Twelfth Five-Year Plan as a Catalyst for Valuation of Construction Machinery Industry

From tracking the sales of foreign machinery products in June and July of this year, there are clear signs of recovery in external demand. In addition, the “Twelfth Five-Year Plan” will be issued in the coming quarter and will be the catalyst for the continued increase in industry valuation.

Recalling the results of the semi-annual report, the machinery industry, the performance and delivery of the engineering machinery industry exceeded expectations. Considering the demand for refinancing and the industry’s performance in the first half of the year was exceeding expectations, we generally raised the forecast for the performance of the construction machinery industry by about 20%. In addition, the performance of heavy machinery is lower than expected and it is difficult to perform in the short term. The railway equipment industry grew more than 50% in the first half of the year, in line with expectations. As the Ministry of Railways may not have a large tender in the second half of the year, the stock price lacks a catalyst.

We believe that the industry valuation is still being repaired, and the “Twelfth Five-Year Plan” and regional rejuvenation are catalysts. Although the share price of construction machinery companies has rebounded by nearly 50% in the past three months, the dynamic PE is still less than 15 times after the performance forecast is raised. We believe that the monthly sales decline is a seasonal factor. The “12th Five-Year Plan” and the regional revitalization plan will guarantee the growth of the industry in the next year. It is noteworthy that the global demand for mechanical products rebounded significantly, indicating that the export recovery is expected. Demand for refinancing of listed companies was released centrally, and the theme of delivery was also a driving factor for stock prices. In addition to the construction machinery sector, we also recommend companies that may have improved QoQ, such as Anhui Heli, CIMC, and China First.

The sales volume of domestic construction machinery declined seasonally, and there was still a year-on-year increase. New features appeared in the regional distribution. This year's best growing excavator sales area is mainly distributed in major provinces of GDP, such as Jiangsu, Shandong, Sichuan, Anhui, and Henan. Unlike the excavator, the loader sales area obviously benefits from the development of the western region. The top five regions for sales are Inner Mongolia, Xinjiang, Shandong, Henan, and Sichuan.

Foreign construction machinery steadily strengthened, and sales of construction machinery in Japan and South Korea rebounded significantly, especially in strong export recovery. The Caterpillar dealership index returned to pre-crisis levels and achieved full positive growth. Heavy machinery production and sales fell. Due to the long order cycle of heavy machinery, orders were delivered this year last year. From January to July this year, the output of metal smelting equipment, metal rolling equipment, and metallurgical and petrochemical equipment declined significantly. Mining and lifting equipment declined slightly, but it was better than the same period last year. In July, the output of castings and forgings continued to remain high. European machine tool orders also showed signs of recovery. In July, the domestic machine tool output and export volume fell back. The orders of the German machine tool industry grew strongly, and the United States also showed a slight improvement. Japan's orders for cutting machine tools have continued to grow steadily. China's demand has remained strong and European orders have also rebounded sharply.