-to-end, digitalization and localization, and continue to promote the leapfrog development of overseas business.

Guojin Securities said that domestic sales of construction machinery are expected to gradually enter a recovery stage, and they are optimistic that the domestic construction machinery market will reach an inflection point in 24 years. Judging from export data, domestic construction machinery manufacturers continue to increase their export value by exporting high value-added products. Currently, domestic enterprises are still at a low level of global market share. Domestic manufacturers are exporting smoothly to countries along the “Belt and Road”, and they are optimistic about opportunities for construction machinery manufacturers to go overseas in the medium to long term. It is recommended to focus on globally competitive construction machinery manufacturers Zoomlion Heavy Industries, Liugong, Sany Heavy Industries, and Xugong Machinery.

Related concept stocks:

First Tractor Co., Ltd. (00038): On April 25, First Tractor Co., Ltd. (00038) announced its results for the first quarter of 2024, with operating income of about 4.656 billion yuan, up 11.11% year on year; net profit attributable to shareholders of listed companies was about 599 million yuan, up 23.4% year on year; basic earnings per share were 0.5334 yuan.

Zhonglian Heavy Industries (01157): In early April, Citi 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 the number of 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.

Weichai Power (02338): In early April, J.P. Morgan Chase released a research report stating that maintaining Weichai Power's “increase” rating, the company's net profit for the first quarter of 2024 could reach 2.6 billion yuan, which means a year-on-year increase of about 40%, and heavy truck sales are expected to outperform its peers. The company's earnings estimates for this year and next two years were raised by about 2% each, and the target price was raised from HK$22 to HK$23. The report points out that even though the outlook for domestic demand for heavy trucks in the mainland is slowing down, the company's market share in various major product categories has increased. Coupled with increased efficiency and rising profit margins driven by continuous product portfolio changes, the bank continues to be optimistic about the company's performance growth prospects and offset concerns about the slowdown in demand for heavy trucks.

Sinotruk (03808): According to data from 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.

Sany International (00631): In mid-April, GF Securities released a research report stating that maintaining Sany International's “buy” rating, the 24-26 EPS is expected to be 0.81/1.17 yuan/share, with a reasonable value of HK$9.11. According to the company's annual report, in 2023, it achieved operating income of 20.078 billion yuan, +30.5% year on year; net profit to mother was 1,929 billion yuan, +15.86% year over year. The gross profit margin in '23 was 26.86%, +3.51 pct. By sector, in 2023, the mining equipment sector achieved revenue of 11.8 billion yuan, +19%; the logistics equipment sector achieved revenue of 5.8 billion yuan, +26% over the same period; and the newly merged oil and gas equipment sector achieved revenue of 1.5 billion yuan.