Since the beginning of this year, the machinery and equipment industry has gradually strengthened. In January, it rebounded sharply by 9% and outperformed the market. Some companies, such as Qinchuan Machine Tool and Neway CNC, all rose by about 15%. Process speed is not unrelated.

       Since the second half of last year, the gross profit margin of the machinery industry has rebounded month-on-month, and the turning point of the industry has begun to appear. In the context of China's economic recovery and the country's continuous promotion of high-end manufacturing, intelligent manufacturing and other manufacturing upgrades, opportunities for general-purpose equipment in the machinery industry are highlighted, and some leading companies such as cutting tools and machine tools are expected to usher in a new round of growth.

       General equipment will be the first to enter the update cycle

       From the current point of view, the PMI index is expected to gradually strengthen in 2023, the recovery of downstream demand may drive the increase of capital expenditure, and the general equipment in the machinery industry will take the lead in entering the update cycle. In addition, with the gradual implementation of technological progress and related support policies, the market share of mid-to-high-end products may increase, and domestic leading companies are expected to fully benefit from domestic substitution.

       Since the second half of last year, the manufacturing PMI has weakened, the capital expenditure of the manufacturing industry has been relatively weak, and domestic demand has been under pressure; and since Q3 this year, the revenue growth rate of different segments has diverged. Among them, the machine vision and industrial control automation sector benefited from 1) the acceleration of domestic substitution and the increase in market share; 2) the downstream advanced manufacturing industries such as lithium batteries and photovoltaics have a good boom, and their performance growth performance is good; the forklift sector is gradually disappearing due to the impact of the epidemic, Affected by factors such as the recovery of the downstream prosperity, the growth rate turned positive from the previous quarter; the process industry benefited from the positive upstream capital expenditure, and the Q3 single-quarter revenue growth rate also maintained a good level.

       From the perspective of gross profit margin, the performance of most general equipment sub-sectors is relatively stable. Affected by the hysteresis effect of the price drop of raw materials, the adjustment of sales product structure, and the limited sales growth resulting in insufficient scale effect, the gross profit margin of some industries is short-term. Under pressure, and with the expected decline in commodity prices, the superimposed downstream market prosperity is expected to improve marginally, and the gross profit margin of sub-sectors may gradually recover.

       The downstream of general equipment corresponds to almost all manufacturing industries including automobiles, home appliances, electronics, food and beverage, etc., and its prosperity will fluctuate with the capital expenditure of the manufacturing industry. On the other hand, based on the import substitution of most domestic general-purpose equipment will continue to advance in the next 3-5 years, and the equipment replacement driven by industrial upgrading, the automation industry has its own cyclical operation. Taking typical machine tool products as an example, by sorting out the order and production data of a long time series, we found that the boom cycle of domestic general-purpose equipment is relatively significant, and a complete cycle is about 3.5 to 4 years. The industry inflection points reflected by different data are not the same, and the time deviation is within 6 months. Looking back, the general equipment cycle is expected to open an upward channel, superimposed on the increase in the localization rate brought about by the trend of independent control, and general equipment is expected to enter a new round of rapid growth.

       Benefit from domestic substitution of machine tools

       For this sector, the seller’s institutions judged that the arrival of the industry’s boom cycle is superimposed with domestic independent and controllable advancement, and the general equipment industry is expected to usher in a bottoming out. However, there are many general equipment subdivided industries, among which cutting tools and machine tools will be the first to benefit from economic recovery and domestic substitution.

       Machine tools are industrial master machines, and the industry's prosperity is closely related to the capital expenditure of the manufacturing industry. The short-term focus on the manufacturing industry's prosperity is gradually ushering in an upward inflection point. As an indispensable link in the production and processing of the manufacturing industry, machine tools have a wide range of downstream applications, including all manufacturing industries such as automobiles, general machinery, electronics, molds, aerospace, and military industries. They are essentially general industrial products and are affected by the capital expenditure of the manufacturing industry. Obviously, it presents certain periodic properties. From the perspective of the demand side, the current manufacturing demand shows a weak improvement and is still in the bottoming stage. According to the tracking of historical cycles and industry leading indicators, the inflection point of the manufacturing industry is gradually approaching, but the specific timing needs to be followed up to confirm. From a marginal point of view, last year's Q4 low base + policy loose credit drive, the growth rate of the Q4 sector is worth looking forward to.

       From the perspective of total volume, the machine tool industry presents cyclical fluctuations, and China has become a global machine tool powerhouse. According to MIR data, the consumption of metal processing machine tools in China in 2021 will be 184.7 billion yuan, of which the consumption of metal cutting and forming machine tools will be about 123.3 billion yuan and 61.4 billion yuan respectively. At the same time, China has developed into the world's largest machine tool producer and consumer. According to the data of the German Machine Tool Industry Association, the global machine tool output value in 2021 will be 70.9 billion euros, of which China's machine tool output value will be 21.814 billion euros, accounting for 30.8%. First, leading Germany and Japan by 18.1pct and 18.2pct respectively; at the same time, from the perspective of machine tool consumption, the global machine tool consumption in 2021 will be about 70.3 billion euros, of which China's machine tool consumption will be 23.588 billion euros, accounting for 34%, and the proportion of consumption will continue to increase , 21pct and 27pct ahead of the United States and Germany respectively. From the perspective of total volume, the domestic machine tool industry has entered a mature stage, with a huge market size, and both consumption and output value account for about one-third of the global share. Corresponding to the development stage of the machine tool industry, the machine tool industry may show a low-speed stable growth and cyclical fluctuations in the future from a total perspective. The medium-to-long-term industry is more likely to come from structural growth opportunities in the sector. One is high-end products, and the other is the import of medium and high-end machine tools substitute.

       From the perspective of investment, there is a big gap between the income, production and sales of domestic machine tool companies and overseas leaders. Therefore, investors can choose companies with large domestic alternatives, strong technical capabilities, rapid revenue growth, and continuous release of production capacity. Comparing DMG Mori Seiki with domestic C company, DMG Mori Seiki will achieve a revenue of 21.945 billion yuan in 2021, with a global sales volume of 11,574 units; while C company’s revenue in 2021 will be 254 million yuan, with a sales volume of 126 units, and will grow in the future. Considerable space. The latter has maintained a revenue growth rate of around 30% in the past four years. It is a leading manufacturer of CNC machine tools in China, and its performance is more flexible with the release of production capacity.

       Industrial knives gradually catch up with Japanese and Korean products

       Specifically, industrial knives are consumables and are the first to benefit from industrial replenishment. In recent years, the demand for domestic knives has been strong, and the process of domestic substitution of industrial knives continues to advance. According to the data of China Machine Tool Industry Association, since 2015, my country's cutting tool import dependence has decreased year by year, from 37.2% in that year to 28.9% in 2021. The technological iteration of cutting tool products is not fast. Domestic enterprises have grasped the advantage of latecomer. Now is the time window for domestic substitution. Investors can pay attention to related companies with a low proportion of localization, high technical level, and high gross profit margin, such as Company A in the sector has a high level of technology and high investment in research and development. The compound growth rate of net profit in the past five years has exceeded 30%, and the operating gross profit margin has continued to maintain at around 30%.

       Another example is Company B. In the last four years except last year, the average growth rate of net profit in the remaining three years exceeded 40%. The company's mid-to-high-end knives have excellent performance, gradually catching up with Japanese and Korean products, and have high cost performance. They will benefit from domestic substitution in the future.

       The cost of raw materials has decreased, and the gross profit margin of the machinery industry has improved

       From historical experience, a new inventory replenishment cycle may come in the second half of this year. Against the background of my country's economic recovery, the just-released January Manufacturing Purchasing Managers' Index (PMI) was 50.1%, an increase of 3.1 percentage points from the previous month, rising above the critical point, and the level of manufacturing prosperity rebounded significantly.

       Benefiting from the decline in upstream raw material prices, the gross profit margin of the CITIC machinery industry began to rebound significantly last year, and the pressure on the cost side was greatly eased, reflecting a relatively positive signal. The machinery industry is also greatly affected by the cost of raw materials. In its operating cost composition, raw materials account for more than 60% on average. For example, construction machinery leaders Sany Heavy Industry, Xugong Machinery and other raw materials account for more than 60% of revenue.

       The data shows that the gross profit margin of CITIC machinery industry in the third quarter of last year was 22.48%, which has gradually recovered from the previous quarter. This reflects that with the decline in raw material prices, the gross profit margin of the machinery industry has shown obvious signs of improvement quarter by quarter, and the pressure on the cost side has gradually eased. However, due to the weak economy last year, the gross profit margin of the machinery industry has not yet returned to the level of 2019.

       At the same time, the recent annual report forecasts of some listed companies in the machinery industry are more beautiful. For example, Shantui shares are expected to achieve a net profit of 605 million to 682 million yuan last year, a year-on-year increase of 255% to 300%; Anhui Heli is expected to increase its net profit last year by 40% to 52% year-on-year; Zhejiang Dingli expects its net profit to increase by 39% to 39% year-on-year 50%.

       However, compared with other industries, the performance of the machinery and equipment industry in 2022 is relatively weak, ranking 21st among the 31 Shenwan first-level industries, and the ranking is relatively low. In terms of valuation, from a horizontal perspective, the dynamic price-earnings ratio of the machinery and equipment industry is 24.2 times, which is at the median level in the Shenwan industry. From a vertical perspective, the valuation of the machinery industry is at a low point. From the perspective of various sub-sectors, the price-earnings ratio of rail transit equipment and construction machinery is the lowest, and this happens to be the opportunity for industry recovery and valuation restoration this year.

       In addition to domestic recovery, the machinery industry is also vigorously expanding overseas markets. Last year, the overseas market of construction machinery continued to improve, and the sales volume continued to grow steadily. It is expected that the overseas market will maintain a rapid growth trend this year. According to data from the association, my country's excavator exports continued to grow steadily last year. 26 excavator manufacturers exported a total of 109,457 excavators, a year-on-year increase of 59.8%. From the perspective of enterprises, Sany Heavy Industry, Zoomlion and other construction machinery companies achieved outstanding results in overseas revenue last year. In the first three quarters, Sany achieved international sales revenue of 25.88 billion yuan, a year-on-year increase of 43.7%, an increase of 10.8 percentage points from the first half of the year.

       Since the end of last year, with the optimization and adjustment of prevention and control policies, the increase of financial institutions’ support for real estate, and the issuance of special bond quotas in advance in 2023, there have been continuous positive policies, the expansion of manufacturing capacity is still strong, and the recovery of corporate profits is expected to accelerate. . Therefore, in 2023, the bottoming out of the manufacturing industry is a high-probability event. The machinery industry is expected to usher in a wave of valuation repairs. An increase in value leads to an increase in valuation.

       (This article is for reference only and does not represent any investment advice from us. For relevant information, please refer to the original report.)

Source: Securities Market Red Weekly, Recognized, Xianji.com

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