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

Soochow released a research report stating that the construction machinery sector is showing clear signs of spring excitement, with a noticeable uptrend expected in March and April. Influenced by factors such as budget releases, resumption of work after the Spring Festival, favorable weather conditions, policy support after the Two Sessions, and market promotions, Q1 is generally the peak season for construction machinery production and sales. The fundamentals of the construction machinery sector in 2025, both domestically and internationally, are better than in 2024. With the domestic and international markets resonating, and in the context of a faster recovery cycle, it is anticipated that the improvement in profit margins due to economies of scale will be promising. Sany Heavy Industry (600031.SH), ZOOMLION (000157.SZ), Guangxi Liugong Machinery (000528.SZ), Shantui Construction Machinery (000680.SZ), and Jiangsu Hengli Hydraulic (601100.SH) are recommended investments. The peak season for construction machinery production and sales is approaching, focusing on the sector's "spring excitement" trend. The construction machinery sector is showing clear signs of spring excitement, with a noticeable uptrend usually occurring in March and April. When reviewing the trends in the construction machinery sector from 2021 to 2025, the sector generally experiences about two weeks of excessive gains in March and April. The excessive gains during the spring excitement in 2021 and 2022 were the highest of the year; in 2023, the spring excitement was not as significant due to the early release of demand for National II and III standards; in 2024, benefiting from the rebound of the industry, the spring excitement period was longer. Soochow believes that in 2025, with the recovery of excavator sales in China, there is the potential for a significant uptrend in spring excitement. The source of this spring excitement is mainly policy-driven, as the construction machinery sector experiences a peak season for production and sales. Due to various factors such as budget releases, resumption of work after the Spring Festival, favorable weather conditions, policy support after the Two Sessions, and market promotions, Q1 is generally the peak season for construction machinery production and sales. Looking at production, it can be seen that the monthly working hours of Komatsu excavators in China generally peak in March and April. In terms of sales, the proportion of Q1 sales to total annual sales of excavators in China from 2021 to 2024 were 41%, 34%, 32%, and 26% respectively, indicating that Q1 sales set the tone for the year, and stock prices will also reflect the sales figures of excavators in Q1. It is expected that excavator sales in Q1 will exceed expectations, and the industry will experience resonance domestically and internationally in 2025. Domestic market: In January, domestic excavator sales decreased by 0.3% year-on-year, with the Spring Festival affecting about 10 days of work, but having a minor impact on excavator production and sales. Looking at the production side, Komatsu's working hours in China in January were 66.2, a 17.3% decrease year-on-year, which performed better than in previous years with months affected by the Spring Festival. Looking ahead to February, Soochow believes that the low base due to the Spring Festival effect in February 2024 will result in a year-on-year sales growth of about 20% for domestic excavators. In terms of the cyclical perspective, Soochow estimates that this cycle will reach its peak in 2028, with sales reaching about 250,000 units, compared to internal sales of 100,000 units in 2024, indicating a 150% increase. Export market: In January, excavator export sales grew by 2.2%, maintaining a moderate recovery trend. With a low base in the first half of 2024, Soochow believes that the pressure on exports will be lower in the first half of 2025, with stronger visibility in sales rebounding. Excavator revenue & profits account for a high percentage, and the industry's potential to exceed expectations could bring significant profit elasticity. To meet the increased demand brought by the rapid growth of the previous cycle, leading companies in the industry expanded their production capacity rapidly, with Soochow estimating that the industry's capacity utilization rate was only about 40% in 2024. If the industry experiences a rapid recovery in 2025, Soochow predicts that the industry's capacity utilization rate could recover to around 60%. The increase in capacity utilization will effectively reduce fixed production costs, and using Sany Heavy Industry's profit margin performance as an example during the previous cycle: from 2015 to 2019, the company's excavator profit margin increased from 28% to 39%, with profitability improvement coming from the increase in economies of scale. Excavators are the largest category in the construction machinery sector and have the highest technological barriers. Therefore, the profitability of excavators is the highest among all categories and is the core source of profit for all companies. In 2025, the excavator sector will experience a resonance in both domestic and international markets, and in the context of a faster recovery cycle, the improvement in profit margins due to economies of scale is promising.