Mechanical Industry Monthly Report for November: Fluctuation and rebound after the third quarter report

Domestic Macro Environment: The economy is recovering from its bottom, and the worst is over. From the perspective of leading economic indicators, macro-monetary leading indicators such as M1, M2, credit structure and characteristics, and total social financing sources have rebounded in August and September, indicating a recovery in social investment demand. Correspondingly, infrastructure and real estate investment data have improved. We believe that both will continue a moderate rebound trend within two quarters, and the risk of further economic decline in the coming months can be basically ruled out.
From the perspective of coincident indicators, some industrial data have begun to show signs of rebound, such as the rebound in electricity generation growth rate starting in mid-October. After seasonal adjustment, this rebound is basically the first since the economic downturn in early 2010, indicating that demand has begun to be transmitted to industrial enterprises, leading to increased production. Inventory data should improve in the next two months. However, due to the weak strength of demand recovery and the serious overcapacity in various industries, the destocking process may encounter setbacks.
For the machinery industry, due to the six-month lag between investment transmission to midstream industries, it is expected that the industry will see an improvement in sales and business conditions around March and April 2013. The industry's business conditions should not continue to deteriorate in the fourth quarter of this year and the first quarter of next year, and the third-quarter report represents the low point of performance growth for many companies. Excessive interpretation of the poor third-quarter report or direct annualization to predict future performance should be avoided.
Investment Strategy for the Machinery Industry: Post-Third Quarter Report Fluctuation and Rebound. Reviewing the performance of the machinery industry in October, using the arithmetic average algorithm and the weighted average algorithm based on the circulating share capital, it outperformed the Shanghai and Shenzhen 300 Index by 1.24 percentage points and underperformed by 0.47 percentage points respectively, which is consistent with the neutral rating given to the industry. Shanghai and Shenzhen 300 Index
In terms of the performance of sub-sectors in October, large-cap sub-sectors such as engineering machinery and shipbuilding continued to slightly underperform, while the refrigeration and air compression equipment sub-sector outperformed the industry independently due to the stimulation of the ground source heat pump concept.
In the fourth quarter of this year and the first quarter of next year, economic indicators will continue to improve, supporting an upward fluctuation in the valuation of the machinery industry, but company performance will not improve. It takes six months for the recovery of demand to be transmitted to the machinery industry. It is expected that the industry will see an improvement in sales around April 2013. The stock price is likely to fluctuate upward amid poor performance and improved expectations. After the second quarter, if industry sales recover as expected, industry performance expectations will be formed, and the upside potential of the stock price may open up.
Among the sub-sectors of machinery, the railway equipment sub-sector shows a trend different from other sub-sectors. Railway investment has its independent investment cycle. After the Wenzhou train accident, railway investment began to decline. After more than a year of rectification, railway investment has recently accelerated. This is the only machinery sub-sector with an upward trend in the short to medium term.
This month, we maintain a "neutral" investment rating for the machinery industry. Given the increase in railway investment month-on-month and the upcoming bidding for high-speed trains, we will upgrade the railway equipment sub-sector to "positive" in the short term, while the ratings of other sub-sectors remain unchanged. In terms of companies, given the greater impact on small companies when the coal industry's business conditions decline, we downgrade Linzhou Heavy Machinery rating to "hold". The ratings of other companies remain unchanged.