外文报告：CICC-Transition Against Headwinds Construction Machinery Sector 2H12 Strategy-120712

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July 12, 2012 Machinery RESEARCH
Daisy Huimin WU
SFC CE Ref: AUZ699
wuhm@http://wendang.chazidian.com

Weichao SHE
SFC CE Ref: AWL894
weichao.she@http://wendang.chazidian.com
Transition Against Headwinds
Construction Machinery Sector 2H12 Strategy
Action
The construction machinery sector struggled in 1H12 amid market doubts (weak sales made the market believe the economy
was flagging, while good sales made the market worry about excessive promotions which bodes ill for future demand). We
expect the sector to bottom and begin a slow recovery in 2H12 as infrastructure construction accelerates though real estate
continues to slow. The increase in ownership and the financial risk are still manageable in the short term. Long term, China’s
construction machinery firms should become the next Komatsu, and they are now in a golden era like Komatsu was in the
1960s~1970s. We continue to favor leading companies with stable earnings and strong overall competitiveness, and we look
forward to their policy-driven share performance.
Reasoning
? Industry is bottoming; wait for a gradual recovery driven by policy. Construction machinery sales were weak in 1H12,
with loaders, excavators and truck cranes falling 25~45% YoY in January~May. Concrete machinery sales managed to
grow 20% in 1H12 thanks to low-income housing construction and lower-tier market penetration. Looking ahead, we
expect infrastructure investment to grow 15% and thus demand for construction machinery to recover gradually. But
compared to previous cycles, this time around the industry may stay at the bottom for longer and the recovery may be
weaker. Our conservative estimates show excavator and truck crane sales are likely to drop by >20% for the full year.
Concrete pump truck sales are unlikely to fall sharply in the short term considering the rising commercial concrete
penetration rate and replacement needs, and we expect ownership to reach >70,000 units in 2015.
? There are concerns in the long term, but risks still manageable in the short term. 1) Is the market close to
saturation after the rapid expansion? The ownership of excavators, bulldozers, loaders and cranes by end-2011 was
2.5~3.3x the ownership in 2006, in line with the increase in total fixed asset investment, which was 3.2x larger than in
2006. At present the size of China’s construction industry is 1.5x that of Japan’s at its height in the 1990s, while the
average annual sales of mobile cranes, bulldozers and excavators in China are less than sales in Japan during the peak
period, indicating there is still upside potential. 2) Is there looming financial risk? We took full account of the exposure
to installments, mortgages and finance leases (both on and off balance sheet), and found that the increase in exposure as a
percentage of annual revenue has risen gradually, but is still manageable (sales on credit accounted for 60% of revenue in
2011). The bad debt provision rate fell, but is still higher than the actual bad debt rate. Based on the most conservative
assumptions, bad debt provision equal to 2% of all the exposure would impact Zoomlion’s earnings by 5.8%.
? Future direction of China’s construction machinery companies—the next Komatsu. The industry is now
characterized by low concentration, excessive competition, limited product lines, and low overseas market shares, which
are similar to the conditions in Japan in the 1960s~1970s. Having compared Komatsu and Caterpillar from several
perspectives, we conclude that China should follow the development path of Japan’s construction machinery industry:
leading domestic firms will improve technology, capture developing markets, and then break into developed markets to
achieve a global presence.
? 1H12 results to be mixed, with leading companies performing better. We expect Sany and Zoomlion to post 10~15%
earnings growth for 1H12 while LiuGong and Sunward should see big earnings declines (full-year earnings forecast may
be downgraded). The A-share construction machinery sector is trading at 8.7x 2012e P/E, inexpensive; Zoomlion-H is
trading at 6.3x 2012e P/E, implying a 27.6% A/H premium. W e continue to favor leading companies with stable earnings
and strong overall competitiveness, and we look forward to their share performance driven by policy.
Risks
Lower-than-expected policy effect; capacity expansion intensifies competition; risks from overseas expansion.