Machinery industry: firmly grasp the match between growth and valuation

The machinery industry grew by about 20% in 2011. Machinery industry is closely related to urban investment. Our strategy team expects domestic investment growth in 2011 to be about 23%. Based on this, the author roughly estimated that the machinery industry revenue in 2011 will grow by about 20%, and may show a V-shaped trend throughout the year. New industries such as high-speed rail, nuclear power, photovoltaic, and smart grid will maintain rapid growth, and the growth rate of traditional industries such as construction machinery and machine tools may decline.

High-speed rail: low-value growth industries. Under the dual drive of high-speed rail and subway construction, we expect the growth of the domestic railway equipment industry to be sustainable by 2013. Compared with the high valuations of other emerging industries, the value of leading railway equipment companies is significantly lower than their growth potential, and is our first choice. The investment target. According to the proportion of railway business, the market share of the company's products in the subdivided areas and the current valuation level, we mainly recommend China South Locomotive, China CNR, Times New Material, Jinyi Industry and Taiyuan Heavy Industry.

Nuclear power: visible growth. In 2011, nuclear power equipment companies will achieve a definite high growth. After going through the general increase in 2010, we believe that the focus of investment in nuclear power next year will be reduced to key enterprises, and we also need to consider a reasonable valuation. We mainly recommend Dongfang Electric, Jiangsu's Shentong for nuclear island valves, Nanfeng's nuclear-air cooling equipment for nuclear islands, and China's heavy and heavy heavy-duty equipment for nuclear island casting and forging parts.

Photovoltaic: Growing up in fluctuations. PV demand is highly correlated with international oil prices. We expect international oil prices to increase to US$100 next year, and global PV demand to increase by about 35%. We mainly recommend market-wide aerospace electromechanical companies, polysilicon enterprises Leshan Power, and solar cell companies' sunflowers whose market share is relatively high. The investment trigger point of the photovoltaic sector is the continuous rise of international oil prices.

Construction Machinery: From offensive to defense. Assume that the urbanization rate in China will increase by 1.5 percentage points in the next five years. In 2015, the urban residential area will reach 35 square meters per person. Based on this, we estimate that the growth rate of domestic real estate investment will decrease from about 20% to about 10%, and urban investment will increase. The speed will decrease from about 26% to about 18%, and the growth rate of the construction machinery industry will decrease from about 26% to about 14%. Specific to 2011, we expect the growth rate of the construction machinery industry to be about 15%. Industry investment in the down cycle will shift from offensive to defensive, with Liugong as the key recommendation.

Industry ratings and risks. We believe that after experiencing high growth in 2010, the machinery industry in 2011 will face many complicated situations. We will adhere to the pace of domestic economic restructuring and continue to focus on the development of emerging industries such as high-speed rail, nuclear power, photovoltaics, and smart grids. Changes in macroeconomic policies may bring opportunities to traditional industries, while paying attention to the opportunities that international geopolitical turmoil may bring to military-industrial firms. We believe that the focus of investment in mechanical stocks in 2011 is not the division between emerging and traditional, but also the match between growth and valuation. We maintain the industry recommendation rating, and the industry risk is mainly due to the fluctuation of demand caused by fluctuations in the economic cycle.