The Zhitong Finance App learned that Dongwu Securities released a research report saying that CME predicts sales of 16,200 excavators of various types in May 2024, -3.6% year-on-year, of which 7,700 units will be sold domestically, +19% year-on-year, exceeding market expectations. The bottom of the construction machinery industry is marginally rising, which is expected to resonate with domestic and foreign sales, gradually showing investment value. Comprehensive enterprise competitiveness and valuation conditions, we continue to recommend Sany Heavy Industries (600031.SH), Xugong Machinery (000425.SZ), Zhonglian Heavy Industries (000157.SZ), etc., and it is recommended to focus on Liugong (000528.SZ), Shantui (000680.SZ), and Weiwan Seal (301161.SZ).

The main views of Dongwu Securities are as follows:

CME predicts domestic excavator sales will exceed expectations by +19% year-on-year in May, which is expected to start a new upward cycle

CME predicts sales of 16,200 excavators of all types in May 2024, with domestic sales of 7,700 units, +19% over the same period, exceeding market expectations. It is mainly due to the issuance of treasury bonds at the end of 2023 to drive a continuous increase in small-scale excavation sales volume and share; exports of 8,500 units, -17% compared to the same period last year. We judge that this is mainly due to the high base for the same period last year and high current dealer inventory levels. From January to May 2024, overall excavator sales fell by about 9% year on year, and the decline continued to narrow. Among them, the domestic market basically bottomed out with a 0.5% year-on-year decline, and the export market fell 16% year on year. Looking ahead to the second half of the year, domestic downstream infrastructure investment continues to improve, and domestic sales of construction machinery have a clear upward inflection point, which is expected to begin a new upward cycle. Looking at overseas markets, the export growth rate was phased under pressure due to last year's high base+high short-term inventory. The overseas high base effect disappeared in the second half of the year, and dealers went to warehouses to end. Overseas growth is expected to pick up in the second half of 2024.

Domestic sales bottomed+overseas market expansion, and the industry ushered in domestic and foreign resonance

The upward cycle of last-round construction machinery is 2016-2020. According to the 8-year service life, the last-round sales equipment is already in a large-scale life cycle replacement period. A series of policies such as large-scale equipment updates have boosted the industry's recovery, which is expected to resonate with the dual cycle of “large-scale equipment update+industry self-renewal”. In terms of exports, the main companies in 2023&2024Q1 continued to expand in the “Belt and Road” countries in the dominant region, and continued to make breakthroughs in the European and American markets, highlighting the international competitiveness of domestic brands. The overseas construction machinery market capacity is three times that of the domestic market. Currently, leading companies have an overseas market share of about 5%, while the overseas leader Carter shares 15% +, and domestic leaders still have room to more than double.

ROE restoration will occur before the industry's inflection point. This cycle needs to focus on improving business quality

Compared to the previous cycle, the current cycle was more affected by the downturn in real estate, so the industry's inflection point was later. However, the drastic improvement in the operating quality of leading OEMs in this cycle will drive early restoration of profitability. In 2023, the ROE of leading OEMs will reach an upward inflection point. We believe that the operating quality and profitability in 2024 will continue to recover. Combined with PB valuations, they are currently at a low valuation level.

Investment advice

The bottom of the construction machinery industry is marginally rising, and it is expected to resonate with domestic and foreign sales. Based on the competitiveness and valuation situation of enterprises, we continue to recommend [Sany Heavy Industries] [Xugong Machinery] [Zhonglian Heavy Industries] [Hengli Hydraulic] [Zhejiang Dingli], and it is recommended to pay attention to [Liugong], [Shantui Co., Ltd.], [Weiwan Seals], [Longage Hydraulic], [Fusite], etc.

Risk warning

Downstream investment falls short of expectations; industry cycle fluctuations; international trade disputes.