According to the latest figures released by CCMA, the sales volume of excavators by 25 major producers in China in Dec grew 25.8% YoY to 20,155 units, representing the highest growth rate since Mar. The figures suggested a robust downstream demand and reaffirmed our positive stance on the sector. Our recent check also indicates that demand will likely stay strong in the near term. Reiterate BUY on SANY Heavy (600031 CH, TP: RMB19, Top pick) and Jiangsu Hengli (601100 CH, TP: RMB54). Maintain HOLD on Lonking (3339 HK, TP: HK$1.90) on sluggish wheel loader demand.
- Excavator sales growth accelerated in Dec. The sales growth in Dec accelerated to 25.8% from 11.5% in Oct and 21.7% in Nov. Sales volume in China grew 21% YoY to 17,238 units while export volume surged 67% YoY to 2,917 units. For the full year in 2019, the sales volume of excavator grew 16% YoY to ~236k units, slightly above our 15% growth projection.
- Wheel loader sales remained sluggish. The sales volume of wheel loader (by 22 major producers in China) slightly increased 3.7% YoY to 10,200 units in Dec (China: +0.6% to 7,591 units; Export: +14% to 2,609 units). In 2019, sales of wheel loaders increased 4% YoY to ~124k units, in line with our full year growth estimate of 4%.
- Favourable government policy to support the upcoming infrastructure spending. In 2019, the quota of local government special bonds was RMB2.15tn (Net issuance in 11M19: RMB2.06tn). According to CMBIS Economic Research, given that infrastructure spending is a measure to stabilize the economy, the quota of special bonds issuance will reach RMB3.35tn in 2020E. CMBIS Economic Research expects infrastructure spending growth (excluding power) will reach 5% under the base case scenario (vs 4% in 11M19).
- Positive on 2020 outlook. We forecast China excavator sales to grow 10% YoY in 2020E, driven by several positive factors: (1) strict environmental policies to eliminate polluting models, (2) implementation of strict National Emission Standard (NES) on the new sales, (3) favourable government policies to support infrastructure, (4) substitution of wheel loader and (5) replacement of labor force. Our analysis assumes 50% of the demand will come from replacement demand in 2020E.
