Engineering Machinery Industry: Profit Flexibility Years Reconstruction of Competitive pattern

The year of profit flexibility, restructuring of the competitive pattern, and structural investment opportunities.The first one is Liu Gong

In Mar,2018, we visited 9 provinces in eastern, central and western China for research. From the survey, sales in the peak season (March to May) may exceed expectations. We expect the growth rate of excavator sales in March to be 30% to 50%. We are cautiously optimistic about the overall demand of the excavator industry. It is expected that the annual growth rate in 2018 will be 10% to 20%. On the other hand, we believe that 2018 is the year of profitability of the construction machinery industry, the industry may be reshuffled. And the sales growth of domestically-made outstanding manufacturers is expected to outperform the industry. From the viewpoint of performance elasticity and valuation, Liugong is the first to focus on Sany Heavy Industry and Hengli Hydraulics.

Grassroots Research Feedback: Excavator sales are expected to exceed expectations in peak season

We expect the sales growth of the excavator industry in March is between 30% and 50% year-on-year, faster than the 14% increase in January and February. The reason we regarded March as the peck season are as follows: 1) The time for the downstream resumption of work this year is early, and the machine utilization rate remains high, which is better than the same period of last year. The downstream demand mainly comes from new rural construction, railway and highway investment; 2) Update demand, the proportion of old replacement is generally between 40-50%, in some areas more than 70%, mainly the machines of 2010-2012; 3) manufacturers focus on market share increase this year, dealers hope in the 3-5 months Take more orders during the sales season to ensure sales for the whole year.

Our Judgment on the Whole Year's Demand for the Digging Machine Industry: Steady Growth

Maintain the growth rate of 10%~20% of the annual sales of the excavator industry. The premise of this judgment is that the growth rate of infrastructure investment is between 14% and 15%, and the real estate investment is between 3.5% and 4.5% in 2018. This is consistent with our conclusions on dealer grassroots research. The excavation industry is expected to steady growing this year. It is expected that the growth rate in the first six month will be faster than the growth rate in another half of the year.

2018 is expected to become a profitable year for construction machinery.

We believe that the construction machinery income will grow steadily this year.The dealer’s pressure on the cost will ease, and the gross profit margin will remain stable Their burden will be basically cleared up last year. Overall, we believe that this year is expected to become a big year for the profitability of construction machinery.

Restructuring the industry, bringing structural investment opportunities, highlighting Liugong

We expect that this year will be a year for the industry to reshuffle, and the market share of domestic manufacturers will further increase. In the new round of competition, the sales growth of some outstanding manufacturers is expected to outperform the industry. We continue to recommend LiuGong with the highest performance elasticity in 2018 and the lowest valuation ( predicted net profit of RMB 800 million/yoy is 150%, and PE of 11.9 times). The big drop is a good buying opportunity.