We believe Chinese government’s strong determination to boost infrastructure spending will further extend the upcycle of the construction machinery sector. Speedy issuance of special bond issuance in 1Q, significant improvement in contractors’ cash flow and fast recovery of machinery utilization hours are all favourable factors to boost upcoming machinery demand. We expect strong demand in 2Q, evidenced by strong hydraulic component demand and ASP hike on excavator and concrete machinery. We continue to prefer names with high exposure to domestic infrastructure. We lifted earnings forecast and TP for SANY Heavy (600031 CH, BUY, TP: RMB23.5, Top pick) and Jiangsu Hengli (601100 CH, BUY, TP: RMB85), due to higher assumptions on excavator demand. We also like laggard plays such as Sinotruk (3808 HK, BUY, TP: HK$20.5) and Zoomlion (1157 HK, BUY, TP: HK$6.90; 000157 CH, TP: RMB6.85).
- Special bond issuance +54% YoY in 1Q20. According to MoF, a total of RMB1.1trn was raised from special bond issuance in 1Q, with average duration reaching 14.5 years, much higher than the average of nine years in 2019. From the viewpoint of infrastructure investment, the increase in duration can better match the long payback period of infrastructure and municipal projects. We expect the full year net issuance to exceed RMB3tn, up from RMB2.05tn in 2019.
- Significant improvement in contractors’ cash flow bodes well for upcoming investment on the back of strong backlog. CRCC (1186 HK, NR) and CRG (390 HK, NR) reported operating cash inflow of RMB40bn and RMB22bn, respectively, surging 6.3x and 86% YoY, in 2019. Such significant improvement, together with their accelerated order intake growth since 2Q19, will likely drive strong project execution this year.
- Lifted forecast on excavator demand in 2020E-21E. According to CCMA, the sales volume of excavator by 25 major producers in Mar surged 4.3x MoM (or 12% YoY) to 49,408 units. We raise our 2020E/21E excavator sales growth forecast from 10%/0% to 12%/5%. We believe our full year growth forecast for this year is achievable as the implied growth of 25% between Apr and Dec will be well-supported by infrastructure spending. We estimate every 1% increase in China infrastructure FAI will boost excavator demand by 6.5k units, or ~2.5% incremental growth to our estimate in 2020E.
- SANY Heavy – ASP hike suggests strong pricing power. SANY raised ASP of concrete pump trucks by 5-10% last week, due to strong downstream demand and tight supply of imported chassis. Over the weekend, SANY raised ASP of excavator as well (5%/10% for large to medium-size / small-size excavator). This suggests strong pricing power to protect the Company’s gross margin. We raise SANY Heavy’s 2020E/21E earnings forecast by 3%/6% after incorporating our new forecast on excavator into our model.
- Jiangsu Hengli – Strong order intakes. We understand that Hengli’s order intake for cylinders (for Apr and May) is expected to surge 50% YoY, while that for pump & valves growth will likely exceed 50% YoY, suggesting robust demand in 2Q20E. We raise our earnings forecast in 2020E/21E by 6%/8%, after revising up our projection on both hydraulic cylinders, pump & valves.
