We are staying positive on China construction machinery and HDT sector in spite of the volatile market as result of the pandemic of COVID-19 across the globe, as major players’ earnings are more driven by China market. On the other hand, while CMBI Economic Research revised down China GDP forecast to 4.5% from 5.9% for this year, we expect the impact on construction machinery sector to be limited for the full year, as a strong demand recovery in 2Q driven by accelerating construction activities will cover the lost sales in 1Q (traditional peak season). We prefer names with high exposure to China infrastructure, such as SANY Heavy (600031 CH, BUY) and Jiangsu Hengli (601100 CH, BUY) and Sinotruk (3808 HK, BUY), due to relatively higher earnings visibility.
- Near-term pressure for companies with relatively high exposure in the US and Europe. The rising COVID-19 cases will likely exert pressure on the overseas demand in the foreseeable future. Zhejiang Dingli (603338 CH, BUY) has a high portion of revenue generated from the oversea (49% in 1H19), with a focus on both the US and Europe. CIMC Vehicles (1839 HK, BUY) generated 40% revenue from the overseas in 1H19. Of the overseas revenue, 88% came from the US and Europe. For Weichai Power (2338 HK / 000338, BUY), 40% of total revenue (in 1H19) was generated from the overseas market but came mainly from KION (KGX GR) in which Weichai has 45% equity interest. Therefore the attributable revenue from overseas is ~20% based on our calculation.
- Decline in overseas stock market may offer opportunities for Chinese players. Chinese machinery/component makers such as Weichai and SANY Int’l (631 HK, BUY) have always been looking for acquisition opportunities in the overseas. A decline in overseas valuation may offer excellent opportunities for bargain hunting.
- Key catalyst: Construction machinery and HDT demand set for recovery in 2Q. With COVID-19 under control, economic activities are picking up in China. CMBI Economic Research forecast a 3.7% YoY decline of GDP in 1Q20E, followed by 5.5%/8.0% growth in 2Q/3Q (report). While China excavator and HDT sales in 2M20 dropped 37% and 12% YoY, respectively, we expect demand to gradually improve in Mar and the peak season will happen in 2Q, driven by infrastructure construction recovery.
