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Machinery | CHINA Machinery | CHINA INDUSTRIALS NOMURA INTERNATIONAL (HK) LIMITED Yankun Hou +852 2252 6234 [email protected] Roger Sher (Researcher) +852 2252 1550 [email protected] BULLISH ANCHOR REPORT No barriers Stocks for action We dispute the consensus view that the slowing in fixed asset investment (FAI) growth Our top picks in the Asia-Pacific is negative for the Chinese machinery industry; we accept there has to be a natural construction machinery universe are slowdown after 60%-plus volume growth in 2010 (exaggerated by the general recovery SANY Heavy, Zoomlion, and Komatsu, from the credit crisis and policy-driven investment spending), but see no barriers to our all rated BUY. healthy 12% growth forecast for 2011F. We also recognise that investor interest in the Stock Rating Price PT sector may be somewhat weak leading up to expected negative y-y growth in March Zoomlion (000157 CH) BUY 14.8 18* 2011 (high base and seasonality), particularly given the background of tight monetary SANY Heavy (600031 CH) BUY 21.5 26* policy in 1Q. Still, we think rising labour costs in the industrial economy will refresh Lonking (3339 HK) NEUTRAL 4.87 5.3* investor interest in Chinese machinery manufacturing from 2Q, and we see pockets of Kobe Steel (5406 JP) BUY 206 300 Toshiba Machine (6104 JP) BUY 390 470 value for longer-term investors now. Our recommendations also cross the investability Nabtesco (6268 JP) BUY 1,596 1,870 barrier; even though many Chinese players only have A-share listings, we see access Komatsu (6301 JP) BUY 2,427 3,000* to the story through the listed Japanese manufacturers. Our top BUYs are SANY Hitachi Construction (6305 JP) NEUTRAL 1,973 2,160* Kawasaki Heavy (7012 JP) BUY 272 310 Heavy, Zoomlion and Komatsu, with exposure to excavators and concrete machinery, Volvo (VOLVB SS) NEUTRAL 109.3 96 the fastest-growing segments in 2011F on our estimates (both 20% vs 10% for cranes Upgrading rating from Neutral; * lifting PT and flat for wheel loaders). We also recommend BUY on hydraulics suppliers Prices as of 10 December, 2010; all prices in local currency Kawasaki Heavy, Toshiba Machine and Nabtesco, given strong demand and their Analysts technological competitiveness. Meanwhile, we think Hitachi Construction Machinery Yankun Hou (HK) (NEUTRAL) will benefit from strong excavator growth. +852 2252 6234 [email protected] Beyond the base effect Katsushi Saito (Japan) +81 3 6703 1160 [email protected] Secular growth drivers Roger Sher (Researcher, HK) Prefer excavators for investment; play China through Japan +852 2252 1550 [email protected] Wenjie Ge (Japan) Nomura Anchor Reports examine the key themes and value drivers that underpin our +81 3 6703 1168 sector views and stock recommendations for the next 6 to 12 months. [email protected] Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 129 to 132. Nomura 16 December 2010 Machinery | CHINA INDUSTRIALS NOMURA INTERNATIONAL (HK) LIMITED Yankun Hou +852 2252 6234 [email protected] Roger Sher (Researcher) +852 2252 1550 [email protected] BULLISH Action Stocks for action We believe rising labour costs, an improving product mix and gradually increasing Our top picks in the Asia-Pacific pricing power will bring the limelight back to strong growth in the machinery sector. We construction machinery universe are would advise investors to focus on excavators and concrete machinery: these should SANY Heavy, Zoomlion, and Komatsu, be 2011’s fastest growing segments. SANY, Zoomlion and Komatsu are our top BUYs all rated BUY. on this basis. With listed China exposure still limited to HKSE, we also recommend Japanese suppliers Kawasaki Heavy Industries, Toshiba Machine and Nabtesco. Stock Rating Price PT Zoomlion (000157 CH) BUY 14.8 18* Catalysts SANY Heavy (600031 CH) BUY 21.5 26* Lonking (3339 HK) NEUTRAL 4.87 5.3* Possible negative growth in March 2011 could hurt share prices, while strong Kobe Steel (5406 JP) BUY 206 300 volume growth from 2Q and onwards should support share-price appreciation. Toshiba Machine (6104 JP) BUY 390 470 Nabtesco (6268 JP) BUY 1,596 1,870 Anchor themes Komatsu (6301 JP) BUY 2,427 3,000* We expect rising mechanisation in China as a consequence of labour cost increases. Hitachi Construction (6305 JP) NEUTRAL 1,973 2,160* Kawasaki Heavy (7012 JP) BUY 272 310 Chinese construction machinery makers will likely become more competitive due to Volvo (VOLVB SS) NEUTRAL 109.3 96 strong growth of the domestic market, improving product quality and technology level. Upgrading rating from Neutral; * lifting PT Prices as of 10 December, 2010; all prices in local currency No barriers Analysts Yankun Hou (HK) Beyond the base effect +852 2252 6234 After 60%-plus volume growth in 2010, we forecast machinery will increase 12% y- [email protected] y in 2011. The slowing growth rate is mainly due to: 1) a high base effect and Katsushi Saito (Japan) 2) the peaking of new projects. We believe the industry might witness negative y-y +81 3 6703 1160 growth in March 2011 owing to a high base effect and seasonality. Coupled with a [email protected] tight monetary policy in 1Q, we think the share-price performance of Chinese machinery makers might face downward pressure during this period. However, we Roger Sher (Researcher, HK) think increasing attention to labour cost/Lewis effect will refresh investor interest +852 2252 1550 from 2Q, but we underscore that buying on dips is not a bad way into our BUYs [email protected] here. Wenjie Ge (Japan) +81 3 6703 1168 Secular growth drivers [email protected] Contrary to the consensus view that machinery companies have passed the golden investment period due to the slowing growth rate of FAI investment over the long Yuji Matsumoto (Japan) term, we are still positive on the long-term growth potential of China’s machinery +81 3 6703 1220 industry, thanks to: 1) improving mechanisation rate due to rising labour cost and [email protected] safety/environmental requirements; 2) improving product mix; 3) increasing pricing trend due to better product quality and brand image, and 4) export growth potential. Ryo Tazaki (Japan) In the next five years, we believe Chinese machinery makers will likely become +81 3 6703 1117 competitive in the global market, backed by continuous R&D investment. [email protected] Shigeki Okazaki (Japan) Prefer excavators for investment; play China through Japan +81 3 6703 1170 Of the different types of machinery, we believe excavators will lead in 2011, with [email protected] 20% y-y growth to 194,400 units, while concrete machinery will be up 20% y-y, cranes up 10% and wheel loaders should be flattish y-y. SANY, Zoomlion and Alexis Albert (UK) Komatsu are our top BUYs on this basis. We believe SANY and Zoomlion could +44 20 710 21781 potentially emerge as global players due to their long-term commitment to product [email protected] quality, aftermarket service and R&D investment. We believe Komatsu, HCM and Kobe Steel will benefit from strong excavator growth in China in both the short and long term. Given their strong demand and technological competitiveness on hydraulic equipment, we recommend accumulating hydraulic suppliers Kawasaki Heavy Industries, Toshiba Machine and Nabtesco. Nomura 1 16 December 2010 Machinery | China Yankun Hou Contents Executive summary 4 Valuation 6 Moderate growth expected in 2011F 14 Excavator to lead growth in 2011 15 Infrastructure construction: diminishing impact from railway and highway investment 16 Mining industry: recovering from consolidation 18 Properties development: public housing drives growth 18 Long term: not just an FAI story 20 Rising mechanisation rates 21 Upgrading product mix 23 Overseas expansion 24 Excavators: digging gold 25 China accounted for 50% of global excavator demand in 9M10 25 Competitive landscape in China 26 Industry growth forecasts 28 Hydraulic equipment: mainly reliant on Japanese suppliers 30 Concrete machinery: cementing a bright future 40 Growth drivers: property, infrastructure, and mechanisation rate 41 Industry growth forecasts 42 Upgrading product mix 43 Profitability analysis 43 Technical: Concrete machinery 45 Construction crane: lifting to new heights 46 Growth driver: industrials & energy capex, infrastructure and property investment 47 Industry growth forecasts 48 Shifting to upper-end 49 Profitability analysis 50 Technical: Construction cranes 51 Wheel loaders: glories in yesterday 52 Growth drivers: mining and replacement demand 53 Industry growth forecasts 54 Profitability analysis 55 Appendix: Lewisian turning point and China’s competitiveness 57 China heading toward the “middle-income trap”? 57 How to avoid the trap? 57 Productivity basket: Bullish for Chinese capital goods companies 58 Nomura 2 16 December 2010 Machinery | China Yankun Hou Latest company views Zoomlion Heavy 59 Sany Heavy International 69 Lonking Holdings 75 Kobe Steel 81 Toshiba Machine 87 Nabtesco Corp 93 Komatsu 98 Hitachi Construction Machinery 108 Kawasaki Heavy Industries 116 Volvo B 124 Nomura 3 16 December 2010 Machinery | China Yankun Hou Valuation Executive summary China’s construction machinery market has experienced robust growth in the past Not hard to see China taking a decade with a CAGR of 23%; it became an RMB300bn sales industry in 2009 due to quarter of the global market in strong FAI and GDP growth. In 2010 YTD, the industry has grown about 60%-plus, in construction machinery further out terms of sales volume. China has become one of the largest markets globally, and we estimate China could account for about 25% of global market share this year, in terms of sales revenue. We estimate that the market size of major construction machinery (including excavators, wheel loaders / bulldozers, road machinery, construction cranes, concrete machinery and forklifts) could reach about RMB280bn in 2010, with excavators becoming the largest segment with about RMB90bn sales revenue.
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