ab 25 July 2025 Global Research First Read China construction machinery sector Expert call takeaways: Optimistic estimates suggest lower YTR hydropower project may boost China construction machinery sector annual sales by c5-10%, especially benefiting leading domestic players Under base/bull case scenarios, lower YTR project could increase annual construction machinery sales by c3~5%/5-10% Equities China Heavy Machinery Phyllis Wang Analyst phyllis.wang@ubs.com +86-21-3866 8964 We invited an expert to share ...

Summary of Conference Call Transcript Industry Overview - **Industry**: China Construction Sector - **Project**: Lower Yarlung Zangbo Hydropower Project - **Announcement Date**: July 19, 2025 - **Total Investment**: Approximately RMB 1.2 trillion [2][3] Key Points and Arguments 1. **Project Details**: The Lower Yarlung Zangbo hydropower project involves the construction of five cascade hydropower stations, with preparatory infrastructure works already in progress since the previous year [2][3]. 2. **Investment Allocation**: It is estimated that 60-70% of the RMB 1.2 trillion investment will be directed towards project construction, 20% towards power equipment, and the remaining 10-20% to other areas [3]. 3. **Annual Investment Forecast**: The annual investment is projected to be between RMB 80-120 billion, representing 0.3%-0.5% of China's infrastructure investment in 2025E and 4-6% of water conservancy management investment in 2025E [3]. 4. **Revenue Impact on Construction Companies**: The revenue impact on major construction companies like China Railway Group (CREC), China Communications Construction Company (CCCC), and China Railway Construction Corporation (CRCC) is expected to be less than 1% in 2025E/2026E [4]. 5. **Equipment Demand**: The project will primarily require medium-to-large-tonnage equipment, including tunnel boring machines and heavy trucks, due to its scale and the challenging high-altitude environment [4]. Market Outlook 1. **Cautious Optimism**: Despite limited revenue impact from the hydropower project, there is a cautiously optimistic outlook for the construction sector due to policy support and potential re-rating of H-shares, which are currently undervalued [5]. 2. **Valuation Metrics**: Leading construction firms are trading at low valuations (0.2-0.3x PB) with attractive dividend yields (approximately 5-6% in 2026E) [5]. Risks and Challenges 1. **Macro-Level Investment Risks**: A key risk for the construction sector is the potential downsizing of investments at the macro level, which could adversely affect corporate revenue [7][8]. 2. **Operational Risks**: Rising raw material and labor costs pose significant risks to contractors' profitability [7][9]. 3. **Geopolitical Risks**: Overseas projects face geopolitical risks that could impact revenue [9][10]. Company-Specific Insights 1. **China Communications Construction (CCCC)**: Price target based on PE multiple; risks include macro-level investment downsizing and operational cost increases [8]. 2. **China Railway Construction (CRCC)**: Price target also based on PE multiple; major risks include government spending uncertainty and foreign currency exposure [9]. 3. **China Railway Group (CRG)**: Revenue is dependent on government spending on transportation infrastructure; risks include economic slowdown and restructuring challenges [10]. Conclusion The Lower Yarlung Zangbo hydropower project represents a significant investment in China's construction sector, with limited immediate revenue impact on major contractors. However, the sector is supported by government policy and presents potential investment opportunities despite existing risks related to macroeconomic conditions and operational costs.

Investment Rating - The report maintains a positive outlook for the construction machinery sector, projecting a full-year growth of 15% for domestic excavator sales in FY25, despite short-term fluctuations in demand [2][3][6]. Core Insights - Domestic excavator sales experienced a decline in May due to a significant drop in medium excavators, but the overall upward trend in the industry is expected to continue until 2027/28 [2][3]. - Small excavators showed the fastest growth in May, while large excavators lagged behind, primarily driven by urban underground utility tunnel construction [2][3]. - The expert anticipates that wheel-loader growth may surpass excavators in 2025E, influenced by the rise of electric wheel-loader penetration [2][3]. - The report highlights that the price competition for medium excavators has intensified, while competition for small and large excavators remains milder compared to previous cycles [4][6]. Summary by Sections Domestic Demand - Domestic excavator sales are expected to fluctuate in the short term, with a rebound anticipated in June due to mid-year KPI pressures, although real demand may remain weak during the off-season [3][6]. - The expert forecasts a 5% year-on-year growth in H225E for domestic excavators, indicating a gradual recovery post-September [3][6]. Competitive Landscape - Price competition is more pronounced in the medium excavator segment due to lower brand concentration, while Tier-1 manufacturers focus on profitability [4][6]. - The report notes that as domestic brands enter the large and extra-large excavator segments, price cuts may become more significant in those areas [4][6]. External Demand - The impact of trade tensions on external demand is considered limited, with Chinese OEMs expected to continue gaining market share in overseas markets [6].

Summary of XCMG Construction Machinery (000425 CH) Earnings Call Company Overview - **Company**: XCMG Construction Machinery - **Ticker**: 000425 CH - **Sector**: Machinery - **Market Cap**: CNY 106,582 million (USD 14,797 million) [12] Key Industry Insights - **Domestic Sales Recovery**: Domestic excavator sales increased by 16% year-on-year in April, driven by replacement demand, while exports rose by 19% year-on-year, contributing to an overall industry growth of 21.4% year-on-year in the first four months of 2025 [2][24]. - **Emerging Markets Focus**: XCMG is expected to see higher growth in Southeast Asia, Latin America, and Africa due to increased efforts in these regions amid trade tensions, despite only 1% of last year's revenue coming from North America [2][24]. Financial Performance - **1Q25 Results**: XCMG reported a revenue growth of 11% and a net profit growth of 26% year-on-year, primarily due to strong sales in road machinery and earth-moving machinery [25]. - **Revenue Forecast Adjustments**: The revenue forecast for 2025 has been increased by 1%, while the 2026 estimate has been reduced by 1%. Net profit estimates for 2025 and 2026 have been cut by 6.4% and 4.6%, respectively [3][25]. Valuation and Price Target - **Target Price Increase**: The target price has been raised to RMB 10.20 from RMB 8.62, reflecting a 13% upside potential based on a new price-to-book (PB) multiple of 1.7x [4][32]. - **Valuation Comparison**: XCMG trades at a PB of 1.6x for 2025 estimates, compared to local peer Sany at 2.2x, indicating a more attractive valuation for XCMG given its better return on equity (ROE) outlook [33]. Segment Performance - **Crane and Earth Moving Machinery**: Revenue forecasts for cranes have been raised by 21% for 2025-26, while earth-moving machinery forecasts have been increased by 5-8% due to industry upcycle and emerging market sales efforts [26]. - **Concrete Machinery Decline**: Revenue forecasts for concrete machinery have been cut by 12-15% due to overestimated export momentum and lower-than-expected domestic demand [26]. Risks and Challenges - **Profitability Concerns**: The construction machinery sector faces risks from raw material price hikes, which could pressure margins if costs cannot be passed on to customers [41]. - **Demand Slowdown**: Potential slowdown in machinery demand due to tighter project financing or a significant deceleration in property construction could negatively impact sales [41]. - **Working Capital Management**: Economic slowdowns or unfavorable monetary conditions could lead to higher receivables, affecting working capital management [41]. Conclusion - XCMG is positioned for growth in domestic and international markets, particularly in mining and earth-moving machinery. The company’s focus on emerging markets and adjustments in revenue forecasts reflect a positive outlook, despite potential risks from market conditions and competition. The maintained "Buy" rating and increased target price suggest confidence in the company's future performance and market share potential in the machinery sector [4][12][32].