We believe the timely issuance of local government bonds since early this year will continue to lend strong support to the infrastructure growth and machinery demand going forward. In addition, strict measures on emission control and market share gain remain the key positive factors for the industry leaders. We revise up our HDT and excavator sales projection in 2020E-21E. Our key BUY calls are Sinotruk (3808 HK, TP: HK$26, Top pick), Jiangsu Hengli (601100 CH, TP: RMB93), SANY Heavy (600031 CH, TP: RMB24.7) and Weichai Power (2338 HK, TP: HK$18.6; 000338 CH, TP: RMB16.6). Besides, we continue to like the long-term structural growth story of Zhejiang Dingli (603338 CH, TP: RMB81).
- Local government bond issuance on track. The amount of local government bond issued surged 3.3x YoY to RMB1.3tn in May. In 5M20, a total amount of RMB3.2tn were raised, up 65% YoY. Excluding bonds for refinancing, the amount of new bond issuance reached RMB2.7tn in 5M20, representing ~95% of the quota assigned by the Ministry of Finance. The investment mainly covers the infrastructure projects. In May, infrastructure FAI grew 10.9% YoY, accelerated from 4.8% in Apr. We expect the momentum to continue.
- Higher HDT sales forecast. We expect the demand for HDT will be well supported by the infrastructure spending, stringent measures on anti-overloading, and the ongoing elimination of NES III trucks. We revise up our 2020E/21E HDT sales forecast by 16%/8% to 1.36mn/1.27mn units. We expect a 15% YoY sales growth in Jun-Dec 2020, after a 17% YoY growth in 5M20, which will take the full year growth to 16% YoY. We forecast the HDT sales to drop 7% YoY in 2021E and stabilize in 2022E. We believe our assumption is not aggressive given that the GDP value per operating HDT will remain stable at RMB12mn. Such figure will be similar to the average over the past few years, and higher than the figure of RMB10mn in 2010 when the sector started seeing overcapacity.
- Higher excavator sales forecast. Excavator is highly exposed to infrastructure spending. We revise up our excavator sales forecast in 2020E/2021E by 4%. We expect sale volume growth in Jun-Dec 2020E to reach 15%, taking the full year growth to 17%. We expect a 5% growth in 2021E, driven by continuous elimination of low NES models, replacement of labour and substitution of wheel loaders. We estimate every 1% increase in infrastructure FAI will drive 2.5% of annual excavator sales.
- Major catalysts: Based on our check, we believe the industry sales figure of HDT and excavator in Jun (to be released in the first and second week of Jul, respectively) will remain strong given the strong infrastructure spending and low base effect. Following that, we expect earnings surprise in 2Q20E, driven by strong operating leverage.
