Construction machinery industry stocks will be the first to rise

“Demand weakness and high cost” have suppressed the overall performance. At present, the overall mechanical sector is still in the phase of correction, and in the short-term, the market will mainly be staged rebound. According to the closing price of August 31st, 2011, except for the construction machinery and shipbuilding industries, the PE value of mechanical equipment and other sub-sectors in the past 12 months has generally exceeded the average of the Shanghai and Shenzhen A shares, and there is no obvious valuation advantage.

We believe that because China's economy is currently in the late stage of inflation, the cost has reached a high level, and the downstream demand for the middle reaches has weakened, and the price of raw materials is expected to slowly decline in the late period. Therefore, our overall view of the machinery industry in the latter part of the period is that the operating income of most sub-sectors has slowed down, and gross margins have begun to decline. This will continue until deflation ends. During this period, the machinery industry was mainly staged by rebounding prices, and only some downstream industries have strong demand and individual sub-sectors and companies have the opportunity to basically face up.

Focus on "determined performance + weak cycle + rebound sensitivity": construction machinery industry, oil drilling equipment industry, aerospace equipment industry, refrigeration equipment industry and environmental monitoring equipment industry. The construction machinery industry is one of the fastest-growing sub-sectors in the mechanical industry in terms of relative economic recovery. Once the regulation is relaxed, individual stocks in the construction machinery industry will be the first to rise. We also expect that the housing and water conservancy construction will become effective in October-November. One of the driving forces for the demand for construction machinery. The high price of bulk raw materials is hard to fall, which has led to an increase in demand for oil drilling equipment, and the growth of oil drilling equipment industry performance has been confirmed.

Aerospace has typical military attributes and high-end equipment manufacturing attributes. It will benefit from the acceleration of domestic securitization of military assets and the upgrading of national defense construction in China. Long-term growth is still worth paying attention. The refrigeration and air-conditioning industry is the best performing sub-sector in the machinery industry since the end of 2008. Benefiting from the high prices of agricultural products and the key support for the development of cold-chain logistics in China, the follow-up demand space is still huge, and steady growth can still be sustained. The environmental monitoring instrument industry will benefit from long-term domestic investment in environmental protection and the acceleration of reforms in water conservancy development. The medium and long-term growth will be more certain.