As the capital markets transition from a general rise to a differentiated stage, the market volatility increases, posing higher challenges for investors. It is precisely because sector rotation is accelerating, investors who focus on short-term gains may find it more beneficial to shift their focus to sectors with stronger long-term logic. For instance, brokerage firms like Guojin and Everbright have mentioned the pro-cyclical sectors.

Among the many pro-cyclical sectors, the machinery industry has become the focus of investors due to its wide application and sensitivity to economic activities. As an indispensable equipment in construction, tower cranes are closely linked to market demand and the pace of economic development.

As a highly scarce tower crane service provider in the Hong Kong stock market, Dafeng Equipment is naturally a sample worth paying attention to. Recently, the company announced its latest mid-term performance. For the six months ended September 30, 2024, the company achieved revenue of 0.341 billion RMB, with a net loss attributable to owners of approximately 36.2 million RMB.

Overall, this performance also reflects the significant challenges faced by the machinery industry during this period of weak recovery. However, with the emergence of more macro bullish factors, the valuation reshaping potential brought by performance reversal is becoming increasingly clear.

1. Bullish policies help restore the fundamentals.

With a series of national stimulus policies being introduced intensively, initial signs of market recovery have emerged.

In October of this year, China's manufacturing PMI rose to 50.1%, breaking the continuous 5-month contraction trend and returning above the boom-bust line. The consumer confidence index increased by 1.2 percentage points compared to the previous month, marking the first rise after six consecutive months of decline. From August to October, the year-on-year growth rates of total retail sales of consumer goods were 2.1%, 3.2%, and 4.8%, showing a clear monthly upward trend.

Macro data continues to strengthen the pro-cyclical logic, and tower cranes, as a typical pro-cyclical industry, are also benefiting from this.

Specifically, downstream demand for tower cranes mainly comes from real estate and infrastructure. Since the beginning of this year, the policy support for real estate and infrastructure has been unprecedented, but it will still take time for these policies to be fully implemented, providing greater room for improvement in the related industry chain's business climate.

Regarding real estate, on September 24, the central bank announced policies including reserve requirement ratio cuts, interest rate cuts, and reductions in mortgage rates for existing homes. On September 26, a political bureau meeting emphasized the need to 'promote the stabilization of the real estate market.' On September 29, the central bank and the China Banking and Insurance Regulatory Commission issued a series of measures, such as improving the pricing mechanism for commercial individual housing loans, optimizing the minimum down payment ratio for individual housing loans, refining requirements for housing provident fund re-loans, and extending some real estate financial policy deadlines.

In terms of infrastructure, as an important lever for counter-cyclical adjustments, the 10-trillion-yuan debt-to-equity swap plan will release previously constrained resources in various regions, offering more support for future infrastructure investments.

Whether it's the continued improvement in the supply-demand relationship in the real estate market or additional infrastructure projects, the demand for upstream equipment such as tower cranes will increase, benefiting top companies at various stages. As of September 30, 2024, Dafeng Equipment Management had a total of 1,193 tower cranes, making it the second largest tower crane fleet in the Chinese tower crane service market. Its leading size advantage and industry position have positioned Dafeng Equipment as one of the core beneficiaries in the cyclical logic.

2. Seeking Market Increment through Strategic Adjustments

The above judgment on the fundamentals of the tower crane industry is mostly based on medium to long-term perspectives, focusing on Dafeng Equipment. Their flexible response to the macro environment has enabled them to achieve fundamental restoration ahead of others.

Firstly, in order to reduce the impact of real estate and infrastructure on business operations, Dafeng Equipment adjusted its strategic direction and established the 'Clean Energy Business Division' in 2023, increasing its presence in the energy sector, particularly in thermal and nuclear power fields.

Energy is the cornerstone of economic development, and the importance of enhancing energy self-sufficiency capabilities is self-evident. Thermal power, as the primary energy supply form in China, still holds an unshakable strategic position. In the first three quarters of 2024, the proportion of thermal power generation reached 67.23%. According to the incomplete statistics from Polaris Power Grid, in the third quarter of this year, there are a total of 145 planned, under construction, and commissioned thermal power projects across China.

Dafeng Equipment has early awareness of this incremental market segment, actively preparing for thermal power plant projects. Given that the construction period for thermal power projects is generally 12 to 18 months, this part of the performance is expected to be reflected in the company's financial report next year.

While nuclear power may not have the large scale of thermal power, its clean and stable advantages are becoming increasingly important against the backdrop of the 'dual carbon' target and energy security.

According to the "China Nuclear Energy Development Report 2024", by 2035, the proportion of nuclear power generation in China's power structure will reach around 10%. This data is expected to increase to around 18% by 2060, whereas in 2023, the proportion of nuclear power generation was only 4.86%.

The broad development prospects have brought incremental opportunities to the entire nuclear power industry chain. However, the long construction period and high construction difficulty have created entry barriers. This has brought more development dividends to top companies in the industry like Dafeng Equipment. As of September 30, 2024, there are a total of 17 operational nuclear power plants in Mainland China, with Dafeng Equipment participating in the construction of 12, accounting for over 70%.

With its leading industry position, Dafeng Equipment's nuclear power footprint is continuously expanding. This year, the company has added projects such as Zhejiang Sanao Nuclear Power, Guangdong Taipingling Nuclear Power, and Lianjiang Nuclear Power. These are expected to be important drivers of the company's performance growth in the next 3 to 5 years.

In addition to the domestic market, Dafeng Equipment is also expanding into broad overseas markets to seek more incremental opportunities.

On the one hand, whether it is the 'construction of 0.33 million public housing units in the northern urban area of Hong Kong over 10 years' or the expansion of Macau International Airport, both bring incremental opportunities to the Greater Bay Area's construction real estate and infrastructure. Dafeng Equipment has seized this development opportunity and expanded its business to the Hong Kong and Macau regions through its subsidiaries.

Furthermore, Dafeng Equipment is continuously expanding its presence in the Indonesian market.

In recent years, the Indonesian economy has maintained strong growth. In 2023, Indonesia's GDP is about $1.37 trillion, consistently ranking first in the ASEAN for many years, accounting for 36% of the ASEAN's total economy. At the same time, its urbanization rate continues to increase, reaching 59% in 2023, and the demand for construction machinery has also been continuously rising.

Moreover, Indonesia has abundant mineral resources such as oil, natural gas, coal, tin, bauxite, nickel, copper, gold, and silver. The mining industry, as one of Indonesia's important pillar industries, has driven the increasing demand for construction machinery such as tower cranes.

Furthermore, Indonesia plans to restart the construction of a giant seawall to cope with the rapid sinking of the capital, Jakarta, in 2024. The infrastructure development budget is set to increase from 198.45 billion to 238.75 billion RMB in 2024, aimed at accelerating the construction of the new capital and economic transformation, further boosting the demand for construction machinery in the Indonesian market.

DaFeng Equipment has already entered the Indonesian market as early as 2018 and successfully established a joint venture with local partners in June this year, poised to benefit from Indonesia's incremental dividend.

III. Conclusion

Despite the existing macro challenges, DaFeng Equipment, with its leading position in the tower crane service sector and flexible strategic adjustments, has demonstrated strong market adaptability and growth potential.

DaFeng Equipment's long-term value lies in its focus on core business and open attitude towards new opportunities. The company's layout in domestic and international markets, especially its investments in the energy sector and emerging markets like Indonesia, demonstrates its sensitivity to industrial changes and global economic trends. This timely strategic adjustment helps the company maintain competitiveness in different market cycles.