Shenwan Hongyuan Group: Excavator sales in February exceeded expectations, and the sustainability of this round of updates is expected to be even better.

Shenwan Hongyuan Group released a research report stating that considering the disturbance of the Spring Festival factor, the sales volume of excavators in January-February was calculated cumulatively. The sales volume of excavators in January-February increased by 27.2% year-on-year, with domestic excavator sales increasing by 51.4%, exceeding market expectations. Since the growth rate of domestic excavator sales turned negative in April 2021, the downward cycle has lasted for 35 months. The growth rate turned positive in March 2024, with signs of acceleration in February this year, indicating that the current cycle may be the start of a new cycle. The construction machinery sector is currently at the bottom of the cycle and sector allocation is recommended. In the short term, excavator-related targets are favored, while long-term prospects for sector opportunities are good. Key points of Shenwan Hongyuan Group: Event: According to statistics from the China Construction Machinery Industry Association on the main excavator manufacturers, 19,270 various types of excavators were sold in February 2025, a year-on-year increase of 52.8%. Among them, domestic sales were 11,640 units, a year-on-year increase of 99.4%; exports were 7,630 units, a year-on-year increase of 12.7%. In January-February 2025, a total of 31,782 excavators were sold, a year-on-year increase of 27.2%; domestic sales were 17,045 units, a year-on-year increase of 51.4%; exports were 14,737 units, a year-on-year increase of 7.37%. In February 2025, 19 electric excavators were sold (16 below 6 tons, 2 in the 10 to 18.5 ton range, and 1 in the 18.5 to 28.5 ton range). February excavator sales exceeded expectations, indicating the start of a new cycle Considering the disturbance of the Spring Festival factor, the cumulative sales volume of excavators in January-February was calculated. The year-on-year increase in excavator sales in January-February was 27.2%, with domestic excavator sales increasing by 51.4%, exceeding market expectations. Since the growth rate of domestic excavator sales turned negative in April 2021, the downward cycle lasted for 35 months. The growth rate turned positive in March 2024, with signs of acceleration in February this year, indicating that the current cycle may be the start of a new cycle. Debt conversion cycle may resonate with engineering machinery renewal cycle Since September 2024, a series of counter-cyclical adjustment policies have been intensively introduced. The central bank released long-term liquidity of about 1 trillion through reserve ratio cuts and interest rate reductions, while the Ministry of Finance supported stabilization of the construction and real estate industry through special bonds and tax tools. On November 8, 2024, the General Office of the National People's Congress Standing Committee held a press conference to introduce incremental debt conversion measures. The overall debt conversion plan can be summarized as "6+4+2", reducing the hidden debt resolution tasks of local governments to 12 trillion yuan by 2028. 1) Increase the special quota for local government debt by 6 trillion yuan to replace existing hidden debts, with 2 trillion yuan allocated annually from 2024 to 2026 to support local governments in replacing various hidden debts. 2) From 2024 to 2028, allocate 800 billion yuan from the new local government special bonds annually to supplement government financial resources specifically for debt conversion, accumulating to replace hidden debts amounting to 4 trillion yuan. 3) After 2029, hidden debts of 2 trillion yuan from shantytown renovation that mature in the years following 2028 will not be affected by the point in time when hidden debts are cleared in 2028. In 2025, with further policy intervention, the quota of local government special bonds has been increased to 4.4 trillion yuan. With stable demand, the engineering machinery replacement cycle will continue. With the environmental upgrading, exchange of old for new, export of second-hand machinery, and machinery replacing labor factors, the engineering machinery is expected to start a new upward cycle. This round of renewal cycle is expected to be more sustainable Compared to the previous two cycles, domestic excavator products have recovered first, and it has been a year now. Cranes, concrete machinery, and other sectors with lower base numbers and narrower declines are expected to follow the recovery of excavators. On the other hand, overseas markets still have significant growth potential and less obvious cyclicality, with domestic companies in the accelerated stage of going international. Key targets include: 1) Main manufacturers: Sany Heavy Industry (600031.SH), XCMG Construction Machinery (000425.SZ), ZOOMLION (000157.SZ,01157), Guangxi Liugong Machinery (000528.SZ), Shantui Construction Machinery (000680.SZ), etc.; 2) Component companies: Jiangsu Hengli Hydraulic (601100.SH), Yantai Eddie Precision Machinery (603638.SH), Hengong Precision Equipment (301261.SZ), Jiangxi First Hydraulic (301446.SZ), Voneseals Technology (301161.SZ), Allied Machinery (605060.SH), etc. Risk warning: Macroeconomic and policy uncertainties; intensifying industry competition, etc.