Zhixin Securities released a research report stating that compared with the previously launched plan in March, the Measures to Promote Large-scale Equipment Upgrades and Replacement and Old-for-New Consumer Products issued by the National Development and Reform Commission and the Ministry of Finance on July 25th have further expanded the scope of support, promoting the equipment upgrades of small and medium-sized enterprises. The policy supports the scrapping and replacement of old operational vessels, which is expected to stimulate the replacement of old inland and coastal ships and the new energy transformation; the policy raises the standard of subsidies for scrapping and replacement of agricultural machinery, which is expected to drive the replacement of agricultural machinery; and the update of old elevators is a newly added content of the equipment update policy, which is expected to further release the demand for elevator updates.

The scope of policy support has been expanded to support equipment upgrades of energy and electric power, old elevators, and other key industries for energy conservation, carbon reduction, and safety transformation, in addition to the areas mentioned in the Plan. The document also proposes to lower the funding application threshold and no longer requires a total investment of at least 0.1 billion yuan for a project, supporting small and medium-sized enterprises to upgrade their equipment.

According to the Plan for Promoting Large-scale Equipment Upgrades and Replacement and Old-for-New Consumer Products issued by the State Council on March 13, 2024, the description of "equipment investment" is as follows: "By 2027, equipment investment in industries such as industry, agriculture, construction, transportation, education, culture and tourism, and medical care will increase by more than 25% compared to 2023." The document released this time expands the scope of support to equipment updates and key industry energy conservation, carbon reduction and safety transformation in the fields of energy and electric power, old elevators and others, in addition to areas mentioned in the Plan. At the same time, the document also proposes to raise the financial discount rate for equipment update loans, increasing the central government's discount rate from 1 percentage point to 1.5 percentage points, with a discount period of 2 years and a total discount scale of 20 billion yuan. The document specifies that the ultra-long-term special national debt funds must be managed strictly and are strictly prohibited from being misused, and any unused funds allocated by the central government as of December 31, 2024 will be recovered.

The subsidy funding channels are further clarified, and the subsequent implementation is guaranteed.

For equipment upgrades and scrapping of old operational vessels, the National Development and Reform Commission will lead the arrangement of approximately 148 billion yuan of ultra-long-term special national debt funds to support policies for large-scale equipment upgrades; for the scrapping and replacement of agricultural machinery, automobiles, and home appliances and other consumer goods, the National Development and Reform Commission will directly allocate approximately 150 billion yuan of ultra-long-term special national debt funds to local governments. In addition, the document also proposes to increase the financial discount rate for equipment update loans, increasing the central government's discount rate from 1 percentage point to 1.5 percentage points, with a discount period of 2 years and a total discount scale of 20 billion yuan. With regard to the regulation of fund utilization, the document specifies that the ultra-long-term special national debt funds must be managed strictly and are strictly prohibited from being misused, and any unused funds allocated by the central government as of December 31, 2024 will be recovered.

The policy supports the scrapping and replacement of old operational vessels, which is expected to stimulate the replacement of old inland and coastal ships and the new energy transformation.

1) Document content: Support the scrapping and replacement of old inland passenger ships over 10 years old, cargo ships over 15 years old, coastal passenger ships over 15 years old, and cargo ships over 20 years old. For those scrapped and replaced with fuel-powered ships or new energy clean energy ships, subsidies of 1500-3200 yuan/total tonnage depending on the type of ship will be provided; for the construction of new energy clean energy ships, subsidies of 1000-2200 yuan/total tonnage depending on the type of ship will be provided. For those who only scrap old operational vessels in advance, subsidies of an average of 1000 yuan/total tonnage will be provided. 2) Policy impact: According to the 2023 annual report of China Shipbuilding Industry Group Power, the company has a market share of 78% and 39% for marine diesel engines in China and the global market, respectively. For inland and coastal ships, the company's products cover high-speed diesel engines, all-electric propulsion, hybrid systems, gearboxes, etc. Zhixin Securities believes that this subsidy policy will stimulate the replacement of old inland and coastal ships and the new energy transformation. According to the Statistical Bulletin on the Development of the Transportation Industry in 2021, as of the end of 2021, the net tonnage of inland transport ships in China was 146.7692 million tons. 3) Elastic calculation: According to data from the Ministry of Transport, China currently has about 0.1 million inland ships. Assuming a 20% ratio for replacement, the average cost of an engine/battery for one ship is approximately 2 million yuan, corresponding to a market space of 40 billion yuan for the power system. China Shipbuilding Industry Group Power has a 30% market share of ship engines and batteries, with other manufacturers including Weichai Heavy Machinery, Guangxi Yuchai Machinery Group, and Yuchai Group, among others.

2) Policy Impact: According to China Shipbuilding Industry Group Power's annual report for 2023, the company occupies 78% and 39% of the market share for marine engines in China and globally, respectively. For river and coastal vessels, the company's products cover medium and high-speed diesel engines, full electric propulsion, hybrid systems, gearboxes, etc. CITIC Securities believes that this subsidy policy will stimulate the replacement of old river and coastal ships as well as their electrification. The "2021 Development Statistics Report of the Transportation Industry" shows that as of the end of 2021, the net tonnage of inland water transportation vessels in China was 146.7692 million tons.

3) Elasticity Test: According to data from the Ministry of Transport, China currently has approximately 0.1 million inland waterway ships, and assuming a 20% replacement rate, the power system market space for one ship's average engine/battery is around 2 million yuan, corresponding to a 40 billion market space. China Shipbuilding Industry Group Power holds about 30% of the market share in the engine+battery field of inland waterway ships, and other manufacturers include Weichai Heavy Machinery, Guangxi Yuchai Machinery Group, Yuchai Group, etc.

The policy raises the standard of subsidies for scrapping and replacement of agricultural machinery, which is expected to drive the replacement of agricultural machinery.

1) Document content: Based on the Circular on Increasing Efforts to Implement the Subsidy Policy for Scrapping and Replacement of Agricultural Machinery, the maximum subsidy amount for scrapping of tractors below 20 horsepower is increased from 1000 yuan to 1500 yuan per unit; compared with the current subsidy standard, the subsidy standard for scrapping and replacing combines, seeders, and other equipment of the same type is increased by no more than 50%; the maximum subsidy amount for scrapping and replacing cotton pickers and purchasing new cotton pickers is increased from 0.03 million yuan to 0.06 million yuan per unit.

2) Policy impact: The policy this time has increased the maximum scrappage subsidy, added subsidy models, has higher operability and flexibility, and emphasizes handling according to law. CITIC Securities believes that the policy will drive the scrapping and upgrading of agricultural machinery, such as tractors. In addition, the Central Committee of the Communist Party of China has proposed in its decision on further deepening reform and promoting China's modernization, deepening the reform of the land system, allowing legally-owned housing of farmers to be revitalized and utilized through renting, shareholding, cooperation and other means, orderly promoting the reform of the entry of collective construction land for rural business use into the market, and improving the distribution mechanism of land value-added benefits. This move is expected to accelerate the modernization of agriculture and speed up the upgrading trend of agricultural machinery from the demand side.

The update of old elevator series is an addition to the equipment update policy, and it is expected to further release the demand for elevator updates.

1) Document content: The document proposes to extend support to energy and electricity, old elevator and other fields of equipment update, as well as energy conservation, emissions reduction and safety transformation in key industries.

2) Policy impact: According to data from the National Development and Reform Commission, there are currently about 0.8 million elevators in my country with a service life of more than 15 years, of which about 0.17 million elevators have a service life of more than 20 years, and the number of over-time out-of-service old elevators is still increasing. With the continuous increase of service life of stock elevators, the scale of future maintenance and service market and stock elevator update demand is considerable. CITIC Securities believes that companies with leading joint venture elevator brands are expected to benefit.

Investment strategy:

Domestic macroeconomic performance falls short of expectations; corporate capital expenditure and equipment replacement progress falls short of expectations; subsidies fall short of expectations.

Bullish on investment opportunities in the fields of marine engines, agricultural machinery, and elevators.

This round of policy has provided a more clear exposition and implementation of the coverage and capital channels, and CITIC Securities expects it will stimulate investment in equipment upgrades and replacements. Among them, CITIC Securities believes that the fields of marine engines, agricultural machinery, elevators, etc. are particularly profitable.