The operating conditions of the machinery industry have stabilized at a low level.

Over the past three months, the main macroeconomic indicators affecting the machinery industry, namely the growth rate of industrial added value and the growth rate of fixed asset investment in urban areas, have gradually stabilized, and the overall operating conditions of the machinery industry have also stabilized at a low level. Among the major sub-sectors, the year-on-year growth rate of construction machinery, which is most sensitive to the economic cycle, has stopped falling and rebounded in June-August, showing a weak recovery; while machine tools and heavy mining machinery, which lag behind the economic cycle, are still showing a downward trend. Affected by the continued decline in industrial production growth, electricity demand is weak, and the operating conditions of power generation equipment, power transmission equipment, power consumption equipment, and industrial energy-saving equipment are all unsatisfactory. The in-depth promotion of smart grid and rural grid transformation has maintained a high level of prosperity for power automation and distribution network equipment; in August, the monthly completion of railway infrastructure investment reached 39.3 billion yuan, a year-on-year increase of 19%, which is the first positive growth after 15 consecutive months of negative growth since May 2011. In September, the monthly completion reached 64.28 billion yuan, a year-on-year increase of 111.37%. At the same time, the Ministry of Railways raised the scale of railway infrastructure investment in 2012 to 516 billion yuan, and railway construction is showing a continuous recovery; from June to September, Xinjing Group Yili Energy's 2 billion cubic meter coal-to-natural gas project, China Power Investment's coal-to-natural gas project, Lu'an's 1.8 million-ton coal indirect liquefaction project, and Tongmei's 4 billion cubic meter coal-to-gas project were successively approved, which will benefit related coal chemical equipment companies; wind power and photovoltaic power generation in the new energy sector remain sluggish, and the restart of nuclear power has not made substantial progress; the environmental protection industry has entered the post-policy development period. In the past three months, our research has found that although the overall operation of the industry is generally average, some companies in sub-sectors with low correlation to the economic cycle still maintain continuous growth, such as SiFang Share (601126), a power grid automation company, Furui Special Equipment (300228), an LNG equipment company, Jicheng Electronics (002339), a leading company in distribution network automation, and Robot (300024), which replaces manual labor. With the domestic inflation level falling back to around 2%, the monetary policy, which has been constrained by the inflation level in the early stage, will be partially liberated. It is expected that the overall macroeconomic policy in the fourth quarter will tend to be stable, and the machinery industry will also achieve stable operation. After the economic adjustment has lasted for so long, and after the sales data of major products in the construction machinery industry has shown negative growth for more than a year, we believe that adhering to and waiting for the turning point may be more in line with the long-term interests of investment.