Looking back over the past 20 years, China's construction machinery growth has experienced the driving force of domestic real estate infrastructure investment (before 2011), the driving force of domestic ownership replacement cycle (2016-2021), and is now entering the third stage (starting in 2023) - the driving force of high-quality development, in which internationalization is the main line, electrification, efficient operation and benign domestic competition are the branch lines, and the proportion of leading enterprises is expected to exceed 50% in 2023. Under this background, The performance elasticity of related companies in 2023 may exceed expectations.
China's construction machinery growth momentum is changing, and "high-quality development" is the core at this stage
We believe that China's construction machinery growth can be divided into three typical stages: the domestic real estate infrastructure investment drive stage (before 2011), the domestic ownership replacement cycle drive stage (2016-2021), and the high-quality development drive stage (starting in 2023). The specific connotation of the core driving force "high-quality development" at the current stage is: the internationalization of regional structure, the electrification of product structure, the efficient operation, and the benign domestic competition. Among them, internationalization is the main line. The main engine manufacturers in all directions are optimistic about the overseas market in 2023, and the proportion of overseas revenue of individual enterprises is expected to exceed 50%, resulting in double improvement of performance and valuation; In addition, the trend of industry electrification opens the ceiling of enterprise growth, and the advantages of China's lithium battery industry chain also provide Chinese enterprises with the advantages of lane change and overtaking compared with global giants; Efficient operation and benign domestic competition are conducive to the repair of corporate profitability.
The brand effect continues to show, and the overseas market is the core variable of performance elasticity in 2023
Since 2020, the performance of overseas construction machinery market has fluctuated, while the export of Chinese construction machinery has continued to increase. We believe that the main reason is the cost-performance ratio and supply chain advantages. The cost-performance advantage is reflected in both price and service, and the supply chain advantages are also reflected in two aspects. On the one hand, the supply resilience of Chinese enterprises during the epidemic, On the other hand, the advantages of China's lithium battery industry chain endow the electric 名媛直播 of construction machinery with advantages. The cost-performance ratio and supply chain advantages not only make China's construction machinery market share in emerging markets continue to increase, but also open the door of developed countries' markets, and the product strength and brand strength have been continuously recognized by customers in mature markets. Therefore, although the macro analysts of many securities companies generally have recession expectations overseas in 2023, there is room for China's construction machinery enterprises to increase their share in emerging and developed countries' markets, and companies with a high share of overseas companies, It is expected to have higher performance flexibility.
Risk statement
The domestic construction machinery industry fell sharply, the price of raw materials rose sharply, and the overseas market expansion was less than expected.
1、 Discussion 1: What is the driving force for the subsequent growth of China's construction machinery?
As the weight plate of mechanical equipment, construction machinery is also a typical cyclical growth industry. Its growth and driving force are worth studying. In this paper, the industry sales volume of excavator, the representative product of construction machinery, is used to represent the industry fundamentals, and the SW construction machinery index is used to represent the market of the plate. It can be seen that the market performance of the plate is basically consistent with the trend of the industry fundamentals, and the era background and growth force of the industry development are carefully considered, We believe that China's construction machinery growth can be divided into three typical stages: the domestic real estate infrastructure investment drive stage (before 2011), the domestic ownership replacement cycle drive stage (2016-2021), and the high-quality development drive stage (from 2023 to present).
Review the past two stages:
The first stage (before 2011): the domestic real estate investment drive stage is a huge dividend given by the times. At this stage, the investment in domestic infrastructure real estate is in a period of rapid growth. The era background has given the construction machinery industry huge development dividends, and the construction machinery has also entered a high-speed growth channel. From the perspective of fundamental performance, it can be found that the growth of the construction machinery industry is very significant. During the period of 2000-2001, the sales volume of the excavator industry maintained an overall growth, with the order of magnitude from 1000 to 100000 units, and only in 2004 showed a negative growth. From the perspective of market performance, the SW construction machinery index also increased rapidly, from about 1000 to about 23000.
The second stage (2016-2021): under the background of huge population, the demand for upgrading shows its strength. Downstream infrastructure real estate investment is an important driving force for the construction machinery industry, but on the general trend, we believe that the high-speed growth period of domestic engineering construction has passed. From the perspective of recent infrastructure real estate fixed asset investment, its growth center is generally down, so the growth of the demand for construction machinery driven by investment will slow down synchronously. However, with the increase of domestic construction machinery ownership, the industry replacement demand is another force that cannot be ignored, It also drives the construction machinery industry into a five-year golden period. From the perspective of fundamental performance, the sales of excavators increased from more than 70000 to more than 340000, an increase of nearly four times. In terms of market performance, the SW construction machinery index rose from about 8000 to about 37000, a record high.
The third stage (to be launched in 2023): the high-quality development drive stage with internationalization as the main line and electrification, efficient operation and benign domestic competition as the branch line. At present, China's economic growth has shifted from high-speed growth to high-quality growth. As an industry closely related to the macro economy, construction machinery is also considered as the driving force of its subsequent growth, which is also "high-quality development". Its specific connotation is: internationalization of regional structure, electrification of product structure, efficient operation, and benign domestic competition. Internationalization is the main line. Electrification and efficiency as the thrust will also help the continuous depth of internationalization. Under the highly centralized domestic competition pattern, the benign leading competition will also bring higher development quality to the industry.
Internationalization is the main line. It is expected that the performance and valuation of construction machinery will be improved in 2023. In June 2022, we released the industry depth "Hedging Impact of Overseas Markets on the Current Domestic Downward Cycle", and pointed out that the continuous growth of Chinese construction machinery enterprises overseas will narrow the downward range and duration of the current cycle. In 2023, it is expected to achieve a small positive growth and move out of the downward cycle ahead of time. Therefore, in terms of performance, enterprises with leading international layout will be better able to hedge the downward trend of domestic market through the growth of overseas markets and achieve higher growth. But more importantly, if the company's revenue regional structure is fully internationalized, it will be weakened by the fluctuations of the single market cycle, and is expected to usher in the improvement of valuation. The global giants Caterpillar and Komatsu's revenue regional structure is fully internationalized, with local revenue lower than 50%. In recent years, the overseas revenue of domestic construction machinery enterprises has also been increasing. In 2022, the export sales of excavators in the industry accounted for nearly 40%, and the overseas revenue of the leading company Sany Heavy Industry in 2022H1 accounted for about 41%, which is expected to exceed 50% in 2023, becoming an important milestone.
Electrification is the industry development trend, and the economy of the whole life cycle accelerates the arrival of this trend. In the field of passenger vehicles, the economy and intelligent degree of electric vehicles have been widely accepted and recognized. Now this trend is spreading to the field of engineering vehicles, especially in the developed countries. The trend of electrification in the industry opens the ceiling of enterprise growth and also provides Chinese enterprises with the advantage of changing lanes and overtaking. At the product level, the average price and profit margin of electric 名媛直播 are far higher than those of traditional internal combustion 名媛直播, which will drive the enterprise's revenue and profit ceiling to continue to rise. At the competitive level, the advantage of domestic lithium battery industry chain is the empowerment of China's construction machinery. From January to November 2022, the share of China's battery enterprises in the global power battery installed capacity exceeded 60%. In addition, the first-mover advantage of domestic head construction machinery enterprises' electrification is obvious. Relevant 名媛直播 are popular in developed countries and regions in Europe and the United States, driving the brand effect of China's construction machinery to improve. We believe that after the arrival of the tide of industry electrification in the future, The global competition pattern will be reshaped, and the domestic leader is expected to leap to the global leader.
There are two major trends in the evolution of the domestic market competition pattern: domestic capital replaces foreign capital, and large enterprises replace small enterprises. In the past, the process of domestic substitution was accompanied by a fierce price war, and domestic construction machinery continued to seize its share by virtue of its cost-effectiveness advantage. Taking excavator as an example, the share of domestic enterprises had reached nearly 80% by the end of 2020. In addition, the improvement of concentration is another major feature. Due to the cyclical fluctuations and significant scale effects of the construction machinery industry, small enterprises with weak strength are difficult to survive the cold winter and gradually lose their competitive advantage. At present, the domestic market has formed a highly concentrated competitive pattern.
Several leading enterprises advocate raising prices, and domestic competition is expected to be benign. As an industrial product, the price of construction machinery is inevitable in the long run, but the disorderly price war will suppress the profit space of the industry, which is not conducive to long-term development. Since the industry entered the downward period, we have noticed that the price war in the industry is tending to ease, and the leading enterprises pay more attention to profits in the channel policy. According to the market monitoring report in the field of China's construction machinery circulation, the month-on-month decline in the transaction price of excavators has continued to narrow since 2022. After the implementation of the fourth national standard in December 2022, the transaction price of excavators began to turn positive. We believe that the fourth national standard switch is a good time window, and the leading enterprises advocate product price increase, Guide the benign development of the industry.
2、 Discussion 2: Why do we have confidence in the overseas growth of China's construction machinery?
From the perspective of the overseas market itself, it will recover in 2021-2022, and may decline slightly in 2023. According to Off-Highway forecast, the global construction machinery market will decline significantly in 2022, mainly due to the impact of the Chinese market, while other markets will remain flat or slightly increase; In 2023, the global sales of construction machinery will continue to decline, but the decline will narrow. From the perspective of market, China, Europe and the United States will decline slightly, while the Indian market will achieve positive growth; It is expected to achieve a soft landing in 2024 and pick up again in 2025.
From the perspective of the performance of Chinese enterprises, exports have continued to increase since 2020. Since 2020, the overseas income of domestic enterprises has continued to grow at a high rate. We believe that the driving force for the growth in 2020 is mainly from the fact that after the epidemic, China's construction machinery supply chain has obvious advantages, not only in Southeast Asia, India, the the Belt and Road and other traditional advantageous markets, but also in Europe and the United States; The driving force for the growth in 2021 is mainly the demand for mining in Africa, South America and other regions driven by the sharp rise in the price of resource goods, as well as the demand brought by the stimulus policies in Europe and the United States. The overseas demand is strong. In 2022, the overseas market will achieve a small positive growth, while the overseas share of domestic enterprises will further increase.
Looking forward to 2023, our confidence that overseas growth can still be achieved stems from the rapid increase in the share of Chinese enterprises in developed markets and the continued breakthroughs in emerging markets. Comparing the global construction machinery market structure with the export structure of Chinese enterprises, it can be found that the European and American markets have huge capacity, accounting for more than 40% in 2021. While China's construction machinery exports focus on the regions along the "the Belt and Road", and have obtained a high share, but the penetration rate in North America, Europe and other large markets is still low, especially in North America. In recent years, China's construction machinery 名媛直播 have been successfully introduced into the European and American markets, It is expected to replicate its routes in China and along the "the Belt and Road" to achieve rapid increase in share. In addition, emerging markets are in a period of rapid growth, and there is still room for Chinese enterprises to increase their share in areas along the "the Belt and Road". Some highly explosive markets, such as Saudi Arabia, will also contribute additional growth.
Cost performance and supply chain advantages are the key to success, and product strength and brand strength are the core drivers of share increase in the future. The driving forces for Chinese construction machinery to achieve breakthroughs in different overseas markets are different. Chinese enterprises have made breakthroughs earlier in emerging markets, especially in the "the Belt and Road" region, and have achieved a higher share, mainly driven by overseas contracting projects and the cost performance advantages of Chinese construction machinery 名媛直播, including 名媛直播 and services. In developed countries, the market breakthrough is relatively late, mainly due to the relatively mature markets in Europe and the United States, which pay more attention to product strength and brand strength, while the supply chain advantages of Chinese enterprises help them to open the door of the European and American markets. On the one hand, it is the supply resilience during the epidemic, on the other hand, it is the advantage of electric construction machinery 名媛直播 given by the advantages of China's lithium electricity industry chain. At present, China's construction machinery 名媛直播 have been successfully introduced into the European and American markets, And the product strength and brand strength are being recognized by customers, which will be the core driving force for China's construction machinery to continue to increase its share in the overseas market in the future.
Overseas market is the core variable of performance elasticity in 2023. We judge that with the continuous pull of infrastructure and the marginal improvement of real estate, the downward range of the domestic market will narrow in 2023, and it is expected to decline by about 10% year on year, while the overseas market is expected to achieve more than 30% growth. In general, the industry is likely to achieve positive growth in 2023, while the average price, gross profit rate and even net interest rate of 名媛直播 in the overseas market have exceeded the domestic market, It will achieve more flexible performance growth.
3、 Risk tips for investment suggestions
① The domestic construction machinery industry has fallen sharply: affected by the downward demand for upgrading, the domestic construction machinery industry is still in a downward cycle. If the sales of excavators in the domestic market still fall sharply next year, the sales revenue of the company's related 名媛直播 will also fall sharply. ② The price of raw materials has risen sharply: the cost of raw materials of the company is relatively high. If the price of raw materials rises sharply in the future, it will affect the profitability of the company. ③ The expansion of overseas market is less than expected: the overseas market is the company's key power market in the future. If the layout is less than expected, it will affect the company's share in the overseas market, thus affecting the company's overall sales revenue growth.
