The construction machinery market is nearly trillion yuan, and domestic leaders are speeding up penetration. The global construction machinery industry maintained a high growth rate in 2012, reaching 871.09 billion yuan in sales. In terms of value, the most valuable category of construction machinery is the excavator, which accounts for nearly 30% of the construction machinery market space. From a downstream perspective, infrastructure (45%), real estate (20%), and mining (20%) are the main downstream of construction machinery. Currently, the global construction machinery market share is in the hands of leading foreign investors. The global leaders are Carter and Komatsu, with global shares of 16.3% and 10.7% respectively in '22, and the market share of Chinese enterprises is also growing rapidly. The combined shares of Sany, China Union, and XCMG increased from 8.7% in 2016 to 13.9% in 2022. Among them, Xugong Machinery's global share increased from 3.7% in 2016 to 5.8% in '22, making it one of the top three in the world.
Domestic construction machinery is expected to bottom out in 24 years. Demand side: Trillions of treasury bonds help infrastructure investment continue to prosper. In February '24, the additional treasury bond fund of 1 trillion yuan has been implemented to about 15,000 specific projects. Construction will begin before the end of June this year, which is expected to help infrastructure investment continue to prosper. Infrastructure construction investment completed in January-April 2024 was about 5.6 trillion yuan, an increase of 7.78% over the previous year, maintaining a high growth rate. Unlike long-term infrastructure investment in the transportation sector, more than half of the 1 trillion additional treasury bonds were used to build water conservancy facilities such as flood prevention and drainage, and more than 200 billion yuan was spent on post-disaster reconstruction in places such as Beijing-Tianjin-Hebei. The growth rate of infrastructure construction investment is expected to rise to about 8% in 24 years. Natural update: According to our estimates, 134,900 domestic excavators were scrapped in '23, which is more than the actual sales volume of about 42,000 units in that year. Moreover, the amount of excavators scrapped is now in a relatively low range. It is estimated that the amount of excavators scrapped in '24 and '27 will be 128,500 and 1391,000, respectively. Equipment renewal policy: A new round of large-scale equipment updates is expected to promote the upgrading of construction machinery and equipment, and promote the clearance of old “country 1” and “country 2” models. According to a related publication in Construction Machinery Magazine, it is estimated that 70%-80% of old equipment will be eliminated, and 20%-30% of old equipment will generate demand for trade-in.
Assuming that 25% of old equipment will generate trade-in demand, it will bring about 9.7, 9.1, 18.9, and 90,000 replacement requirements for excavators, loaders, forklifts, and rollers, respectively, accounting for 104.1%, 159.4%, 24.3%, and 132.0% of actual domestic sales in 2023.
“Horizontal expansion & product launch”, contributing to incremental revenue. The company's emerging businesses, such as high machinery and mining machinery, are progressing smoothly, and overseas revenue continues to rise. In '23, the company's high-tech machines ranked in the top three in the world, achieving revenue of 8.883 billion yuan, yoy +35.62%. Mine open pit excavation equipment remains fifth in the world, and the mining machinery business achieved revenue of about 4.236 billion yuan, yoy +14.18%. The company's overseas sales revenue in '23 reached 37.220 billion yuan, yoy +33.71%, accounting for 40.09% of overseas revenue. However, from a global perspective, the company's global share of only 5.8% in '22 still has a lot of room for growth.
Investment advice: Considering that the domestic industry cycle is bottoming out, the company's emerging business is progressing smoothly, overseas revenue continues to grow, and profitability has improved. The company's net profit for 2024-2026 is estimated to be 64.97/81.80/10.649 billion yuan, respectively. The corresponding valuations are 13x/10x/8x, respectively, maintaining the “recommended” rating.
Risk warning: Risk of industry demand falling short of expectations, risk of overseas penetration falling short of expectations, risk of exchange rate fluctuations, risk of policy progress falling short of expectations, and falling short of expectations in emerging businesses.