The Zhitong Finance App learned that China Galaxy Securities released a research report stating that the overseas construction machinery market has broad medium- to long-term space. While we wait for domestic demand to bottom up and rebound, going overseas is an important driving force for domestic manufacturers to get through the cycle. After many rounds of industry cycles, leading Chinese construction machinery enterprises continue to accumulate comprehensive advantages such as products, supply and production, R&D, channels, and organization, and are shifting towards overseas industrial expansion and global expansion, which is expected to consolidate their alpha and gain an increase in share. China Galaxy Securities recommended leading domestic OEMs Sany, Zhonglian, and component manufacturer Hengli Hydraulic (601100.SH), and recommended focusing on Xugong (000425.SZ), Liugong (000528.SZ), and Eddy Precision (603638.SH).

The main views of China Galaxy Securities are as follows:

Global construction machinery market: regional performance differentiation, broad long-term space. Current market space: North America > Europe > Southeast Asia > India/Brazil, growth certainty: Emerging countries represented by India/Indonesia/Brazil > North America > Europe. Among them, (1) North America: the largest market for construction machinery in the world, the market size was about 46.3 billion US dollars in 22 under the off-highway caliber, accounting for 37%, and 29.9% in 23 under the KHL caliber. Demand is expected to remain high and stable for 24 years. CR5 is concentrated, the share of Chinese enterprises is still low, and entry barriers are high due to trade frictions. (2) Europe: Under the off-highway caliber, the market size was about 17.8 billion US dollars in '22, accounting for 14%; under the KHL caliber, it accounted for 29% in '23. The total sales volume of new excavators and loaders in Russia was 0.0162 million/0.0294 million units, respectively (European Construction Industry Association, AEB). Demand in Western Europe is weak in the short term, and electrification is accelerating. The Russian market is expected to grow steadily, and the share of Chinese enterprises is high. (3) Emerging markets: Under the Off-Highway caliber, the market size was about 37.8 billion US dollars in '22, accounting for 30%. Benefiting from the low urbanization rate and high government willingness to invest in infrastructure/mining, growth is more certain, and the policies and investment environments of the Belt and Road countries and Brazil are more friendly. Looking at the breakdown, Southeast Asia's total demand in 23 years was 0.0295 million units/-16% year over year, with Indonesia accounting for more than 50% (Komatsu). From April '23 to March '24, India's construction machinery and equipment sales reached 0.1357 million units/year on year +26%, including domestic sales of 0.1237 million units/year on year +24% (Indian Construction Equipment Manufacturers Association, ICEMA). Brazil sold a total of 0.0524 million units (SOBRATEMA) of construction machinery products in '23.

China's construction machinery has taken advantage of the momentum when going out to sea, and there is much to be done. According to the Machinery Construction Machinery Industry Association, China's construction machinery export value in 2023 was 48.55 billion US dollars, up 9.6% year on year, and 32% CAGR in 21-23. There is still plenty of room for Chinese companies to increase their overseas market share. According to KHL, in the 2023 global construction machinery market, Caterpillar and Komatsu had a share of 16.8% and 10.4% respectively. Together, the two reached 27%, far higher than XCMG, Sany Heavy Industries, Zoomlion Heavy Industries, and Liugong's 5.3%, 4.2%, 2.4%, and 1.6%. Although the share of overseas revenue of domestic OEMs has risen sharply to the 40-60% range in recent years, due to the contraction in domestic demand, and compared to Caterpillar/Komatsu/Hitachi, which accounts for nearly 50% /90+%/90+% of overseas revenue, the volume of overseas revenue is expected to reach another level.

Chinese OEMs are on the fast track for the industry to go overseas. Based on weak domestic demand, increased global competitiveness of products, and better overseas gross margin performance, Chinese construction machinery manufacturers are speeding up their overseas market, shifting from product launch and single-site testing to industrial overseas and global expansion, reducing the impact of trade frictions and gaining higher brand influence by “going overseas by car (outsourcing & Belt and Road infrastructure cooperation) +overseas building+going overseas independently”. Countries along the Belt and Road and Latin America have location advantages, policy and investment environment advantages, and similar social culture, and have become important markets where initial assembly capacity went overseas and market share has increased rapidly recently. In the medium to long term, Chinese manufacturers are expected to achieve hierarchical breakthroughs in high-end products in the wider European and American markets, and truly advance globally.

Investment advice: The overseas construction machinery market has broad medium- to long-term space. While we wait for domestic demand to bottom up and rebound, going overseas is an important driving force for domestic manufacturers to get through the cycle. After many rounds of industry cycles, leading Chinese construction machinery enterprises continue to accumulate comprehensive advantages such as products, supply and production, R&D, channels, and organization, and are shifting towards overseas industrial expansion and global expansion, which is expected to consolidate their alpha and gain an increase in share. We recommend leading domestic OEMs Sany, Zhonglian, and parts manufacturers Hengli Hydraulic. We recommend paying attention to Xugong, Liugong, and Eddy Precision.

Risk warning: the risk that the global economy falls short of expectations, the risk of trade frictions escalating, the risk of exchange rate fluctuations, and the risk of increased market competition.