2021-12-15-瑞士信贷集团-展望2022年_一年分为两半；是有选择性的_109页_2mb

China Industrials Sector Summary

Core Content

The China Industrials Sector outlook for 2022 is characterized by a two-halves structure, with stronger performance expected in the second half (2H22) compared to the first half (1H22). This is attributed to easier comparisons and a potentially looser liquidity environment due to government incentives to stabilize the economy.

Main Points

1. Macro Growth Trends

• 2H22 will be weighted with better growth prospects due to improved macro indicators and more supportive fiscal policy.
• The first half of 2022 will face challenges due to tougher comparisons and ongoing economic headwinds.
• The government may front-load local government special bond issuance in 1H22 to support the economy.

2. Infrastructure FAI (Fixed Asset Investment)

• Infrastructure FAI growth was weak in 2021, only +1% YoY in 10M21, significantly below pre-pandemic levels.
• We expect a mild recovery in 2022 to mid-single-digit growth due to more supportive fiscal policy and looser liquidity.
• Limiting factors include declining land sales and tight regulations on local government bonds.

3. Raw Material Prices and Margins

• Prices for steel, copper, and aluminum rose by ~35% YoY in 2021 but have since stabilized.
• Historical average gross margins of industrial companies lag raw material prices by about 1 quarter.
• If raw material prices remain stable, industrial margins are expected to stabilize in early 2022.

4. Sub-sector Growth Outlook

• Automation is expected to grow by ~7% in 2022, driven by resilient downstream demand, lower laser prices, and better technology.
• EV supply chain will benefit from strong global demand, with China's NEV market projected to grow by 60% YoY.
• Construction will be a major beneficiary of counter-cyclical measures, particularly prefabricated construction (PC).
• Railway equipment may see some recovery in 2022, especially with low base in 2021, but long-term growth is limited.
• Construction machinery will likely remain in downturn, with excavator orders expected to decline by 16%.
• Elevators are expected to see a slight decline in orders due to a cautious property market outlook.
• Testing industry will have robust momentum despite macroeconomic headwinds, due to stringent regulations and carbon neutrality goals.

5. Investment Recommendations

• Positive picks include Estun, Inovance, Friendess (Automation), Hongfa (EV supply chain), and CSCI (Construction).
• Underperform ratings are given to XCMG, Liugong, Hengli (Construction machinery) due to weak domestic demand and lack of catalysts.
• Other recommendations include CTI (Testing), Daqin Railway (Railway operator), and Meyer (Others).

Key Information

• Property market remains a drag on the sector, despite recent policy relaxation.
• Laser penetration is expected to increase due to lower prices and better technology.
• EV demand is strong, especially in China, supporting the supply chain's top-line growth.
• Construction machinery is in downturn and will likely continue due to limited replacement demand.
• Elevator orders are expected to decline slightly in 2022.
• Testing industry is defensive to macroeconomic headwinds but has robust growth potential.
• Valuation varies across sub-sectors, with Automation and EV supply chain showing better upside potential.

Summary Table

Sub-sector	2022E Growth	Growth Drivers
Automation	+7%	- Resilient downstream demand (Li-ion battery, PV) <br> - Easier credit <br> - Improving investment payback period <br> - Labour substitution <br> - Supply chain independence
Laser	+ve	- Penetration to accelerate with lower prices and better technology <br> - Pricing advantage for domestic players
EV Supply Chain	+60% for NEV	- Robust NEV growth <br> - Higher market share or content per vehicle
Construction	+ve	- Counter-cyclical measures <br> - Prefabricated construction (PC)
Railway Equipment	Recovery	- Improved Infra FAI <br> - Low base in 2021 <br> - Potential recovery in passenger traffic
Construction Machinery	-16% for excavator	- Weak property demand <br> - Sufficient fleet base <br> - Healthy fleet age
Elevator	Slightly -ve	- Weak property outlook
Testing	+ve	- Government regulations on QHSE, carbon neutrality, and consumption upgrades

Sector Valuation Highlights

• Automation sector has higher valuations, with Estun and Inovance being top picks.
• EV supply chain has strong valuations, with Hongfa preferred over Sanhua.
• Construction sector shows favorable exposure to prefabricated construction.
• Construction machinery has lower valuations, with XCMG, Liugong, and Hengli rated UNDERPERFORM.
• Testing industry has discounted valuations compared to European peers.

Conclusion

The China Industrials Sector is expected to show divergent growth across sub-sectors in 2022, with stronger performance in the second half. Automation and EV supply chain are most promising, while construction machinery and elevators face challenges. Investors should be selective, focusing on companies with strong growth potential and favorable exposure to policy support.