Inventory clearing makes construction machinery expected to recover

With the favorable industrial policies of agricultural mechanization, we expect that the construction and agricultural construction machinery sector will witness strong growth. Given the strong R&D and production capabilities, and relying on a wide range of sales channels, we believe that the leading players in the machinery manufacturing industry will be able to better capture the market's recovery opportunities.

Industry Report 2013, Year of Recovery: With the depth of adjustments in 2012, machinery and equipment vendors have gone through a period of continuous inventory clearance. At the same time, with the start of a large number of new construction projects, it is expected that the machinery manufacturing market will rebound in 2013. After the new government leadership team took office, it is expected that more infrastructure and affordable housing projects will kick off this year.

Rebuilding of the construction and engineering machinery sector: Zoomlion, a concrete machinery manufacturer, has sales channels all over the country. This will help it diversify its business into the field of tower cranes and bulldozers. In addition, its strong financial position helps the company to expand working capital at a lower cost to meet the increase in demand for construction machinery in 2013. We maintain our “buy” rating on Zoomlion and upgrade China Longgong from “sell” to “hold”. Faced with challenges from international peers such as Caterpillar and local rivals such as Zoomlion and Sany Heavy Industry, the pace of recovery of China Longgong sales is its biggest uncertainty in 2013.

The agricultural machinery sector was blessed by the policy: In the document No. 1 of the Central Committee in 2013, the policy guidelines for agriculture were clearly mentioned, which led us to expect more subsidies for the agricultural machinery sector this year. This will trigger a rebound in sales. We reiterate our "Buy" rating on the First Tractor.

Coal mining machinery manufacturers face a difficult year: The weakness of coal prices has impeded capital spending in the coal mining industry. Therefore, we expect the sales growth of coal mining machinery manufacturers will decline. We downgrade Sany International’s rating from “buy” to “hold” and give Zheng Coal Machine a “hold” rating for the first time.