China Galaxy Securities: Three Major Investment Directions in the Machinery Industry from Local Two Sessions

China Galaxy Securities released a research report stating that starting in mid to late January 2025, local Two Sessions of 31 provinces and cities across the country will be held one after another. By reviewing the investment targets and deployment of key projects and industrial policies disclosed by various provinces and cities for 2025, domestic demand recovery is the biggest investment theme in 2025, counter-cyclical adjustment policies are expected to exert force, investment in new quality production capacity will continue to grow, and it is recommended to focus on three major investment opportunities in engineering machinery, new quality production capacity, and equipment renewal. Key points of China Galaxy Securities are as follows: Engineering Machinery: Domestic demand has bottomed out and is rebounding, benefiting from the rise in infrastructure investment under the background of debt reduction The target growth rate of weighted fixed asset investment in provinces and municipalities for 2025 has been lowered from 6.4% in 2024 to 5.7%. As infrastructure serves as an important support for stable economic growth, it is expected to benefit from a new round of debt reduction and special bonds, with the growth rate expected to rise. According to Galaxy Macro's forecast, it is neutrally estimated that China's infrastructure investment growth rate will be 6.6% in 2025. Provinces and municipalities such as Tianjin, Shandong, Sichuan, Heilongjiang, and Fujian have indicated that in 2025, they will make good use of special national bonds and special bonds for the long term to seize opportunities for "dual-control" construction and strengthen infrastructure investment. 2024 was a year of rebound for domestic sales of engineering machinery, with excavator sales increasing by 3.13% year-on-year for the whole year; among which, domestic sales increased by 11.7% year-on-year. The Central Economic Work Conference emphasized the implementation of a moderately loose monetary policy and a more proactive fiscal policy. Against the background of debt reduction by local governments and the stabilization of the real estate market, the financial situation and demand for terminal engineering machinery are expected to improve. Domestic demand recovery combined with equipment renewal is expected to benefit main products such as medium and large excavators first. New Quality Production Capacity: Transition from old to new kinetic energy, new quality production capacity is expected to flourish China's economy is at a critical moment in the transition from old to new kinetic energy, and investment related to the transformation of new quality production capacity is expected to continue to grow at a high rate. Local governments will accelerate the layout of emerging and future industries as one of the key tasks for 2025. It is particularly optimistic about Siasun Robot&Automation and the low-altitude economy sector. Siasun Robot&Automation: One of the important directions for the landing of general artificial intelligence, it is the forefront direction of new quality production capacity. In recent times, catalyzed by the industrial chain, Siasun Robot&Automation announced mass production of over a thousand units. Tesla showcased the Optimus new generation 22dof dexterous hand and rough terrain walking abilities, and announced its latest mass production plan at the CES exhibition, with plans to produce thousands of units in 2025, target 50,000-100,000 units in 2026, and production to further increase tenfold to over 500,000 units in 2027. Huawei has established an Intelligent Industry Innovation Center, accelerating the layout of intelligent industries. It is recommended to pay attention to the Tesla industrial chain, the Huawei-Siasun Robot&Automation industrial chain, and related component suppliers. Low Altitude Economy: Under the joint promotion of policies and industries, the low-altitude industry is accelerating its development, commercialization is getting closer, and the mechanically equipped sectors benefiting from the low-altitude economy include various aircraft processing equipment, urban rail control system companies transforming into low-altitude airspace management, aircraft take-off and landing platforms, and charging and changing equipment. Equipment Renewal: Tianjin is implementing "Two New" policies, and the flexibility of renewal is expected to become apparent Attention to the replacement of equipment in the machinery industry, such as railway locomotives, is important. Other sectors that can benefit from equipment renewal include engineering machinery and machine tools. Railway Locomotives: The elasticity of replacing old internal combustion locomotives with new energy locomotives is expected to be released. China's railway locomotive fleet consists of 22,400 units, of which the fleet of internal combustion locomotives is 7,800 units, with around 4,000 units being old (over 30 years old). Policies encourage the replacement of old internal combustion locomotives with new energy locomotives, and the demand for replacing approximately 2,000 new energy locomotives is expected to be released in the next three years. Engineering Machinery: The stock of hydraulic excavators and loaders in 2023 is approximately 1,912,069 units and 866,000-938,000 units, respectively, with a total of about 1.7 million units of all types of excavators. The previous boom cycle started in 2016, and the replacement cycle for excavators and loaders is generally 7-8 years and 8-9 years. From 2024, they will gradually enter a new replacement cycle. Machine Tools: The policy of large-scale equipment renewal emphasizes promoting the replacement of machine tools in the industrial mother machine industry that have been in service for over 10 years. Calculated based on a machine tool service life of 10-15 years, the annual output of metal cutting machine tools and metal forming machine tools was 750,000 and 270,000 units, respectively, from 2009 to 2017. Therefore, the annual demand for machine tool renewal from 2024 to 2027 is estimated to be around 1 million units. Investment recommendations: 1. Engineering Machinery: Sany Heavy Industry (600031.SH), XCMG Construction Machinery (000425.SZ), ZOOMLION (01157,000157.SZ), Guangxi Liugong Machinery (000528.SZ); 2. Siasun Robot&Automation: Zhejiang Sanhua Intelligent Controls (002050.SZ), Ningbo Tuopu Group (601689.SH), Shanghai Beite Technology (603009.SH), Zhejiang XCC Group (603667.SH), Leader Harmonious Drive Systems (688017.SH), Shanghai Moons' Electric (603728.SH), Harbin Boshi Automation (002698.SZ), UBTECH ROBOTICS (09880), etc."Je suis dsol, je ne parle pas franais. Pouvez-vous rpter en anglais s'il vous plat?" "I'm sorry, I don't speak French. Can you please repeat in English?"3. Low-altitude economy: Anhui Yingliu Electromechanical (603308.SH), Xi'an Bright Laser Technologies (688333.SH), Farsoon Technologies (688433.SH), Traffic Control Technology (688015.SH), China Railway Signal & Communication Corporation (03969,688009.SH), UniTTEC Co., Ltd. (000925.SZ), Bozhon Precision Industry Technology (688097.SH), etc.; 4. Railway locomotives: CRRC Corporation (01766,601766.SH), Zhuzhou CRRC Times Electric (03898,688187.SH), Henan Thinker Automatic Equipment (603508.SH); 5. Machine tools: Ningbo Haitian Precision Machinery (601882.SH), Neway CNC Equipment (Suzhou) Co., Ltd (688697.SH), etc. Risk Warning: Risks of manufacturing industry investment falling short of expectations; risks of policy intensity or timing being lower than expected; risks of uncertainty in international political environment changes, etc.