Domestic Machinery Structure Adjustment Looks for New Aspects in Machinery Industry

The machinery industry is a midstream investment product, and the degree of prosperity is closely related to the macroeconomic environment. Therefore, the analysis of the downstream capital expenditure trend in conjunction with the corresponding policy environment is the starting point for the study of the machinery and equipment industry. 2011 is an important transition year for China's economic development, and the structural changes in the downstream investment trends during the entire “Twelfth Five-Year Plan” period will also be significant under the guidance of policy controls. We believe that this change is not likely to be a short-term phenomenon but implies that the long-term investment focus of the machinery industry will change with the adjustment of China's economic structure.

The 2011 performance was bleak. 2011 was the winter season for machinery stocks. Reviewing the year-round trend of the secondary market, the machinery industry underperformed the CSI 300 by 13.5 percentage points, ranking 23 in the first-tier industry. Countdown to the third, it became the object of low allocation among various agencies. At the secondary industry level of Shenwan, the performance of each sub-industry is divided. The sub-industry of instrument and instrumentation slightly outperforms the entire machinery, and the sub-sector of electrical equipment is able to lose about 5 points of the entire machinery. According to the classification of specific downstream applications, major subdivided sectors such as construction machinery, railway equipment, coal machinery, and shipbuilding also showed signs of sluggishness, all of which fell to varying degrees. At the level of individual stocks, out of the 316 mechanical shares designated by Shenwan, ST and *ST companies were eliminated, 69 out of the CSI 300 Index, and only 12 were positive.

In the past decade, the gross output value of China's machinery industry continued to grow at a compounded rate of 25.3% in the context of the rapid progress in domestic infrastructure construction, industrialization, and urbanization rates. At the same time, The expenditure on equipment and equipment for fixed assets investment is growing at an annual average compound rate of 24%. Major capital investment projects based on real estate, “Tie Gongji” and heavy industrial expansion investment have contributed to the demand for equipment.

In terms of external demand, the prosperous international economic environment and the successful role of China in the role of the world's factory have further contributed to the expansion of the domestic machinery industry. Since the reform and opening up, China’s exports have maintained an average annual growth rate of 23.4%, and about 90% of the total exports have been digested by Asia, Europe, and North America, and Asian countries have accounted for about 50% of them. Major countries and The regions include Hong Kong (30%), Japan (18%), South Korea (9%), India (6%), Taiwan (5%) and so on. In the last ten years, the share of exports in GDP increased from 20% in 2001 to 35% in 2007, and then fell back to 25% in 2011 due to the global economic crisis. In China's export products, the proportion of machinery and transportation equipment also increased from 35.7% in 2001 to 49.5% in 2010.

Loss of external demand catalyzes domestic structural adjustment However, the extensive growth driven by excessively advanced downstream investment spending and labor cost factor advantage is not sustainable, especially for equipment manufacturing industries that require long-term technology accumulation. The outbreak of the economic crisis in 2008 has become the catalyst for the Chinese government's initiative in adjusting the original economic development model. It has prompted China's economic growth mode to shift from investment and export to consumption, service, and emerging industries, in order to break through the existing production possibilities boundary and form a Endogenous long-term sustainable growth.

The simultaneous adjustment of domestic and international demand has exerted significant pressure on the machinery industry.

From the data on infrastructure and fixed assets investment in the past two years, the year-on-year growth rates of real estate investment, railway investment, highway investment, port investment, and urban fixed asset investment all declined. After the economic crisis occurred, overseas demand quickly contracted, which caused a serious impact on China's exports of machinery and equipment. As of the end of 2011, the U.S. economy is still at the bottom, and the economic situation in Europe remains unclear. Considering that all emerging economies have a closer relationship with European and U.S. economies, the recovery of global market demand cannot be overly optimistic. According to UBS Securities' report data, from the second half of 2010, the actual export growth rate of China's machinery and equipment has shown a trend of decline.

In fact, from the public data of some manufacturing industries, since the end of 2009, the demand for machinery and equipment has turned a turning point. The current manufacturing industry's finished product inventories have exceeded the highest level in the 2008 crisis; meanwhile, new orders, new export orders, and production PMI all continue to decline. Therefore, in the coming period, the manufacturing industry will still undergo a passive increase in destocking and depreciation and amortization of unit products. However, the positive view is - "The worst is now, at least not worse in the future."

The focus of investments changes with changes in demand and takes into consideration a series of factors at home and abroad. Our general judgment on the future of machinery sub-sectors is: From the adjustment of downstream demand, the “12th Five-Year Plan” or even longer period, the various machinery and equipment The degree of prosperity of the industry will be affected by government regulation and structural changes will occur:

First, the high growth in domestic demand for construction machinery and railway equipment is gone forever. In the future, the transition to stable growth will take place, and the overall valuation center will move downwards. The focus will be on policy relaxation. Of course, although the radical growth of the construction machinery and railway equipment industry has become a thing of the past and it has begun to transition to a stable and rational mature development period, for the long-term value investors, the current valuation level is at a relatively low level and is ideal. Long-term value investment intervention opportunities;

Second, aviation and shipbuilding are constrained by the pace of recovery of the global economy and the gradual expansion of capacity. At present, the demand for passengers and freight is still relatively shrinking, and the early expansion of its capacity has caused its basic upward momentum to be insufficient, and it does not have obvious investment opportunities. The focus is on individual stocks related to the promotion of military asset integration.

Third, the grid company's "12th Five-Year Plan" investment is making big strides, and the equipment demand is in a booming cycle. At the same time, the cost pressures on major raw materials will be further released. The electrical equipment sub-sectors will benefit from the above two points. The focus is on the grid. Intelligent, UHV project promotion and rural network reform;

Fourth, energy demand continues to grow rapidly and supply has become relatively tight. Under the concept of “coal preservation, oil stabilization, gas expansion, and development of new energy sources”, an industry chain that meets the principles of “open source and throttling” can become an important investment clue. . We believe that the oil and gas industry chain and the industrial energy conservation sector will become the new focus of the machinery industry.