27 Feb 2023

CMB International Global Markets | Equity Research | Sector Update

China Construction Machinery

Near-term recovery more seasonal than OUTPERFORM
structural; Pair trade opportunities (Maintain)

Following a rally since early Feb, we believe the market has already priced in the China Capital Goods
upcoming recovery of machinery demand. We see little upside potential in the
near term, as (1) the recovery could be more seasonal (MoM) than structural Wayne Fung, CFA
(YoY), with sales of excavator (proxy for the sector) likely falling short of (852) 3900 0826
[email protected]
expectation in Mar; (2) We expect the strong credit growth will only translate into
a moderate recovery of excavator demand this year (+10% YoY in our industry Katherine Ng
assumption). Therefore, we are selective in our universe, and prefer only AWP (852) 3761 8725
(the only type of machinery that stands out by achieving 15% YoY growth in Jan). [email protected]
We see pair trade opportunities, by going long Zhejiang Dingli (strong growth of
AWP demand) and Zoomlion-H (spin-off of AWP unit to unlock value + defensive
valuation at 10x 2023E P/E), funded by short position in SANY Heavy (high
expectation on excavator recovery + unattractive valuation at 27x 2023E P/E).
 Weak sales of major construction machinery in Jan but largely expected.
Excavator (downstream applications: Infrastructure + property + mining):
According to CCMA, total sales volume in Jan 2023 dropped 33% YoY to
10.4k units. In China market, sales volume in Jan declined 59% YoY to only
3.4k units, the lowest level since 2016. We believe the weak sales was due to
pandemic and early CNY this year. In overseas, export volume slightly
Related Reports
dropped 4% YoY to 7k units. Truck crane (Infrastructure + wind/nuclear 1. China Construction Machinery –
power): Sales volume dropped 21.5% YoY to 1.2k units in Jan. Tower crane Upbeat guidance from US AWP
(property): Sales declined 41% YoY to 841 units. manufacturers reaffirms our positive
stance on the sector – 13 Feb 2023
 Can the strong loan growth translate into meaningful demand recovery (link)
of excavator? The sector had a strong rally since Feb given the rising 2. Zoomlion (1157 HK, BUY) – Spin-off
expectations on infrastructure spending. The rally was further fueled by the of AWP business to unlock value –
17 Jan 2023 (link)
67% growth of the medium-to-long term corporate growth data (RMB3.5trn in 3. Prefer AWP to excavator in the near
Jan) released in mid-Feb. Our studies indicate that the correlation between term – 12 Jan 2023 (link)
the M/L term corporate loan growth and domestic sales of excavator had a 4. SANY International (631 HK, BUY)
correlation of 0.3 over the past five years (Fig 1). Meanwhile, we note that the – Expansion to new energy
equipment sector with an ambitious
loan amount in Jan tended to lead the excavator domestic sales by two target – 9 Jan 2023 (link)
months in 2018-2021 (Fig 2). However, the loan amount in Jan 2022 did not 5. China Construction Machinery &
offer much support to the excavator demand, possibly due to a change in mix HDT Sector – 2023 outlook:
of loan (less to excavator related projects). Therefore, while the absolute Difficulties mastered are
opportunities won – 7 Dec 2022
amount was high in Jan 2023, we wonder it will translate into meaningful (link)
recovery in Mar & Apr (the traditional peak season). Our check on hydraulic 6. SANY International (631 HK, BUY)
components’ orders reflected little improvement in Feb (normally 1-2 months – Key takeaways from post-results
ahead of downstream demand). call and NDR – 2 Nov 2022 (link)
7. Zhejiang Dingli (603338 CH, BUY) –
 Expect AWP growth to continue to stand out. In contrast to the weak 3Q22 earnings +36% YoY better
demand for other construction machinery, AWP sales volume in Jan grew 15% than expectation; Raise earnings
and TP on margin recovery – 31 Oct
YoY to 9.8k units. Such resilience reaffirms our positive stance on AWP. We 2022 (link)
maintain our view that tight supply of AWP in overseas will continue to offer 8. SANY Heavy Industry (600031 CH,
good potential for China export, while domestic demand will continue to be HOLD) – Another weak quarter; Still
underpinned by the replacement of labour. Our sales growth forecast for the challenging – 31 Oct 2022 (link)
9. Jiangsu Hengli (601100 CH,
full year is 20%. HOLD) – Revenue rebounded in
3Q22; Wait for more data points
to confirm recovery – 25 Oct
2022 (link)

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1
MORE REPORTS FROM BLOOMBERG: RESP CMBR <GO> OR http://www.cmbi.com.hk
27 Feb 2023

Figure 1: China excavator domestic sales growth vs Figure 2: China excavator domestic sales vs new
new medium-long term loan growth medium-long term loan amount
300% Units RMB bn
80,000 4,000
250%
70,000 3,500
200% 60,000 3,000
50,000 2,500
150%
40,000 2,000
100% 30,000 1,500

50% 20,000 1,000

10,000 500
0%
0 0
-50%

-100% Excavator domestic sales (LHS)

New M&L term loans to enterprises (RMB bn)
Excavator domestic sales growth New M&L term loans to enterprises (growth)

Source: CCMA, Wind, CMBIGM

Source: CCMA, Wind, CMBIGM
Note: Correlation: 0.31

Figure 3: China excavator monthly sales Figure 4: Excavator monthly export volume
(Units) (Units)
80,000 12,000
70,000
10,000
60,000
8,000
50,000
40,000 6,000
30,000
4,000
20,000
2,000
10,000
0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2023 2022 2021 2020 2022 2022 2021 2020
2019 2018 2017 2019 2018 2017

Source: CCMA, CMBIGM Source: CCMA, CMBIGM

Figure 5: Komatsu excavator monthly utilisation Figure 6: Hitachi excavator monthly utilisation
hours in China hours in China
160 180

140 160
140
120
120
100
100
80
80
60 60
40 40
20 20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

201 9 202 0 202 1 202 2 202 3 201 9 202 0 202 1 202 2 202 3

Source: Komatsu, CMBIGM Source: Hitachi, CMBIGM

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2
27 Feb 2023

Figure 7: Komatsu excavator monthly utilisation Figure 8: Komatsu excavator monthly utilisation
hours in North America hours in Indonesia
90

80 220

70
170
60

50 120

40
70
30

20 20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

202 0 202 1 202 2 202 3 202 0 202 1 202 2 202 3

Source: Komatsu, CMBIGM Source: Komatsu, CMBIGM

Figure 9: CMBIGM excavator sales projection Figure 10: CMBIGM wheel loader sales projection
(Units) (Units)
400,000 100% 300,000 60%
350,000 80%
250,000 40%
300,000 60%
200,000 20%
250,000 40%
200,000 20% 150,000 0%
150,000 0%
100,000 -20%
100,000 -20%
50,000 -40%
50,000 -40%
0 -60% 0 -60%

Regular replacement New demand Growth (YoY) - RHS Replacement New demand Growth (YoY)

Source: CCMA, Wind, CMBIGM estimates Source: CCMA, CMBIGM estimates

Figure 11: Excavator fleet size versus construction Figure 12: Construction FAI per unit of excavator in
related FAI operation
RMB mn
Units RMB bn More FAI spending supported
30
by a unit of excavator
1,800,000 40,000
1,600,000 35,000 25

1,400,000 30,000
20
1,200,000 25,000
1,000,000 20,000 15

800,000 15,000
10 Less FAI spending supported
600,000 10,000 by a unit of excavator
400,000 5,000 5

200,000 0
0

Excavator fleet size (units)

Infrastructure + Property+ Coal & metal mining FAI (RMB bn) Construction FAI per unit of excavator (RMB mn) Average

Source: CCMA, Wind, CMBIGM estimates Source: CCMA, wind, CMBIGM estimates
Note: Construction FAI = infrastructure + property + mining

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3
27 Feb 2023

Figure 13: Hengli’s hydraulic cylinders monthly Figure 14: Hengli’s large & medium size pump
production monthly production
Units Hydraulic cyclinder for excavator Units Large & medium size pump
100,000 9,000
90,000 8,000
80,000
7,000
70,000
6,000
60,000
5,000
50,000
4,000
40,000
30,000 3,000

20,000 2,000
10,000 1,000
0 0

May-22
May-21

Jan-22

Jun-22

Jan-23
Jan-21

Jun-21

May-21

May-22
Mar-21

Mar-22

Jan-22

Jun-22

Jan-23
Jan-21

Jun-21
Feb-21

Feb-22

Feb-23
Apr-21

Jul-21

Jul-22

Feb-21

Feb-22

Feb-23
Oct-20

Apr-22

Oct-22
Oct-21

Mar-21

Mar-22
Jul-21

Jul-22
Oct-20

Apr-21

Oct-21

Apr-22

Oct-22
Nov-20
Dec-20

Nov-21
Dec-21

Nov-22
Dec-22
Aug-20
Sep-20

Aug-21
Sep-21

Aug-22
Sep-22

Sep-20

Aug-21
Sep-21

Aug-22
Aug-20

Sep-22
Nov-20
Dec-20

Nov-21
Dec-21

Nov-22
Dec-22
Actual production Production plan Actual production Production plan

Source: Company data, CMBIGM estimates Source: Company data, CMBIGM estimates

Figure 15: Hengli’s large & medium size valve

monthly production Figure 16: Hengli’s motor monthly production
Units Large & medium size valve Units Motor
7,000 18,000

6,000 16,000
14,000
5,000
12,000
4,000 10,000
3,000 8,000

2,000 6,000
4,000
1,000
2,000
0 0
May-21

May-22
Jan-21

Jun-21

Jan-23
Jan-22

Mar-22
Feb-22

Jun-22

Feb-23
Feb-21
Mar-21

Jul-22
Oct-20

Apr-21

Jul-21

Oct-21

Apr-22

Oct-22
Aug-20

Sep-21

Aug-22
Sep-22
Sep-20

Aug-21
Nov-20
Dec-20

Nov-21
Dec-21

Nov-22
Dec-22

May-21

May-22
Jan-21

Jun-21

Jan-22

Jun-22

Jan-23
Mar-22
Feb-21
Mar-21

Feb-23
Feb-22

Apr-22
Apr-21

Oct-21

Oct-22
Oct-20

Jul-21

Jul-22
Nov-20
Dec-20

Nov-21
Dec-21

Nov-22
Dec-22
Aug-20
Sep-20

Aug-21

Sep-22
Sep-21

Aug-22
Actual production Production plan
Actual production Production plan

Source: Company data, CMBIGM estimates Source: Company data, CMBIGM estimates

Figure 17: AWP monthly sales (China + export) Figure 18: CMBIGM AWP sales projection
(Units) Units
35,000 300,000 400%

30,000 350%
250,000
25,000 300%
200,000
20,000 250%

15,000 150,000 200%

10,000 150%
100,000
5,000 100%
0 50,000
50%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0 0%
2019 2020 2021 2023 2022 2018 2019 2020 2021 2022E 2023E 2024E

Source: CCMA, CMBIGM Source: CCMA, CMBIGM estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4
27 Feb 2023

Figure 19: Truck crane monthly sales Figure 20: Tower crane monthly sales
(Units) (Units)
12,000
2,500

10,000
2,000
8,000
1,500
6,000

1,000
4,000

2,000 500

0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

202 3 202 2 202 1 202 0 201 9 2023 2022

Source: CCMA, CMBIGM Source: CCMA, CMBIGM

Figure 21: Peers comp table

Ticker Company Rating Price TP Upside/ Market cap PE (x) PB (x)
(local (local (downside)
(US$ mn) FY22E FY23E FY22E FY23E
currency) currency)
HK listed
631 HK Equity SANY INTERNATIONAL BUY 7.99 13.20 65% 3,229 13.1 10.9 2.2 1.9
1157 HK Equity ZOOMLION HEAVY-H BUY 4.66 5.24 12% 7,842 12.2 9.8 0.6 0.6
2338 HK Equity WEICHAI POWER-H BUY 12.20 12.60 3% 15,309 22.0 16.8 1.3 1.2
3808 HK Equity SINOTRUK HK LTD HOLD 12.38 10.00 -19% 4,367 16.5 11.4 0.8 0.8
1839 HK Equity CIMC VEHICLES -H NR 5.21 - - 2,421 n/a n/a n/a n/a
564 HK Equity ZHENGZHOU COAL-H NR 8.27 - - 3,410 5.3 4.3 0.9 0.6
HK listed average 13.8 10.6 1.2 1.0
A share
000338 CH Equity WEICHAI POWER-A HOLD 12.53 11.40 -9% 15,648 26.1 19.9 1.5 1.4
601100 CH Equity JIANGSU HENGLI-A HOLD 69.93 58.00 -17% 13,847 36.0 32.1 8.5 7.2
603338 CH Equity ZHEJIANG DINGLI -A BUY 58.21 71.00 22% 4,353 24.5 20.4 4.2 3.6
600031 CH Equity SANY HEAVY-A HOLD 18.66 14.70 -21% 23,387 35.9 27.0 2.5 2.3
000157 CH Equity ZOOMLION HEAVY-A HOLD 6.73 6.00 -11% 8,015 20.4 16.4 1.1 1.0
000425 CH Equity XCMG-A NR 7.05 - - 12,303 13.8 12.2 1.4 1.3
000528 CH Equity GUANGXI LIUGONG-A NR 6.75 - - 1,945 14.3 11.7 0.8 0.8
603638 CH Equity YANTAI EDDIE P NR 20.00 - - 2,482 72.7 54.1 5.5 5.0
600761 CH Equity ANHUI HELI CO-A NR 19.70 - - 2,153 16.4 13.4 2.3 2.0
603298 CH Equity HANGCHA GROUP-A NR 21.81 - - 2,791 18.8 15.5 3.0 2.7
000951 CH Equity CNHTC JINAN T-A NR 17.28 - - 2,998 60.0 19.3 1.5 1.4
601717 CH Equity ZHENGZHOU COAL-A NR 14.18 - - 3,486 10.4 8.5 1.7 1.3
600582 CH Equity TIAN DI -A NR 5.50 - - 3,362 9.8 8.7 1.1 1.0
A-share average 27.6 19.9 2.7 2.4
Overseas
CAT US Equity CATERPILLAR INC NR 238.0 - - 122,864 15.1 14.2 7.4 6.4
DE US Equity DEERE & CO NR 425.1 - - 125,952 14.3 13.6 6.0 4.9
6305 JP Equity HITACHI CONST NR 3,045.0 - - 5,006 9.1 9.0 1.0 0.9
6301 JP Equity KOMATSU LTD NR 3,274.0 - - 24,359 10.1 10.2 1.3 1.2
042670 KS Equity DOOSAN INFRACORE NR 8,880.0 - - 1,419 8.0 7.1 1.0 0.9
VOLVB SS Equity VOLVO AB-B NR 208.4 - - 41,256 11.6 11.4 2.6 2.4
Average 11.3 10.9 3.2 2.8
Hydraulic components
PH US Equity PARKER HANNIFIN NR 349.0 - - 44,766 17.9 16.3 4.6 4.0
7012 JP Equity KAWASAKI HVY IND NR 2,967.0 - - 3,808 10.0 10.0 0.9 0.9
7242 JP Equity KYB CORP NR 3,750.0 - - 738 4.5 4.1 0.6 0.5
6474 JP Equity NACHI-FUJIKOSHI NR 3,880.0 - - 739 7.3 7.5 0.6 0.5
6268 JP Equity NABTESCO CORP NR 3,465.0 - - 3,206 20.1 17.7 1.6 1.5
Average 12.0 11.1 1.7 1.5
Aerial working platform
TEX US Equity TEREX CORP NR 57.6 - - 3,887 11.8 11.1 2.7 2.2
OSK US Equity OSHKOSH CORP NR 89.5 - - 5,856 15.9 12.5 1.7 1.6
LNR CN Equity LINAMAR CORP NR 74.2 - - 3,414 11.7 9.3 n/a n/a
PIG FP Equity HAULOTTE GROUP NR 3.6 - - 121 n/a 30.0 0.5 0.5
6345 JP Equity AICHI CORP NR 796.0 - - 458 10.9 10.2 n/a n/a
Average (excluding Haulotte) 12.6 10.8 1.6 1.4
Source: Bloomberg, Company data, CMBIGM estimates
Note: Based on CMBI earnings estimates for stocks under coverage

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5
27 Feb 2023

Disclosures & Disclaimers

Analyst Certification
The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities
or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities
or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific vi ews expressed by that analyst
in this report.
Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by Th e Hong Kong Securities
and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue
of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve
as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies
covered in this report.

CMBIGM Ratings
BUY : Stock with potential return of over 15% over next 12 months
HOLD : Stock with potential return of +15% to -10% over next 12 months
SELL : Stock with potential loss of over 10% over next 12 months
NOT RATED : Stock is not rated by CMBIGM

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months
MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months
UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

CMB International Global Markets Limited

Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800
CMB International Global Markets Limited (“CMBIGM”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly owned
subsidiary of China Merchants Bank)

Important Disclosures
There are risks involved in transacting in any securities. The information contained in this report may not be suitable for the purposes of all investors. CMBIGM does
not provide individually tailored investment advice. This report has been prepared without regard to the individual investment objectives, financial position or special
requirements. Past performance has no indication of future performance, and actual events may differ materially from that which is contained in the report. The value
of, and returns from, any investments are uncertain and are not guaranteed and may fluctuate as a result of their dependence on the performance of underlying assets
or other variable market factors. CMBIGM recommends that investors should independently evaluate particular investments and strategies, and encourages investors
to consult with a professional financial advisor in order to make their own investment decisions.
This report or any information contained herein, have been prepared by the CMBIGM, solely for the purpose of supplying information to the clients of CMBIGM or its
affiliate(s) to whom it is distributed. This report is not and should not be construed as an offer or solicitation to buy or sell any security or any interest in securities or
enter into any transaction. Neither CMBIGM nor any of its affiliates, shareholders, agents, consultants, directors, officers or employees shall be liable for any loss,
damage or expense whatsoever, whether direct or consequential, incurred in relying on the information contained in this report. Anyone making use of the information
contained in this report does so entirely at their own risk.
The information and contents contained in this report are based on the analyses and interpretations of information believed to be publicly available and reliable. CMBIGM
has exerted every effort in its capacity to ensure, but not to guarantee, their accuracy, completeness, timeliness or correctness. CMBIGM provides the information,
advices and forecasts on an "AS IS" basis. The information and contents are subject to change without notice. CMBIGM may issue other publications having information
and/ or conclusions different from this report. These publications reflect different assumption, point-of-view and analytical methods when compiling. CMBIGM may make
investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report.
CMBIGM may have a position, make markets or act as principal or engage in transactions in securities of companies referred to in this report for itself and/or on behalf
of its clients from time to time. Investors should assume that CMBIGM does or seeks to have investment banking or other business relationships with the companies in
this report. As a result, recipients should be aware that CMBIGM may have a conflict of interest that could affect the objectivity of this report and CMBIGM will not assume
any responsibility in respect thereof. This report is for the use of intended recipients only and this publication, may not be reproduced, reprinted, sold, redistributed or
published in whole or in part for any purpose without prior written consent of CMBIGM.
Additional information on recommended securities is available upon request.

For recipients of this document in the United Kingdom

This report has been provided only to persons (I)falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended
from time to time)(“The Order”) or (II) are persons falling within Article 49(2) (a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc.,) of the Order, and
may not be provided to any other person without the prior written consent of CMBIGM.

For recipients of this document in the United States

CMBIGM is not a registered broker-dealer in the United States. As a result, CMBIGM is not subject to U.S. rules regarding the preparation of research reports and the
independence of research analysts. The research analyst who is primary responsible for the content of this research report is not registered or qualified as a research
analyst with the Financial Industry Regulatory Authority (“FINRA”). The analyst is not subject to applicable restrictions under FINRA Rules intended to ensure that the
analyst is not affected by potential conflicts of interest that could bear upon the reliability of the research report. This report is intended for distribution in the United States
solely to "major US institutional investors", as defined in Rule 15a-6 under the US, Securities Exchange Act of 1934, as amended, and may not be furnished to any other
person in the United States. Each major US institutional investor that receives a copy of this report by its acceptance hereof represents and agrees that it shall not
distribute or provide this report to any other person. Any U.S. recipient of this report wishing to effect any transaction to buy or sell securities based on the information
provided in this report should do so only through a U.S.-registered broker-dealer.

For recipients of this document in Singapore

This report is distributed in Singapore by CMBI (Singapore) Pte. Limited (CMBISG) (Company Regn. No. 201731928D), an Exempt Financial Adviser as defined in the
Financial Advisers Act (Cap. 110) of Singapore and regulated by the Monetary Authority of Singapore. CMBISG may distribute reports produced by its respective foreign
entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed
in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, as defined in the Securities and Futures Act (Cap. 289) of
Singapore, CMBISG accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact
CMBISG at +65 6350 4400 for matters arising from, or in connection with the report.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 6