Can the construction machinery industry continue its high growth trend in 2023 as market recovery signals emerge?

As the saying goes, the harder a person falls, the higher their future rebound will be. This principle also applies to the field of construction machinery.

Last year, the overall index of the construction machinery sector was at its lowest level in recent years, and in May, it reached its darkest hour. Under the favorable conditions of the opening up of the epidemic this year and the stimulation of multiple economic policies, construction machinery has returned to the perspective of investors.

So today we will enter the world of construction machinery and see how to seize opportunities that others cannot see on this competition track.

01

Climb out of the swamp

Since 2022, some regions in China, such as Shanghai, Beijing, Hangzhou, and Suzhou, have experienced repeated outbreaks of COVID-19. At the same time, real estate companies are in a precarious situation, with cash flow disruptions, consumer loans being cut off collectively, and real estate companies ending up in bankruptcy. These objective changes in the overall environment are like adding insult to injury to the construction machinery industry.

Through data, we can find that from January to November 2022, the sales of excavators decreased by 28.67% compared to 2021, loaders decreased by 18.5%, and graders decreased by 5%. From the data, it can be seen that changes in the objective environment have a significant impact on construction machinery.

The construction machinery industry is relatively unique, and sales are not only related to the product itself, but also closely related to the market infrastructure environment. When the market engages in large-scale infrastructure construction and real estate, the demand for construction machinery is relatively high; If the construction of market infrastructure is relatively conservative, the market demand will be relatively small.

China, as an infrastructure crazy country, not only supplies construction machinery domestically, but also actively exports it. The top three countries for China's engineering machinery exports are the United States, Russia, and Japan. Except for 2020, China's export volume is steadily increasing every year, and the export growth rate is also increasing every year. The main products exported are excavators and loaders.

From the perspective of product categories in the construction machinery industry, the export value of excavators is 5 billion US dollars, accounting for 15%, the export value of loaders is 2.453 billion US dollars, accounting for 7%, the export value of bulldozers is 403 million US dollars, accounting for 1%, and the export value of road rollers is 538 million US dollars, accounting for 1%.

With the recovery of the economy and the comprehensive opening up of the epidemic in 2023, according to a report from the China Academy of Commerce and Industry, it is expected that the operating revenue of the construction machinery industry will continue to rise in 2023.

02

Stock substitution and export are the main lines

From the perspective of the composition of the construction machinery market, excavators, loaders, and cranes are very important categories. The value of excavators alone accounts for nearly 60% of the construction machinery industry. Based on the principle of grasping the main contradiction, let's first study the excavators that were ignited by the slogan of Lan Xiang many years ago.

Any industry cannot do without the word cycle. In fact, if we briefly review the history of excavators, you will find that since 2004, excavators have gone through two cycles of rise, namely 05-11 and 16-21 years. Of course, if there is an increase, there will be an underestimate. The industry has also been on a downward trend from 2011 to 2016, so the trend of turning every five years is quite obvious.

The decline in the domestic construction machinery demand market last year was evident to everyone. If anything, exports are definitely one of the main growth points of the industry. The data can best illustrate the problem. In 2021, with the gradual easing of the overseas epidemic, the number of domestic excavators maintained a rapid growth, and the year-on-year growth of export volume for the entire year of 2021 has already reached 100%. In September last year, the export volume reached more than half of the total sales volume of that month, creating a record. The export countries are also mainly the "the Belt and Road" countries (accounting for more than 40%).

According to professional institutions' predictions, the third model of the country will be updated in the next five years. Taking into account the new construction area of the real estate industry and investment in the mining industry, there will be an annual update demand for 30000 new excavators.

03

The largest market, leading Hengqiang

From the sales situation of global construction machinery, as an infrastructure craze, China accounts for nearly 40% of global sales, firmly occupying the top spot. Throughout the global competitive market, Caterpillar in the United States has always been the absolute leader in construction machinery. Since the 1960s, we have been racing along the path of globalization.

Recently, Caterpillar's stock price has also reached a historic high, and many investors believe that the investment logic is that the United States will become one of the strongest markets for construction machinery in the next two years, driven by non residential investment.

From the perspective of domestic players, the overall development trend of domestic players is also relatively fast. For example, more than 10 Chinese companies have been listed in the top 50 of construction machinery, and their comprehensive strength (including intelligent manufacturing capabilities) has steadily improved. For example, the market share of XCMG Group (000425) and Sany Heavy Industry (600031) has increased by 4.1% and 4.2% in the past five years, respectively.

So, seizing the opportunity of domestic recovery and seizing more cakes is the top priority to win the favor of investors and outperform the market.

04

Can the industry continue its high growth trend in 2023?

As is well known, construction machinery is a typical cyclical industry. Once there is a signal of economic recovery, construction machinery companies have strong performance growth expectations and are closely linked to the economic cycle.

From the perspective of global demand, the high growth of the construction machinery industry is slowing down, and in the short term, it is not optimistic. The reason is simple, as the demand for construction machinery is essentially related to two factors: one is the update cycle of its own equipment, and the other is the economic cycle, especially the investment cycle of infrastructure, real estate, and other factors.

But upon closer examination, you will find that from a supply perspective, compared to other industries, construction machinery has a certain "moat". Firstly, construction machinery is not like large-scale specialized equipment such as lithography machines, which heavily relies on a small number of B-end customers. Relatively speaking, its customer distribution is relatively scattered, which makes branded enterprises still thrive in the industry's downward cycle and increases their product share in the industry; Secondly, engineering machinery belongs to the large-scale industrial manufacturing industry. Although its technological content is not as high as that of high-tech enterprises such as lithography machines, it has relatively high requirements for cost control, process management, and economies of scale, which is beneficial for leading enterprises and also for enterprises to participate in overseas markets.

There are two main advantages in China: firstly, it has the most complete industrial chain supporting advantages. China has a wide variety of construction machinery and is one of the countries with the most complete product categories and varieties of construction machinery worldwide. It has 20 major categories, 109 groups, 450 models, 1090 series, and tens of thousands of product equipment models. The second is the dividend for domestic engineers. In the past decade, China has graduated nearly 70 million university graduates and over 5 million graduate students. As of 2020, China has the world's largest number of R&D personnel (R&D and experimental development personnel), the second largest investment in related funds, and the second largest patent ranking in the world. However, the proportion of overseas business is still very low, with 90% of performance support coming from domestic business. If Chinese enterprises can seize the share of overseas enterprises in the international market in the future, it is expected to break the curse of the industry cycle.

Overall, the construction machinery industry belongs to the industry with a relatively good supply and demand pattern in the large cycle industry. On the one hand, demand is steadily increasing, especially in overseas markets. On the other hand, there is also a certain moat on the supply side.