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Real estate slowdown of construction machinery will face the fourth quarter decline

    Ruoshi machinery industry underperformed the market price, drop the top construction machinery, import tax and VAT components bullish factors.

    Investment Highlights:

    Ruoshi machinery industry market underperformed the market. Q3 machinery sector fell 31.46%, a drop higher than the market average, one strong cycle of shipbuilding,booster cables construction machinery biggest decliners.

    Q4 difficult macroeconomic environment improved. 7-8 month data showed industrial production and investment decline,battery clip particularly decline in real estate investment and rapid growth is expected in Q4 machinery industry is facing difficult macroeconomic environment improved.

    Positive impact of local fiscal policy. Imported parts and components transferred the state capital tax operating difficulties; VAT equipment needs arising from the restructuring of about 330 billion yuan;tow rope based on past experience, an active fiscal policy is difficult to change the operation of the machinery industry trends, not to mention the current real estate investment has gross domestic investment in fixed assets an important part.

    4-quarter demand for the machinery industry will accelerate the growth or decline. Taking these factors,ratchet tie dowm we believe that 4-quarter growth in demand for machinery industry may face accelerating downturn, being away can be described as high steel prices, low demand usher.

    Railways, power transmission and the growth of solar energy equipment identified. Sub-industry, railway equipment, power transmission equipment, and determine the future growth of solar power generation equipment, and engineering machinery, machine tools and heavy mining machinery will continue the trend of the economy turn down.

    Risk:

    Suddenly the credit policy was relaxed. If the domestic central bank for the maintenance of economic and financial safety, sudden sharp easing of credit, the domestic investment and demand for machinery and equipment will be better than expected.

    Evaluation and rating adjustments.

    Machinery industry neutral rating. In the economic down cycle, the machinery industry will be down the economy, maintaining a neutral rating. Electrical Equipment sub-industry to maintain overweight rating; railway equipment despite the clear growth in demand, but the high valuation of the leading companies, to give a neutral rating; engineering machinery, machine tools and heavy mining machinery to maintain a neutral rating. Tianwei change recommended stocks, high level of electrical, Kunming Machine Tool, and Dongfang Electric, but also drew the attention of investors to avoid systemic risk.

    First, the machinery industry in 2008 continued to weaken in Q3.

    Since June 15, 2008 -2008 period on September 12 (the same below), calculated by the weighted average market capitalization of the Shanghai and Shenzhen 300 Index fell 28.33%, 31.46% Machinery plate fell, fell more than the market average, we second half of 2008 the policy on maintaining a neutral rating, now seems to determine the correct stage.

    (A) 3 quarter led by strong periodic sub-sectors continued.

    In the past quarter, we focus on the machinery industry, 7 sub-industries, only the heavy machinery and machine tools, lesser than the market average, the other sub-sectors recorded a decrease of 5 higher than the market average. Among them, the shipbuilding industry fell 43.7%, is home for 3 consecutive quarters of decline in the forefront of shipbuilding plate so that we fully appreciate the continued leading the decline to what is called the "cycle industry", what is a "bear market is not made at the end"; us strategy report in the second half have given a neutral rating of construction equipment and heavy mining machinery, a drop also exceeded the average level of market and industry; we also offer a neutral rating of the machine tool market and the decline was slightly less than the industry average; and we are more optimistic about 2 quarterly drop in the electrical equipment is more than the market average, but less than the industry average, as shown in Figure 1. It seems that we are in the second half strategy report, the pair to determine the industry there were some deviations, the accuracy was 50%.

    (B) 3-quarter part of a strong stock Budie.

    In the past quarter, we reported in Q3 key strategy recommended three stocks, Tianwei change down 45.04%, falling well above the average level of market and industry can be said to have failed miserably, there is a clear The strong stock Budie features; Kunming Machine Tool fell 31.78%, also slightly decline over the industry average; high level of electrical down 20.72%, down less than the industry and the market average. Taking into account the overall trend is down machinery industry, we have 3 quarterly strategy report has been a significant reduction in the number of recommended stocks, and even then, was not spared, we recommend three stocks fell across the board only, and only one less than the market decline average accuracy rate was only 33.3%. Our stock research work seems to be strengthened.

    Second, the machinery industry in Q4 2008 demand growth will accelerate down.

    (A) 3-quarter rebound in the name of investment, industrial growth dropped significantly.

    According to Bureau of Statistics released data in the first 8 months of 2008, before August 2008 the industrial enterprises above designated size added value up 12.8% over the three previous decline of 3.2 percentage points. Within the industry, heavy industry grew 13.2%, compared with 3 months ago fell 3.8 percentage points. Fixed assets investment grew 27.4%, compared with 3 months ago increase of 1.8 percentage points, if you exclude the impact of rising prices of investment goods, I believe we see the actual growth rate of investment should be a downward trend. See Figure 2. Of course some people would say, the Beijing Olympic Games to within 200 kilometers around the factories and construction sites shutdown, which affected three quarters of some of the macroeconomic data. However, we see that far away from Beijing, Jiangsu, Zhejiang and Guangdong, the industrial added value growth rate also declined.

    (B) 3 quarter credit tightening trend has not changed.

    Although since the 2 quarter, came on the market from time to time the voice of the central bank may ease monetary policy, but we see the actual situation is not the case, forced to inflationary pressures, monetary policy, the tone is still far from tight. Up to 8, the end of the loan balance of financial institutions 29.3 million, an increase of 14.29%, the growth rate than the 5 end of the month and down 0.57 percentage points.
    (C) 3-quarter demand for the machinery industry both inside and outside the drop

    According to the China Machinery Industry Federation, the data from January to August 2008, the national machinery industry total output value of 5.76 trillion yuan sales, an increase of 28.54%, total exports of 0.88 trillion yuan, an increase of 22.1%. Sales and export growth from January to August compared with 3 months were down 1.81 percent before and 3.1 percentage points, showing both internal and external demand growth down the unfavorable situation.

    (Iv) policy support of the local.

    1, import parts practical difficulties in tax breaks.

    Ministry of Finance recently issued a document, to adjust some equipment manufacturing equipment and key parts import tariff and import VAT front-end retreat, the tax rebates as a state investment deal, became the state capital. Specifically including super / ultra high voltage power transmission equipment, large-scale petrochemical facilities, large-scale coal-chemical equipment, the implementation time is January 1, 2008. I remember in 2007 the Ministry of Finance has issued a similar machinery for the textile policy, but we have seen since the second half of 2007, with the operating conditions of the domestic textile and apparel industry declined, the business performance of the textile machinery enterprises also saw a decline. That the policy did not change the trend of running industry. Furthermore, we learned from the enterprise is, the state capital transfer tax refund the actual operation is very troublesome.

    2, the financial subsidies to wind power equipment manufacturers limited.

    August, the Ministry of Finance also announced the implementation of the "wind power equipment industry Interim Measures on Management of special funds", the approach proposed, the first eligible for support given to 50 600 MW class wind turbine / kW subsidy, machine and parts half and half. Condition that the specialized certification body accredited by the prototype, the first of 50 wind turbine industry has sales, installation and grid electricity. Currently meet this condition of the listed company may only machine manufacturers Goldwind and Dongfang Electric, each will receive only 300 yuan subsidy / kW * 50 sets * 1500kW / units = 2250 million, respectively, two companies can bring 2.25 cents and 2.75 cents of earnings, the effect is very limited.

    3, the value-added tax, or equipment will stimulate demand.

    Market speculation that the Government may be value-added tax in full swing to promote the country. Preliminary estimates, value-added tax will allow businesses to save money around 1,500 billion. Assuming all companies will save money for the purchase of equipment, then this new demand brought about 1,500 billion is roughly equivalent to the machinery industry sales value in 2008 (excluding motor vehicles and parts) of 2.35% or so. If you take into account the investment in fixed assets investment in equipment accounts for only less than 22%, and then assume that all the enterprises to save the 150 billion yuan for the expanded reproduction, the new equipment purchase amounted to only 150 billion * 0.22 = 330 billion, about a considerable machinery industry in 2008, sales value (excluding motor vehicles and parts) 0.51%% or so.

    (E) 4-quarter domestic demand is likely to accelerate down the machinery industry.

    4-quarter outlook, our macro analyst to determine the major domestic economic indicators will continue to decline, the domestic price, oil prices are likely to adjust downward trend in inflation is not stable, relaxed credit market may still only look good. Therefore, we maintain the overall demand for machinery industry in 2008 down judgments. And we expected that with the acceleration of investment down the real estate industry, 4-quarter demand for the machinery industry will also be accelerating the trend of decline. According to our medium-term strategy report in 2008 made in correlation analysis, assuming annual growth rate of domestic investment of about 24% under the prerequisite of the year is expected machinery industry output growth of about 27% compared to August growth down 1.5 percentage points.

    Third, the railway equipment, power transmission and solar grow more determined.

    (A) Railway equipment: investment may exceed expectations.

    Ministry of Railways, according to data from January to August 2008, the Ministry of Railways 169.804 billion yuan in fixed asset investment, an increase of 50.6%. According to the Ministry of Railways beginning of the project is scheduled for completion in 2008 will invest 300 billion yuan the year, an increase of 26.9%. Recent news that the Ministry of Railways plans to increase the amount of investment in 2009 to 4,000 billion yuan, up 33.3%. As a result, the railway equipment industry, machinery industry will be the future growth of the sub-sector is relatively established industries.

    (B) Electrical equipment: power steady increase investment in solar energy demand is robust.

    1, the power investment by the power supply to the grid tilt.

    According to CEC information, from January to July this year, the domestic power infrastructure investment was 159.946 billion yuan, the new electric power installed capacity of 41,122,500 kilowatts, down 6.1817 million kilowatts; power infrastructure investment was 139.705 billion yuan, the China Network Corporation Added 110kV and above power transformation capacity of 97.93 million kVA, an increase of 74.62%. CEC power infrastructure investment is expected to be completed this year is about 3,000 billion yuan, and 304.15 billion yuan in 2007 basically the same, the new electric power capacity of about 90 million kilowatts, representing about 10% decline in 2007. Power infrastructure investment is expected to be completed this year is about 3,000 billion yuan, with 2007 growth of 22.39% compared to 245.14 billion yuan. The first time this year, investment in infrastructure, power grid and power infrastructure investment is expected to line, indicating that the construction of short-term domestic supply has peaked, the future power grid construction will be tilted. Infrastructure investment is expected in 2009 is expected to exceed the power grid infrastructure investment, growth in demand for power transmission equipment is relatively OK. See Figure 6.

    2, many governments support the solar energy industry.

    Despite the recent decline in international oil prices, but we note that the needs of the global PV market has not been too adversely affected. Germany and Spain before the market because of subsidies for policy changes, the market worried about the global PV market in 2009 may be adversely impact demand. But recently, some good news came gradually, more and more countries to join the ranks of subsidies, so that our future growth in demand for the global PV market confidence shown in Table 1. We expect the global PV market in 2008 will reach 50% of demand growth over the next 2 years is also expected to maintain a growth rate of more than 40%.

    (C) Construction machinery: the proactive fiscal policy difficult to credit the property market slump.

    Machinery Industry Federation, according to data from January to August 2008, the domestic construction machinery industry sales value was 140.555 billion yuan, an increase of 45.6%, of which export value of 144 billion yuan, accounting for 10.24%, an increase of 73.47%. From a trend point of view, 2-3 quarter of this year, although the construction machinery industry over a quarter of the growth rate has dropped slightly, but remained above 40%.

    Some investors expect the proactive fiscal policy and the post-quake reconstruction will boost the demand for construction machinery. We judge this boost will be very limited, because the current real estate construction has become a major demand for construction machinery users. The first half of 2008, for example, several major downstream users of construction machinery investment as follows: real estate investment 1.5049 trillion yuan, 80.8 billion yuan railway investment, investment of 257.7 billion yuan road, water, environment and public infrastructure investment 460.5 billion yuan. In a number of real estate investment accounted for 65.31%. Accordingly, we judge, with the real estate industry, the rapid investment growth down, 4th quarter of this year and the first half of 2009, construction machinery sales volume growth will rapidly decline.
    Machinery Industry Federation, according to data from January to August 2008, the domestic machine tool industry in sales value was 240.834 billion yuan, an increase of 33.28%, of which export value was 25.297 billion yuan, accounting for 10.5%, an increase of 19.41%. From a trend point of view, 2-3 quarter of this year, showing a growth rate of the machine tool industry, the gradual downward trend. From the product point of view, the main products of CNC machine tools production growth also showed a gradual decline. We judge the future, as the growth rate of domestic investment continued to decline, the machine will continue the downward trend growth rate.

    (E) heavy mining machinery: a reflection of the economic cycle lags behind.

    Machinery Industry Federation, according to data from January to August 2008, the domestic sales of heavy mining machinery industry output value was 301.771 billion yuan, an increase of 36.41%, of which export value was 42.887 billion yuan, accounting for 14.21%, an increase of 31.39%. From a trend point of view, 2-3 quarter of this year, heavy mining machinery remained stable at a relatively high growth rate. Heavy mining machinery in the production cycle is relatively long, the response to the economic cycle than the engineering machinery and machine tools to lag some, but we believe that with the deepening of domestic economic adjustment, the future we will see a growth rate of the drop heavy mining machinery . In fact, as far as we know, business has been better than the previous two years orders, which represent the product output growth has been lifting equipment under the same period last year to a new level.

    Summary: In summary, we believe that the future is difficult to change the proactive fiscal policy downward trend in the machinery industry, sub industry, railway equipment, power transmission equipment and new energy to determine the relative growth, and construction machinery and machine tools are followed by a downward cycle, heavy mining machinery will enter the next down cycle.

    Fourth, the investment rating and stock recommendations.

    Given the above analysis, we maintain a neutral rating of the whole machinery industry; maintenance of electrical equipment Outperform rating; machine tools, construction machinery and heavy mining machinery neutral rating; railway equipment to determine the future growth though, but we think one of the representatives of China South Locomotive Company the current stock price already reflected the expected future growth and, therefore, to give a neutral rating.

    Continuing through pre-market adjustments, valuations and valuation structure has undergone great changes, so we took into account the growth and the valuation of stock level, re-investment rating on the stock have been adjusted, see Table 2. Stock details, see the relevant report.
 

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