EB SECURITIES: Domestic engineering machinery sees a good start, industry demand continues to recover.

EB SECURITIES released a research report stating that the recent sales volume and construction start-ups in the engineering machinery industry have exceeded expectations, with a strong start to the peak season in 2025, providing a good short-term catalyst for the industry; the policy support for the engineering machinery industry is strong, ensuring continued recovery of mid-term demand in the industry; at the same time, with the continuous advancement of internationalization and electrification in the engineering machinery industry, leading companies in the industry are expected to benefit from the increase in both quantity and profits. The bank is optimistic about the long-term performance of the industry, and recommends focusing on main manufacturers such as Sany Heavy Industry, ZOOMLION, XCMG Construction Machinery, Guangxi Liugong Machinery, Shantui Construction Machinery, as well as component companies like Jiangsu Hengli Hydraulic. The main viewpoints of EB SECURITIES are as follows: The sales volume and construction start-ups of the domestic engineering machinery industry in January-February 2025 have exceeded expectations, providing a good short-term catalyst In January-February 2025, the sales volume of excavators (including exports) was 31,782 units, an increase of 27.2% year-on-year; of which, domestic sales were 17,045 units, an increase of 51.4% year-on-year. From the perspective of construction start-ups, in January 2025, Komatsu's domestic construction start-up hours were 66.2 hours, exceeding previous years' data for the Lunar New Year months (28.3 hours in February 2024 and 42.5 hours in January 2023). Both sales and construction start-up performances are strong, reflecting a trend of recovery in downstream engineering machinery. In terms of growth drivers, the bank is optimistic about the continuous growth of replacement demand for engineering machinery driving sales. The sales volume of excavators and other engineering machinery in the previous cycle rapidly increased from the bottom in late 2015 to a peak in early 2021. Considering that the usual service life of engineering machinery is 8-10 years, the bank calculates that there will be a compound growth of about 30% in replacement demand for domestic engineering machinery in 2025 and the following years, leading to a significant increase in recent sales data. In addition, a large number of second-hand engineering machines are exported to developing countries overseas, which objectively lowers the domestic stock of engineering machinery and is also a factor in driving new machine sales. The policy support is strong, ensuring continued recovery of mid-term demand in the engineering machinery industry In terms of funding, the 2025 government work report proposes to issue special long-term national bonds of 1.3 trillion yuan this year, an increase of 300 billion yuan over the previous year; accelerate the implementation of a number of key projects to promote the smooth conclusion of major projects in the "14th Five-Year Plan"; allocate local government special bonds of 4.4 trillion yuan, an increase of 500 billion yuan year-on-year, mainly used for investment construction, land acquisition and storage, purchasing existing commercial housing, and reducing local government debt. The report emphasizes the need to strengthen countercyclical adjustments to fiscal policies, particularly through increased issuance of special bonds and government debt "transformation," which are expected to drive infrastructure investment and subsequently boost downstream equipment demand. In terms of structure, the 2025 government work report proposes to further implement the new urbanization strategy, continue to promote urban renewal and the transformation of old urban areas, accelerate the improvement of urban flood prevention and drainage systems, as well as the construction of gas, water supply and drainage, heating, and underground pipeline systems; develop digital and intelligent infrastructure, and improve accessibility and aging-related facilities. The report indicates that the government will continue to increase investment in urban infrastructure construction, promote the development of new urbanization, especially in areas such as underground engineering, municipal construction, and water conservancy engineering, where demand for engineering machinery will continue to grow. The export sales volume of domestic engineering machinery continued to rise in January-February 2025, with great potential for the overseas expansion of engineering machinery In January-February 2025, the export sales volume of excavators was 14,737 units, an increase of 7.4% year-on-year; the export sales volume of loaders was 8,439 units, an increase of 8.3%. Looking ahead to 2025, China's engineering machinery exports face opportunities and challenges such as changes in the situation in Russia and Ukraine, increased demand for infrastructure and mining in Southeast Asia, Africa, and the Middle East, and increased penetration in high-end markets in Europe and the United States. As leading Chinese companies in the engineering machinery industry increase their overseas presence, China's engineering machinery exports are expected to maintain a growth trend. The sales volume of electric loaders increased significantly in January-February 2025, with the potential for accelerated electrification of engineering machinery In January-February 2025, the sales volume of electric loaders was 2,413 units, an increase of 261.2% year-on-year; the electrification rate reached 14.5%, a 12.0 percentage point increase year-on-year. The 2025 government work report proposes to accelerate the comprehensive green transformation of economic and social development, promote energy-saving and carbon reduction in key industries, and advance the development and utilization of new energy sources; coordinate industrial restructuring, and promote green and low-carbon development. The bank believes that greening and electrification are one of the key development directions of the engineering machinery industry in the future. Domestic manufacturers are seizing the opportunity of the electric motor trend, and the process of electrification in the engineering machinery industry is expected to accelerate, leading to further revenue and profit growth for main manufacturing companies. Risk analysis: Infrastructure investment falls short of expectations, overseas export of engineering machinery falls short of expectations, and industry price competition intensifies.