20140102-光大证券-Coal_Machinery_23页_533kb

Coal Machinery Industry Summary (Hong Kong/China)

Core Content

The coal machinery industry in China is expected to resume growth in 2014, driven by the need for equipment upgrades and mechanization. After a period of decline due to falling coal prices and reduced fixed asset investment, the industry began to recover as coal prices rebounded and demand for mechanized mining increased. The main factors influencing this recovery include the government's push for mechanization, the replacement of outdated equipment, and the trend towards import substitution.

Main Views

• Industry Cycle Bottoming Out:

  • Coal prices declined after 2011 but rebounded at year-end 2013 due to rising demand.
  • Fixed asset investment in the coal sector slowed after 2H12 but started to grow again in 2013.
  • The recovery of overseas economies led to increased international coal prices, reducing the price advantage of imported coal.
  • This is expected to limit the downside of coal prices and support the growth of the coal machinery industry.

• Mechanization and Product Upgrades:

  • Mechanization of coal mining improves safety and efficiency, increasing the demand for coal machinery.
  • The integrated mining rate in China is currently around 60%, significantly lower than the 100% rate in countries like Canada and Australia.
  • The "12th Five-year Plan" aims to raise the mechanized mining rate to over 75% by the end of the period, which will drive significant growth in the coal machinery sector.
  • The "12th Five-year" period is expected to see the fastest growth due to the gap between current and target mechanization rates.

• Import Substitution Trend:

  • China's coal machinery industry has evolved from relying heavily on imported equipment to producing its own, with a focus on cost performance.
  • Domestic manufacturers now have the capability to produce comprehensive coal mining equipment, leading to a gradual replacement of imported products.
  • While some high-end products like shearers and armoured-face conveyors still rely on imports, mid- to low-end equipment are increasingly being substituted with domestic alternatives.

• Demand Drivers:

  • The demand for coal machinery comes from both new integrated mining projects and the replacement of old equipment.
  • The average lifespan of coal machinery is 5-8 years, which creates a steady replacement demand.
  • The closure of small coal mines and the consolidation of the industry will further boost demand for large-scale, high-end machinery.

Key Information

• Industry Overview:

  • Coal machinery is essential for underground mining and includes integrated mining equipment such as roadheaders, shearers, armoured-face conveyors, and hydraulic roof supports.
  • Integrated mining equipment accounts for about 75% of the total output value of the coal machinery industry.
  • The coal machinery industry is expected to resume growth in 2014, with replacement demand becoming a major driver.

• Performance and Valuation:

  • Key companies like Sany International (631.HK), ZMJ (564.HK), and others showed mixed performance in 2013.
  • Valuation metrics such as PEG, P/B, and EBITDA margins are used to evaluate the industry's attractiveness.
  • Domestic companies offer competitive pricing, with home-made products being significantly cheaper than imported ones.

• Market Demand Forecasts:

  • Total demand for integrated mining equipment is projected to grow from Rmb417bn in 2010 to Rmb646bn in 2015.
  • Replacement demand is expected to rise rapidly, from Rmb60bn in 2010 to Rmb311bn in 2015.
  • The growth in demand will be fueled by the need to replace aging equipment and the expansion of large-scale coal mines.

• Import Substitution Progress:

  • Foreign companies like JOY and DBT were major vendors in the past, but domestic manufacturers have gradually taken over.
  • Domestic products now dominate the hydraulic support system market, with over Rmb20bn in market value.
  • Despite improvements, domestic equipment still faces challenges in reliability and performance, particularly in high-end products like shearers.

Trends and Outlook

• Import Substitution:

  • The industry is moving from importing equipment to producing domestic alternatives, driven by cost and technological advancements.
  • Domestic companies are gaining ground in mid- to low-end segments, with increasing performance and reliability.

• Whole-set Equipment Production:

  • The production of whole-set integrated mining equipment is becoming a key trend.
  • This is due to the need for compatibility between different components of the equipment, which enhances operational efficiency and safety.

• Future Outlook:

  • The coal machinery industry is expected to grow significantly in 2014, with replacement demand playing a crucial role.
  • The mechanization rate of the coal sector is projected to increase sharply during the "12th Five-year" period.
  • The industry's development will be influenced by government policies, technological progress, and the consolidation of coal mines.

Conclusion

The coal machinery industry in China is on the cusp of significant growth, driven by the need for mechanization and equipment replacement. The industry has moved from a state of decline to one of recovery, with domestic manufacturers gaining traction in the market. The trend towards import substitution and the production of whole-set equipment is expected to continue, supported by government initiatives and technological advancements.