ANALYSIS - Brisk market demand boosts China machinery industry

Per capita GDP, the proportion of industrial output value in GDP, and the proportion of employment in sectors all point to a fact that China has entered the middle stage of industrialization, and a basic feature in the stage is sharp increase in demand for heavy-duty machinery, say engineering machinery, machine tools, ships and metallurgical and mining machinery. For this reason, experts have a long-term anticipation for huge investment opportunities in machine-building industry. Under the pressure of appreciation of RMB yuan and continuous increase in labor cost, experts still find that heavy-duty machinery represented by engineering machinery, metallurgical and mining machinery, machine tools and shipbuilding has maintained growth in income and profit. As for export, they have also outpaced the average growth of the industry.

Strong domestic market demand is the force behind rapid growth of these sectors. While shipbuilding industry has benefited from the trend of the world's shipbuilding center being shifted to China.

For performance, experts have a high expectation for shipbuilding, engineering machinery and metallurgical and mining machinery; and as for enterprises, experts favor those with connotative growth and outward expansion capacity.

Shipbuilding industry has accelerated the pace of rising

Experts hold that this round of boom cycle for shipbuilding industry worldwide may last until 2011. Even if it falls earlier than anticipated, it won't influence the profitability capacity of shipbuilding enterprises. Worldwide, the orders for new ships have been arranged to 2012, and in terms of orders shipbuilders had in hands in 2006, they can put worldwide shipbuilders in full gear production for four years. It is notable that in 2008, shipbuilders worldwide will only start to make ships whose orders have placed at high prices in 2006.

Compared with shipbuilders in the Republic of Korea (ROK) and Japan, Chinese shipbuilders have obvious advantages in labor and steel products cost, but lag behind their ROK and Japanese counterparts in terms of localization rate and production efficiency. As China has increased the investment in shipbuilding and supporting industries, it is expected that the localization rate of the industries will soon be increased by a large margin. With this background, once the boom cycle for shipbuilding industry worldwide falls, China's shipbuilding industry will rise at a faster pace.

As for valuation of Chinese shipbuilders, Chinese enterprises grow faster in their life span and are over four times their ROK and Japanese counterparts in terms of profitability capacity.

Both domestic and international demands for engineering machinery are brisk Strong growth of domestic demand and breakthroughs made on overseas market in recent years have enabled China's machine-building industry to grow rapidly, with sales revenue increasing from 20.8 billion yuan in 1992 to 97 billion yuan in 2006, and the compound growth rate reached 11 per cent in 1992-2006. In terms of demand, domestic market remains the major consumer of China's engineering machinery enterprises, and the major driving forces are urbanization construction, real estate investment, and construction of large infrastructure facilities.

Sales income of engineering machinery is closed associated with the growth of fixed assets investment. But influence of China's macro control policy adopted in 2004 on engineering machinery industry has varied among products. To diversify products may effectively dissolve the influence of slowdown in growth of fixed assets investment.

Since 2000, export of engineering machinery industry has grown rapidly, with the compound growth of export revenue reaching 39 per cent in 2000-2006, and the industry for the first time realized trade surplus in 2006. For listed engineering machinery companies, the proportion of export revenue has kept increasing, to be above 10 per cent at present. The rate for Hunan Sunward Intelligent Machinery Co. Ltd and Xuzhou Construction Machinery Science and Technology Co. Ltd even exceeds 20 per cent.

Experts hold that world-class engineering machinery giants will emerge in China's engineering machinery industry: the work efficiency of Chinese engineering machinery enterprises will increase; the per capita sales revenue and per capita net profit of the industry will keep growing.

Output and quality of metallurgical/mining machinery are increasing

Since 2002, China's market demand for metallurgical and mining machinery has grown rapidly, and the compound growth of sales revenue averaged 27.65 per cent every year in 2001-2006. To be specific, the average annual compound growth of metallurgical/mining machinery reached 31.5 per cent in 2001-2005; and that of crane machinery, 25.69 per cent. The operating profit of metallurgical/mining machinery has increased from 36 million yuan in 1998 to 15.8 billion yuan in 2006, and the average annual compound growth reached 138 per cent.

It is expected that by 2010, the mechanization rate of mining of large coalmines will exceed 95 per cent; that of midsize coalmine, over 80 per cent; and that of small coalmines, 40 per cent. China National Coal Association predicts that China's market demand for coal mining machinery will be valued at about 100 billion yuan in the "11th Five-Year Program" period (2006-2010).

As Chinese enterprises continue to sharpen their competitive edge, more metallurgical/mining machinery imports are being replaced by domestic ones, and the gap between import and export of machine-building industry has kept narrowing, and the trade surplus was reported for the first time in 2006, and has kept expanding in the first three quarters of 2007.