摩根士丹利中国建筑和机械行业投资报告2010年7月9日

July 9, 2010

China Capital Goods

Growth to Slow; Stay with

High-Quality Industry

Leaders

Investment conclusion: The China capital goods

industry (including both construction and machinery

sectors) enjoyed a record half year in 1H10 on strong

downstream capex, government spending and

abundant liquidity. We expect 2H10 construction

machinery sales growth to slow sharply, but remain

healthy at 15% YoY. Real challenges lie in 2011,

especially 1H, when infrastructure construction is

expected to slow to 11% and machinery sector to dip to

just 3% YoY (the lowest since 1998). However, amid the

downcycle in next 12 months, we still highlight good

investment value in those leading industry players that

are consolidating, penetrating new product categories,

and actively exploring overseas markets. Construction

machinery industry’s current valuation already is pricing

in downcycle risk; FY1 P/E is at a 36% discount to the

prior decade average, on our estimates.

Construction: Stick with Railway plays. Railway

infrastructure investment rose 17.5% YoY in the first 5

months, while new contracts were up a substantial 65%

in 1H10e. We remain more bullish than the market on

railway investment; Rmb700/805/886bn in 2010/11/12e,

a 13.8% CAGR. CRGL remains our top pick, given it has

both the best new contracts growth in 1H10 (up 45%

YoY) and visibility (contract backlog at 2.1 years

revenue), and it seems well on track to lift gross margin

(6.7% in 1H10e versus 6.1% in 2009).

Machinery: Stay with industry leaders with broader

product lines, market share gains. Machinery delivery

reached record levels in 1H10e – up 75% from a low

base in 1H09 and up 44% from the pre-crisis peak in

1H08. While we expect growth to slow, we still forecast a

15%-plus YoY increase. We expect major mining and

property exposed machinery (wheel loaders and

concrete machinery) to dip into negative growth in 2011.

Lonking and Haitian are our top picks.

Key Risk: Tighter government policy.