Caixin reported on July 31st that in the first half of this year, the engineering machinery industry experienced differentiation, with more industry's large overseas customers showing an increase in their net income and the prospects for manufacturers focusing on domestic equipment leasing market are not optimistic. The industry insiders believe that overseas market expansion is still an important source of performance growth in the second half of the year; with the continuous promotion of large-scale equipment updates, the domestic demand is expected to gradually emerge from the cyclical bottom.

As of the time of sending, among the 12 A-share listed companies in the Shenzhen Composite Index of engineering machinery industry, four have released their performance forecast for the first half of the year, showing an uneven pattern. Among them, Guangxi Liugong Machinery Co., Ltd. (000528.SZ) expects net income attributable to shareholders to increase by 45%-70% year-on-year in the first half of the year; Shantui Construction Machinery Co., LTD. (000680.SZ) expects net income attributable to shareholders to increase by 25%-50% year-on-year in the first half of the year; Xiamen XGMA Machinery Co., Ltd. (600815.SH) expects to turn its loss into profit in the first half of the year; Shaanxi Construction Machinery Co., Ltd. (600984.SH) expects to have a loss in the first half of the year. In addition, the Hong Kong stock Lonking Holdings Limited (03339.HK) expects a significant increase in net profit in the first half of the year, an increase of 33% to 50% compared to the same period last year.

According to the current performance forecast of the companies that have already been released, the main reasons for the increase in net income are: firstly, the increase in overseas income; secondly, the increase in product gross margin brought by cost reduction and efficiency improvement.

For example, Shantui Construction Machinery Co., LTD. stated that overseas income increased significantly compared to the same period last year; the company increased its efforts to reduce costs and control expenses, and increased its profitability. Guangxi Liugong Machinery Co., Ltd. and Lonking Holdings Limited both mentioned that their comprehensive product gross margin increased year-on-year due to improved operational efficiency.

Unlike the three companies mentioned above that showed an increase in net income, Shaanxi Construction Machinery Co., Ltd. is mainly engaged in equipment leasing. The company stated in its first-half profit warning announcement that "in the first half of 2024, due to the factors such as the reduction of newly started projects and insufficient start-up rates, the rental prices and utilization rates of the domestic tower crane leasing market are hovering at a low level, leading to the company's loss in the first half of the year."

Although only one-third of the companies in the engineering machinery industry have released their performance forecast for the first half of the year so far, considering the Q1 performance growth and annual planning prospects of companies such as Zoomlion Heavy Industry Science & Technology Co., Ltd. (000157.SZ), Anhui Heli Co., Ltd. (600761.SH), Sany Heavy Industry Co., Ltd. (600031.SH), and XCMG Construction Machinery Co., Ltd. (000425.SZ), these large overseas customers are likely to maintain positive growth in the first half of the year.

Overseas market is still the key engine for performance growth.

The aforementioned companies that have increased their net income in the first half of the year all have a common feature-high proportion of revenue from export business. With China's engineering machinery market entering the stock era, the overseas market has become the main growth point for China's engineering machinery. The proportion of Zoomlion Heavy Industry Science & Technology Co., Ltd.'s overseas revenue reached nearly 50% in the first quarter of 2023. The person in charge of the company said to Caixin that the overseas market is still a blue ocean market for China's engineering machinery. From the perspective of the proportion of major export markets, there is still a lot of room for expansion of product categories in many countries.

Guangxi Liugong Machinery Co., Ltd. similarly believes that the overall demand in overseas markets is slowing down, but the total amount is still at a historically high level. There are still many opportunities in the segmented market with support from overseas infrastructure construction and mining and other factors.

XCMG Construction Machinery Co., Ltd.'s international business accounted for 40% of revenue in 2023, and 44% in the first quarter of 2024. The company believes that during the 14th Five-Year Plan period, the overseas sales of domestic top brands are expected to maintain a growth trend and be an important growth point for the engineering machinery industry.

Some industry insiders said that the growth rate of leading companies is generally 10-20 percentage points higher than the industry average. In the future, the market share of overseas markets will mainly be concentrated in the leading domestic engineering machinery enterprises, and it will be difficult for smaller companies to adapt to competition.

China's engineering machinery industry's major core products, such as earthmoving machinery, lifting machinery, concrete machinery, mining machinery, and high-end machinery, all have exports. It's worth noting that the uncertainty of the overseas market has increased, especially the European Union, the United States, Britain, and other countries that have frequently initiated "double-anti" investigations on China's engineering machinery products.

"In the medium to long-term, global trade frictions may accelerate the construction and layout of Chinese enterprises' production capacity overseas." The person in charge of Sany Heavy Industry previously told Caixin reporters.

Caixin reporters have noticed that domestic leading enterprises such as Sany, Zoomlion, and Xugong are promoting the construction of overseas manufacturing bases, promoting the localization of the company in overseas markets through methods such as directly building factories overseas, or through mergers and acquisitions.

The bonus of H2 equipment renewal may be released faster.

In addition to exports, the recovery process of domestic demand is also one of the factors affecting performance. According to the latest data from the China Construction Machinery Industry Association, the sales data of the domestic engineering machinery market in June this year showed a trend of differentiated recovery, with loaders, excavators, and forklifts achieving year-on-year growth, while most other products are still in a decline period, mainly due to the recovery pressure on real estate-related products. Loaders, excavators, and forklifts are recovering first because their downstream is more dispersed.

Taking the excavator market as an example, small excavator demand corresponds to farmland water conservancy, and the service life of small excavators is relatively short, and they have already entered the renewal cycle first. In combination with CME's estimation for construction machinery magazine, sales of excavators (including exports) in July this year were around 14,000 units, an increase of about 11.06% year-on-year, of which domestic market sales are estimated to be 6,000 units, an increase of nearly 17% year-on-year; export market sales are estimated to be 8,000 units, an increase of nearly 7% year-on-year, the first time it has turned positive year-on-year this year.

Recently, the equipment renewal policy has been further intensified. The NDRC and the Ministry of Finance issued "Several Measures to Support Large-Scale Equipment Renewal and Old-for-New Consumption," which plans to arrange funds of around 300 billion yuan for ultra-long-term special national debt, and increase support for large-scale equipment renewal and old-for-new consumption.

The landing of this round of ultra-long-term special national debt largely solves the problem of policy funding for equipment renewal and old-for-new consumption. In addition, the scale of 3 trillion yuan for central enterprises' equipment renewal in the next 5 years will also effectively drive social fixed asset investment.

The staff of Sany Heavy Industry's Securities Department told Caixin reporters who called as investors that some engineering machinery equipment, such as the first-generation and second-generation models, have reached the point of equipment renewal. The introduction of policies is expected to increase corporate enthusiasm and promote the process of old-for-new in enterprises.

After entering the second half of the year, the policy end may accelerate the clearance of the first and second-generation models and the transition to the third and fourth generations. Some dealers have feedback that brands such as Sany and Guangxi Liugong Machinery have daily transactions of national standard four equipment, and the sales volume of new national standard four machines has increased compared to the same period last year. Many industry insiders in the engineering machinery industry believe that this year is expected to be the year of bottoming out of the domestic market, combined with large-scale equipment renewal policies, the new round of renewal and replacement cycle is expected to be gradually launched next year.