Zhitong Finance App learned that Dongwu Securities released a research report saying that in September 2023, the excavator industry sold 14,283 units, down 32.6% from the previous year, and the industry was under phased pressure. However, overseas construction machinery as a whole is in an upward cycle. In the context of the industry's high export base and the recovery of the overseas supply chain, the growth rate of the industry's export data is under phased pressure, and there is no change in the overseas growth trend. At the same time, raw materials and shipping charges have declined, product and regional revenue structures have been optimized, profit margins have clearly rebounded, and profit growth is stronger than revenue. Furthermore, according to the construction machinery update cycle, the domestic sales market is expected to welcome a new update cycle in 2024-2025, and leaders are expected to gradually begin their performance this year. We recommend Sany Heavy Industries (600031.SH), XCMG Machinery (000425.SZ), Zoomlion Heavy Industries (000157.SZ), and Hengli Hydraulic (601100.SH).

The main views of Dongwu Securities are as follows:

In September, excavator sales volume was -33% year-on-year, and the industry was under phased pressure

In September 2023, the excavator industry sold 14,283 units, a year-on-year decrease of 32.6%. Among them, there were 6263 domestic units, a year-on-year decrease of 40.5%; exports were 8020 units, a year-on-year decrease of 24.8%. The decline in domestic sales and exports increased month-on-month, falling short of CME expectations, and the industry is under phased pressure. From January to September 2023, a total of 14,8812 excavators were sold, down 25.7% year on year; 68075 units were sold in China, down 43.3% year on year; exports were 80,737 units, up 0.54% year on year. Affected by tight funding for downstream projects, domestic sales of construction machinery still declined significantly in September. Judging from real estate and infrastructure data, in August 2023, the area of newly started housing fell 24% year on year, the amount of completed real estate investment fell 19% year on year, and the popularity of real estate construction did not pick up. The amount of infrastructure investment completed in August was 1.9 trillion yuan, an increase of 7% over the previous year.

The overseas construction machinery market as a whole is in an upward cycle, and the logic of overseas growth continues

Overseas construction machinery as a whole is in an upward cycle. In the context of the industry's high export base and the recovery of the overseas supply chain, the industry's export data growth rate is under phased pressure, but there is no change in the overseas growth trend. In 23Q2, Caterpillar, an overseas leader, achieved revenue of 17.3 billion US dollars, a year-on-year increase of 22%, and net profit of 2.9 billion US dollars, an increase of 75% over the previous year, a record high. The overall overseas construction machinery market is in an upward cycle. According to the 2022 Global Top 50 Construction Machinery Manufacturers (“2022 Yellow Table”), Caterpillar/XCMG Group/Sany Heavy Industries/Zoomlion Heavy Industries has revenue of 321/181/160/10.4 billion US dollars, respectively, with a global share of 13.8%, 7.8%, 6.9%, and 4.5% respectively. The bank estimates that the overseas share of domestic leaders is less than 5%, the overseas share space is large, and the trend of leaders going overseas continues.

The profit growth rate of major companies in 2023H1 is stronger than revenue, and it is expected that performance will gradually begin to set sail

Affected by high steel and shipping prices and declining scale effects, etc., the profit margins of construction machinery companies fell sharply in 2022. The pressure from these factors weakened in 2023, and it is expected that profit margins will begin the repair process. In the first half of 2023, 17 A-share listed construction machinery companies achieved revenue of 172.9 billion yuan, an increase of 13% over the previous year; net profit of Gumo was 13.7 billion yuan, an increase of 42% over the previous year. The gross sales margin (equal-weighted average) was 22.3%, up 3.0 pct year on year; net sales margin was 7.4%, up 2.8 pct year on year. In the first half of 2023, the logic of domestic OEMs going overseas was fulfilled, and overseas revenue growth smoothed out fluctuations in the domestic sales cycle. Raw materials/shipping costs have declined, product/regional revenue structures have been optimized, profit margins have clearly rebounded, and profit growth is stronger than revenue. Furthermore, according to the construction machinery update cycle, the domestic sales market is expected to welcome a new update cycle in 2024-2025, and leaders are expected to gradually begin their performance this year.

Investment advice:We recommend Sany Heavy Industries as one of the most globally competitive high-end manufacturing leaders in China, and are optimistic about the opportunities to reshape the global landscape in the process of internationalization and electrification. XCMG Machinery is the leading construction machinery company with the most complete product line. Its performance is clearly alpha, and valuation repairs are highly flexible. Emerging sectors such as Zoomlion Heavy Industries cranes, concrete machinery leaders, elevators, and excavators have contributed new growth poles and are expected to welcome revaluation. Hengli Hydraulic is a leader in upstream high-end hydraulic components, and new products such as screw rods are expected to open up a new growth curve.

Risk warning:The implementation of infrastructure and real estate projects fell short of expectations; the industry cycle fluctuated; international trade disputes intensified; increased competition in the industry led to a decline in profit margins.