Viewing Engineering Machinery Potential from Funding Policy

In 2012, we focused on the following three issues: 1. In the traditional cyclical industry, will the sales growth of construction machinery be stagnant? 2. In the weak-cycle industry, which machinery sub-sectors can withstand economic slowdown? 3. In the emerging industries, which may become the 90's Ke Net.

The cyclical industry sees the expected repair of construction machinery. The newly-started project investment remains high and government investment is about to bottom out. This means that potential demand remains strong. Under the background of targeted easing, the six-month bill direct interest rate, which represents the liquidity of the real economy, has started to fall, and the potential demand for construction machinery has dropped. Expected to translate into actual demand. Starting from August, representative excavators, truck cranes, and loaders of construction machinery have exhibited seasonal characteristics. Under the stimulation of targeted easing policies in the later period, the industry is expected to recover in the first half of 2012.

Potential demand for construction machinery remains strong. The growth rate of newly-started investment projects has been at a relatively high level since the middle of 2011, which means that the sales growth of construction machinery after 3-6 months is expected to pick up. At the same time, civil ROE is still at a relatively high level in history, and the prospect of independent investment by enterprises is also expected to be optimistic. Therefore, we are still optimistic about the potential demand for construction machinery.

Liquidity has gradually eased, which is conducive to the transformation of potential demand for construction machinery into real demand. The core factor constraining the conversion of potential demand from construction machinery to real demand is the tightness of capital in the real economy, which is reflected in the fact that the 6-month bill direct-on-interest rate was once rushed to the historical highest level of 13%. After this period of time, the monetary policy has been fine-tuned and loosely targeted. The direct interest rate has apparently dropped from a high level, the liquidity situation has gradually eased, and the potential demand for construction machinery has turned into a real demand.

The recent sales of construction machinery have seasonal characteristics and the characteristics of the peak season in the first half of next year will emerge. In the first half of 2011, due to the lagging effect of many start-up projects and the driving of leveraged sales, monthly sales data of construction machinery products surpassed market expectations and broke the previous seasonal characteristics. With the gradual decline in demand expectations, monthly sales data for sub-products of construction machinery has gradually become seasonal since August. As the effects of targeted easing policies appear, we expect the decline in sales growth of each product in the first half of 2012 will gradually narrow, and the peak season characteristics will gradually emerge.

The loosely-oriented policies will ensure the smooth implementation of key projects and will also effectively ease the financial strains of downstream customers of construction machinery. We expect that in the first half of 2012, with the potential demand for capital protection gradually being translated into actual demand, construction machinery sales are expected to usher in the peak season, and stock prices will be reflected in sales during the peak season. At present, the leading company's valuation of about 10 times reflects overly pessimistic expectations and still recommends buying Sany Heavy Industry and Zoomlion.