Capital Goods: Equipment replacement proposed in Central government meeting; positive to HDT sector

26Feb2024 CMBInternationalGlobalMarkets|EquityResearch|SectorUpdate CapitalGoods EquipmentreplacementproposedinCentralgovernmentmeeting;positivetoHDTsector IntheCentralCommissionforFinancialandEconomicAffairs(CCFEA)meetingheldon23Feb,PresidentXiproposedanaccelerationofalarge-scalereplacementofproductionequipmenttosupporteconomicgrowth.Thisisthefirsttimethatequipmentreplacementismentionedasatooltosupporttheeconomy.Webelievethismessageisapositivesignaltotheheavy-dutytruck(HDT)sector.Weseepotentialformorelocalgovernmentstorolloutpoliciestoeliminatenationalemissionstandard(NES)IVtrucks.ThemeetingfurtherenhancesourpositiveviewontheHDTsector(replacementupcycle+resilientexportdemand).ReiterateBUYonWeichaiPower(2338HK/000338CH)andSinotruk(3808HK). KeymessagesintheCCFEAmeeting.Duringthemeeting,itwasstressedthatthespeed-upofproductupgradeisanimportantmeasureforpromotinghigh-qualitydevelopment.Sucheffortsshouldbemadetoencourageandguideanewroundoflarge-scaleequipmentrenewalandtrade-inofconsumergoods.Besides,itisessentialtolowerlogisticscostseffectivelyacrosstheentiresociety. Possibletargetofreplacement:NESIVtrucks.AccordingtotheNESpolicy,NESIVtrucksweresoldbetweenmid-2013andmid-2017.Wecalculatethatroughly~3mnunitsofHDTweresoldduringtheperiod,andweassumehalfofthetrucks(i.e.1.5mnunits)arestillinoperation.Assumingthesetrucksaretobephasedoutby2026E,thereplacementdemandperyearwillbe500kunits,quiteasizablevolume,inourview. ExpectmorecitiestolaunchsubsidyprogramfortheeliminationofNESIVtrucksin2024.UnliketheeliminationofNESIII,theprogressonthephase-outofNESIVhasbeenslowed.Basedonourchecks,lessthantencitiesproposedsubsidyprogramin2023(figure1).Thatsaid,weexpectmorecitiestorolloutsubsidypolicygiventhecentralgovernment’saspirationtoboostreplacementandupgrade. ChinaCapitalGoodsSector WayneFUNG,CFA (852)39000826 waynefung@cmbi.com.hk Relatedreports: CapitalGoodssector–HDTsalesvolumesurged~64%YoYinJanonlowbase(link) WeichaiPower(2338HK)–4Q23Eearningssurged31-71%,aboveexpectation–24Jan2024(link) Sinotruk(3808HK)–Bigsurpriseon2023Eearnings;TPraised–24Jan2024(link) ChinaHeavy-dutyTruck–Multi-cylinderdieselenginesales+29%YoYinDec–15Jan2024(link) ChinaConstructionMachinery/HDT–2024Outlook:SlowdownofoverseasdemandalongwithlackofgrowthinChina;beselective–30Nov2023(link) PLEASEREADTHEANALYSTCERTIFICATIONANDIMPORTANTDISCLOSURESONLASTPAGE1 Province/CityTarget/Subsidies(RMBk) Figure1:SubsidiesofferedbylocalgovernmentstoeliminateNESIVtrucksstarting2023 ZhejiangToeliminate60%NESIVdieseltrucksby2025Totalelimination:40kunits Ningbo(宁波)TobasicallyeliminateallNESIVtrucksby2025 Year 2024 2025 HDT MDT HDT MDT <7years 57.0 22.0 45.6 17.6 7-<8years 50.0 18.0 40.0 14.4 8-<9years 40.0 16.0 32.0 12.8 9-<10years 33.0 14.0 26.4 11.2 10yearsorabove 28.0 13.0 22.4 10.4 Hangzhou(杭州)Periodeligibleforsubsidies:13May2023to30Jun2024 HDT MDT LDT <8years 43.5 31.0 17.4 8-<9years 36.5 25.5 15.0 9-<10years 30.0 20.5 12.5 Jiaxing(嘉兴) HDT MDT LDT <8years 36.0 24.0 14.0 8-<9years 33.0 22.0 13.0 9-<10years 30.0 20.0 12.0 10yearsorabove 24.0 16.0 10.0 Quzhou(衢州)Periodeligibleforsubsidies:10Oct2023to31Dec2025 HDT MDT LDT <8years 30.0 21.0 10.0 8-<9years 26.0 18.0 9.0 9-<10years 22.0 15.0 8.0 10yearsorabove 18.0 12.0 7.0 Huzhou(湖州) HDT MDT LDT <8years 36.0 24.0 14.0 8-<9years 33.0 22.0 13.0 9-<10years 30.0 20.0 12.0 10yearsorabove 24.0 16.0 10.0 Lishui(丽水)Periodeligibleforsubsidies:4Apr2023to30Nov2025 HDT MDT LDT <8years 30.0 21.0 10.0 8-<9years 26.0 18.0 9.0 9-<10years 22.0 15.0 8.0 10yearsorabove 18.0 12.0 7.0 Source:Localgovernments,360che,CMBIGM Figure2:TimetablefortheimplementationofNES Typeofvehicles Heavydutyvehicle Year 000102030405060708091011121314151617181920212223 Lightdutyvehicle Offroadvehicle DieselGasolineGasfueledDieselGasolineGasfueledDiesel Nationalemissionstandard NoregulationI II III IV V VI(a)VI(b) Source:MinistryofEcologyandEnvironment,CMBIGM 2009-2010:GrowthaccelerateddrivenbyRMB4tnstimulaspackagepost--globalfinancialcrisis 2013-2015:Sales reboundedin2013duetopre-buyingpriortotheimplementatonofNESIV.In2015,salesreachedatroughduetoweakmacro 2011-2012:Overcapacityasaresultofaggressivecapacityexpansion,coupledwithweaknessinFAIandpropertysector 2005-2007: Upcycledrivenby: (1)strongGDPgrowth;(2)replacementdemandfromanti-overloadingpolicy; (3)Emissionstandardupgrade 2023E-24E: Recoverydrivenby(1)Chinapro-growthpolicy;(2)Resilientexport; (3)Replacementcycle;(4)potentialpolicytophase-outNESIVtrucks 2016-2020Upcycle:(1)Normalreplacementcycle;(2)Recoveryofpropertystart;(3) Morereplacementdemandduetothephase-outofNESIIItrucksinresponsetoBlueSkyInitiative;(4)replacementdemandgrowthdrivenbythecrackdownofillegaltrucks 2021-22Downcycle:(1)Front-loaddemandin1H21asaresultoftheintroductionofNESVIinJul2021;(2)Crackdownofpropertysector;(3)Zero-Covidpolicy Figure3:CyclesofChina’sHDTsales HDTsalesvolume(salesinChina+export)(000units) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013