Soochow: The peak season for sales of construction machinery is approaching, focusing on the active market in the spring season sector.

Soochow released a research report stating that the construction machinery sector is showing signs of spring agitation, with a significant uptrend expected in March-April. Looking ahead to February, the firm believes that in 2024, February will have a lower base due to the impact of the Spring Festival, and domestic excavator sales are expected to increase by 20% year-on-year. On the export front, there is expected to be less pressure in the first half of 2025, with a strong predictability in sales recovery. The fundamentals of the construction machinery sector in 2025, both domestically and internationally, are better than in 2024, and with a faster recovery in the cycle, it is optimistic about the improvement in profit margins brought about by economies of scale. The recommended companies are Sany Heavy Industry (600031.SH), ZOOMLION (000157.SZ), Guangxi Liugong Machinery (000528.SZ), Shantui Construction Machinery (000680.SZ), Jiangsu Hengli Hydraulic (601100.SH). Soochow's main points are as follows: The peak sales season for construction machinery is about to come, focusing on the sector's "spring agitation" trend The construction machinery sector is showing signs of spring agitation, with a significant uptrend usually appearing in March-April. Reviewing the trends in the construction machinery sector from 2021 to 2025, the sector typically experiences a two-week period of excess gains in March-April. The excess gains during the spring agitation in 2021-2022 were the highest of the year; in 2023, the spring agitation was not significant due to the early release of National II and National III demands; in 2024, benefiting from the industry's rebound, the spring agitation lasted longer. The firm believes that in 2025, with the recovery of domestic excavator sales, there is a possibility of a significant spring agitation. The source of the spring agitation mainly comes from policy orientation, as construction machinery welcomes the peak seasons of construction and sales. Influenced by various factors such as budget releases, post-Spring Festival return to work, favorable weather, policy support after the Two Sessions, and market promotions, Q1 is generally a peak season for construction machinery in terms of construction and sales. From the perspective of construction, looking at the operating hours of Komatsu excavators in China, March-April is usually the peak period for annual construction. In terms of sales, the proportion of Q1 sales of domestic excavators in 2021-2024 was 41%/34%/32%/26% respectively, with Q1 sales setting the tone for the whole year, thus stock prices will also reflect the Q1 excavator sales. Q1 excavator sales are expected to exceed expectations, with the industry experiencing resonance at home and abroad in 2025 Domestic market: In January, domestic excavator sales decreased by 0.3% year-on-year, with about 10 days of impact from the Spring Festival, but excavator construction and sales were minimally affected. Looking at construction, in January, Komatsus domestic operating hours were 66.2, a year-on-year decrease of 17.3%, performing better than previous years with Spring Festival impact. Looking ahead to February, the firm believes that the lower base due to the Spring Festival impact in February 2024 will lead to a year-on-year increase in domestic excavator sales of around 20%. From a cyclical perspective, the firm estimates that this cycle will reach its peak in 2028, with peak sales of around 250,000 units, representing a 150% increase compared to the 100,000 units sold internally in 2024. Export market: In January, excavator export sales increased by 2.2% year-on-year, maintaining a moderate recovery trend. With a low base in the first half of 2024, the firm believes that there will be less pressure on exports in the first half of 2025, with a strong predictability in the recovery of sales. Excavator revenues & profits are relatively high, and the industry's unexpected recovery is expected to bring significant profit elasticity In order to meet the incremental demand brought about by the rapid upward cycle, the industry's leading manufacturers have rapidly expanded their production capacity. The firm estimates that the industry's capacity utilization rate was only about 40% in 2024. If the industry experiences a rapid recovery in 2025, the firm predicts that the industry's capacity utilization rate is expected to return to around 60%. The improvement in capacity utilization will effectively reduce fixed production costs. Taking Sany Heavy Industry's gross profit margin performance from the previous cycle as an example: from 2015 to 2019, the company's excavator gross profit margin increased from 28% to 39%, and the improvement in profitability came from the increase in economies of scale. Excavators are the largest category in the construction machinery sector and have the highest technological barriers, so their gross profit margin is the highest among all categories and is the core source of profits for companies. The excavator sector is expected to experience resonance at home and abroad in 2025, and in the context of a faster cycle recovery, there is optimism about the improvement in profit margins brought about by economies of scale. Risk Warning: Macro-economic fluctuations; international political risks; intensified industry competition.