20221207-招银国际-China_Construction_Machinery___HDT__2023_outlook__Difficulties_mastered_are_opportunities_won_28页_3mb

Summary of China Construction Machinery / HDT 2023 Outlook

Core Content

The 2023 outlook for the China Construction Machinery and Heavy-Duty Truck (HDT) sector is optimistic, with expectations of meaningful earnings recovery and growth in key subsectors. The analysis highlights several drivers of this recovery, including resilient overseas demand, strong mining activities, gradual reopening in China, and declines in freight rates and steel prices. The report also emphasizes the supporting policies on property as a risk reduction factor for the sector.

Main Points

1. Excavator Outlook

• Expected sales volume growth: $10%$ YoY in 2023E.
• China market: Forecasted to grow by $15%$ YoY, driven by infrastructure spending and mining investment.
• Overseas export: Expected to grow at a slower rate of $5%$ YoY, due to a high base effect, but still supported by construction and mining activities as well as market share gains by Chinese manufacturers.
• Domestic demand: Suffered a $-46%$ YoY decline in 10M22 due to weak property investment.
• Industry model: Construction related FAI per unit of operating excavator dropped from RMB24mn in 2019 to RMB22mn in 2022E, but remains close to the historical average, suggesting a balance between demand and supply.

2. Heavy-Duty Truck (HDT) Outlook

• Expected sales volume growth: $25%$ YoY in 2023E.
• Reasons for growth:
  • Fleet size recovery: After two years of decline, the potential economic recovery post-reopening is expected to increase HDT fleet size by $5%$ YoY.
  • Historical pattern: HDT sales tend to rebound after two years of consecutive decline, as seen in 2013 and 2016.
  • NES IV truck replacement: The potential speed-up of the elimination of NES IV trucks will trigger a new replacement cycle, boosting demand.

3. Aerial Work Platform (AWP) Outlook

• Expected sales volume growth: $20%$ YoY in 2023E.
• Overseas demand: Strong and sustainable growth is expected due to power grid investment, 5G spending, data center construction, and machinery replacement.
• Chinese manufacturers: Zhejiang Dingli and Jiangsu Hengli are highlighted for their strong market position and favorable supply chain conditions.
• Key players: Terex (TEX US), Oshkosh (OSK US), Linamar (LNR CN), and Haulotte (PIG FP) are mentioned as international AWP manufacturers, with Chinese companies expected to gain market share due to lower supply chain bottlenecks.

4. Other Machinery Outlook

• Tower crane and concrete machinery: High exposure to property construction spending, which is affected by government policies. These are expected to experience limited growth in 2023E due to the weak property investment environment.

5. Cost Reduction Drivers

• Freight rate decline: Global freight rates have dropped significantly, almost back to pre-pandemic levels, helping to improve gross margins.
• Steel price weakness: Steel, which accounts for $15%-20%$ of construction machinery production cost, has seen a decline since 3Q22, contributing to cost reduction.

Key Information

• Top Picks:
  • Zhejiang Dingli (603338 CH): Strong AWP demand overseas, BUY rating, with a 30% upside to current TP (RMB71.00).
  • Zoomlion-H (1157 HK): High operating leverage and attractive valuation, BUY rating, with a 35% upside to current TP (HK$5.24).
  • Weichai-H (2338 HK): Recovery of HDT engine and rising contribution from agricultural machinery, BUY rating, with a 19% upside to current TP (HK$12.60).
• Cautious Picks:
  • SANY Heavy (600031 CH): High consensus forecast, HOLD rating.
  • Jiangsu Hengli (601100 CH): Rich valuation, HOLD rating.
  • Sinotruk (3808 HK): Potentially weaker-than-expected margin recovery, HOLD rating.
• Market Share and Valuation:
  • Chinese manufacturers are expected to gain market share in overseas markets due to cost advantages and supply chain efficiency.
  • The valuation discount for Weichai-H is preferred over Weichai-A.
  • The low valuation of Zoomlion-H is a key factor in its recommendation.

Summary Table of Key Companies

Conclusion

The construction machinery and HDT sector in China is expected to recover in 2023E, with AWP and HDT being the most preferred subsectors. The recovery is supported by resilient overseas demand, strong mining activities, gradual reopening in China, and cost reduction factors such as declining freight rates and steel prices. However, the property sector remains a challenge, and companies with high exposure to property investment are expected to face limited growth. The report highlights Zhejiang Dingli, Zoomlion-H, and Weichai-H as top picks due to their strong fundamentals, attractive valuations, and growth potential.