China Galaxy: Domestic sales of excavators increased by 22% in October, focusing on the direction of benefiting from convertible bonds.

China Galaxy Securities released a research report stating that according to the statistics of the China Construction Machinery Industry Association on the major excavator manufacturing enterprises, 16,791 excavators of all kinds were sold in October 2024, an increase of 15.1% year-on-year. Among them, domestic sales were 8,266 units, an increase of 21.6% year-on-year; exports were 8,525 units, an increase of 9.46% year-on-year. From January to October 2024, a total of 164,172 excavators were sold, an increase of 0.47% year-on-year; with domestic sales of 82,211 units, an increase of 9.8% year-on-year; and exports of 81,961 units, a decrease of 7.41% year-on-year. China Galaxy Securities recommends focusing on the following key areas in 2024: (1) investment opportunities brought about by large-scale equipment updates, including railway equipment, machine tools, construction machinery, and ships, (2) equipment going abroad, including consumer machinery, forklifts, construction machinery, and lithium battery equipment, (3) investment opportunities driven by the landing of AI applications, including robotics and AI hardware driving 3C automation, (4) equipment investment opportunities driven by the improvement of new technology penetration rates and new quality productivity directions. The main points of China Galaxy Securities are as follows: Market review: Last week, the machinery equipment index rose by 7.89%, the Shanghai and Shenzhen 300 index rose by 5.50%, and the ChiNext index rose by 9.32%. Among all 31 industries, machinery equipment ranked 6th in terms of changes in the index. Excluding negative values, the overall industry valuation level (whole method) is 31.7 times. The top three sectors in terms of growth last week were Siasun Robot & Automation, semiconductor equipment, and lithium battery equipment; while the top three sub-sectors in terms of growth from the beginning of the year were rail transportation equipment, semiconductor equipment, and construction machinery. Key areas of focus: 22% increase in domestic sales of excavators in October, focus on benefiting from the bond issuance direction [Construction Machinery] According to statistics from the China Construction Machinery Industry Association on major excavator manufacturing enterprises, 16,791 excavators of all kinds were sold in October 2024, an increase of 15.1% year-on-year. Among them, domestic sales were 8,266 units, an increase of 21.6% year-on-year; exports were 8,525 units, an increase of 9.46% year-on-year. From January to October 2024, a total of 164,172 excavators were sold, an increase of 0.47% year-on-year; with domestic sales of 82,211 units, an increase of 9.8% year-on-year; and exports of 81,961 units, a decrease of 7.41% year-on-year. Since March 2024, the year-on-year growth rate of domestic excavator sales has remained positive. From a cyclical perspective, the excavator market has entered a downturn since 2022. We expect 2024 to be a year in which the domestic market hits bottom, coupled with large-scale equipment renewal policies, and it is expected that a new round of replacement cycles will gradually begin in 2025. Recent monetary and fiscal policies favor infrastructure, with a policy focus on stabilizing the real estate market expected to boost domestic demand recovery, with main machinery products such as large and medium-sized excavators expected to benefit first. In addition, the global construction machinery market is in the trillion-dollar range, and there is still vast room for construction machinery to go abroad. Relevant targets: Sany Heavy Industry, XCMG Construction Machinery, ZOOMLION, Guangxi Liugong Machinery, Jiangsu Hengli Hydraulic. [Monetization of Bonds] At the press conference of the 12th session of the Standing Committee of the 14th National People's Congress held on November 8th, Minister of Finance Lian Foan stated that starting from 2024, China will allocate 800 billion yuan from the new local government special bonds each year for five consecutive years, specifically for bond monetization, with a total of 4 trillion yuan to replace implicit debt. With the additional 6 trillion yuan in debt limit approved by the Standing Committee of the National People's Congress, local bond resources will increase by 10 trillion yuan. The new round of bond monetization is expected to alleviate and improve market liquidity, boosting market expectations. While the bond limit supports local governments in resolving existing implicit debts, it will also indirectly reduce debts owed by sector enterprises. We believe that accelerating local government bond monetization will benefit downstream enterprises that have high proportions of accounts receivable and high exposure to local governments, focusing on three key areas: (1) testing services, with downstream food, environment, and construction companies being major procurers for local governments; relevant targets include Pony Testing International Group and Centre Testing International Group; (2) urban rail equipment, with downstream railway transportation companies under local governments; relevant targets include Traffic Control Technology, UniTTEC Co., Ltd., China Railway Signal & Communication Corporation; (3) construction machinery, improved accounts receivable for construction companies are favorable for equipment procurement; relevant targets include Sany Heavy Industry, XCMG Construction Machinery, ZOOMLION, Guangxi Liugong Machinery. Investment Recommendations: Focus on the following key areas in 2024: (1) investment opportunities brought about by large-scale equipment upgrades, including railway equipment, machine tools, construction machinery, and ships, (2) equipment going abroad, including consumer machinery, forklifts, construction machinery, and lithium battery equipment, (3) investment opportunities driven by AI applications, including robotics and AI hardware driving 3C automation, (4) equipment investment opportunities driven by the improvement of new technology penetration rates and new quality productivity directions. Risk Warning: Risks include policy progress falling short of expectations; slower-than-expected growth in manufacturing investment; and increased industry competition.