We believe the strict measures on emission control and pro-investment approach taken by the government will offer earnings visibility to the China construction machinery sector in 2020E. Besides, leading Chinese brands, on the back of the rising competitive power, have emerged as potential game changers to challenge the global giants. Consequently, we see continuous import substitution and overseas opportunities as growth drivers over coming years. We initiate coverage on SANY Heavy (600031 CH, TP: RMB19.0, Top pick), Jiangsu Hengli (601100 CH, TP: RMB54.0) and Weichai Power-A (000338 CH, TP: RMB15.9) with BUY rating.
- #1: Replacement demand to reach 60% of total sales; driven by emission regulations. For construction machinery, the National Emission Standard (NES) IV will be implemented in Dec 2020, such pressing timetable should trigger strong replacement demand. For HDT, NES VI(a) will be implemented in Jul 2021 but we see potential of advanced preparation from local governments. Besides, some local governments have set deadline for the old models to fade out on the stage. Our industry model suggests that >60% of the demand will come from replacement in 2020-21E.
- #2: Structural growth opportunities: Import substitution + market share gain. Leading Chinese players are gaining market share from the foreign players in the field of excavator and hydraulic components. We see a clear trend of further import substitution on the back of rapid enhancement of product quality, marketing strategy and new product development.
- #3: Global market to offer growth potential for Chinese manufacturers. The world’s top 50 construction machinery manufacturers generated total revenue of US$184bn (2018). The market share of SANY Heavy (600031 CH, BUY) was <5% among the total revenue of the top 50. We see great potential for Chinese players to gain market share in the global market, given their ongoing overseas investment and increasing global competitive edge.
- #4: Pro-investment policy + resilient property construction. Since mid-2019, the Chinese government has gradually loosened rules on local infrastructure financing. CMBIS Economic team forecast infrastructure FAI (excluding power) growth to accelerate to 5.5% in 2020E (vs 4.2% in 10M19). This, together with the strong property construction activities, will lend strong support to the construction machinery demand.
- Lifting our machinery demand estimate. We forecast demand for crane machinery /concrete machinery /excavator / HDT to grow 20%/14%/10%/1% in 2020E. We expect leading players will deliver above average growth thanks to market share gain.
