China Construction Machinery Monthly:High-base effect starts to kick in

Event

    The China Construction Machinery Association (CCMA) released Marchexcavator sales on 14 March 2014. Total sales volume in March showedstrong sequential growth, up 113.3% MoM. But total sales volume fell 9.5%YoY; 1Q14 excavator sales volume increased 1.7% YoY.

    Impact

    Leading producers continue to consolidate market share – In 1Q14, themarket share of the top 15 players increased 6.7ppt YoY to 90.0%. Sany(600031 CH, NR) maintained its leading position, but the company’s sales inMarch fell 16.7% YoY, and its market share was down 1.3ppt YoY to 15.5%.Sany’s excavator sales in 1Q14 declined by 3.2% YoY, and market sharecontracted 0.5ppt YoY to 14.9%.

    Domestic producers continue to rein in sales promotions – Caterpillar(CAT US, US$101.45, Neutral, TP: US$92.00) is the foreign producer thathad the most market-share gain in March, with its overall market shareincreasing 3.5ppt YoY to 9.2%. CAT’s market share in 1–19t, 20–24t and the25t-and-above segments rose 2.6ppt, 6.1ppt and 4.6ppt YoY, respectively.

    Kobelco and Doosan (034020 KS, NR) saw their market shares increase2.6ppt and 2.1ppt YoY, respectively, to 8.7% and 9.0%, with the gains comingfrom the three tonnage categories. Komatsu (6301 JP, ￥2,128, Outperform,TP: ￥2,400) and Hitachi Construction Machinery (6305 JP, ￥1,906, Neutral,TP: ￥2,000) had the smallest market-share gains, mostly in the medium andlarge tonnage excavator segments.

    Zoomlion: Excavator sales for Zoomlion Heavy Industry (1157 HK, HK$5.90,Neutral, TP: HK$7.25) fell significantly, 90.9% YoY, with sales down 88.6%YoY in 1Q. Its market share fell 3.1ppt YoY in March, with market share for1Q declining to 0.3%. The sales decrease and market-share loss are in linewith our expectations, as the company took a more conservative approach torepositioning its excavator business.

    Lonking: Excavator sales for Lonking Holdings Ltd. (3339 HK, HK$1.50,Underperform, TP: HK$1.20) declined 20.7% YoY in March, and sales in1Qdeclined 21.1% YoY. In1Q14 its market share in the overall excavator marketand the small and medium tonnage segments contracted 0.5ppt and 0.6pptYoY, respectively. The market-share loss was in line with the company’s salesrepositioning strategy of focusing on its core product, wheel loaders, insteadof aggressively growing its excavator business in the intensely competitiveexcavator market.

    Outlook

    We maintain our cautious view on China’s earth working machinery industry,as demand is still weak amid excessive supply capacity. We reiterate ourUnderperform rating on Lonking, with the company’s earnings becomingsignificantly dependent on one product, wheel loaders, and its earningsgrowth will be extremely sensitive to its ability to maintain market share andpricing in the wheel loader market. In the excavator market, we believe theforeign producers will continue to de-stock, and we estimate the currentinventory level is still at five months of average sales.