This week, the CSI 300 Index fell 0.6%, while the ChiNext Index surged 4.5%; the machinery equipment index rose 1.2%, with sectors such as shipbuilding and offshore engineering, oil and gas equipment, and automation equipment performing relatively well.

    Industry view: Against the backdrop of continued recovery in overseas economies and stable domestic economic performance, demand for machinery products has gradually entered a recovery phase. We continue to assign a "Buy" investment rating to the machinery industry.

    Recently, the Global Manufacturing PMI compiled from G20 data hit a near three-year high, driven mainly by developed economies such as Europe and the United States. Therefore, machinery companies capable of participating in international competition and sharing in global economic growth deserve special attention.

    Machinery portfolio: (1) The shipbuilding and offshore engineering sector benefits from the building of a maritime power and is in an upswing phase. We continue to assign Buy ratings to CIMC, China State Shipbuilding Corporation, Guangzhou Shipyard International, and Offshore Oil Engineering. (2) Haomai Technology's tire mold business has full order books, and its overseas market share still has substantial room for improvement, supporting sustainable and rapid future development; we assign a Buy rating. (3) We continue to assign Buy ratings to Nanfang Pump, Xinjie Pump, and Juxing Technology, which have good growth prospects; their operating cash flow is healthy, supporting extended expansion and higher growth rates. (4) Railway equipment leaders CSR and CNR have clear growth momentum in 2014, and the probability of continued railway reform is relatively high; we recommend Buy. This week, CSR announced new contracts worth RMB 27.4 billion; new orders signed in 2013 increased by more than 50% year on year, and export contracts reached USD 2.2 billion, a new record high. Xinzhu Co.'s private placement passed the review meeting; pay attention to the progress of its tram project. (5) For construction machinery, we remain optimistic about Anhui Heli, which benefits from logistics development over the medium and long term and has recently maintained relatively rapid year-on-year sales growth. (6) Changrong Co. has huge potential in developing cloud printing; we continue to recommend Buy. This week the company announced receipt of a government subsidy of RMB 20 million, which will boost its 2013 performance.

    (7) Tiandi Technology's coal machinery orders remain stable, and the resumption of production at Wangpo Coal Mine will drive profit improvement in 2014. At the same time, there are expectations of integration by China Coal Technology & Engineering Group; we assign a cautious overweight recommendation.

    Defense portfolio: For 2014, we believe reform and strengthening the military will be the main themes of the year. Due to factors such as tight liquidity and the reopening of IPOs, the valuation of the defense industry may face short-term pressure from market adjustments; however, from the perspectives of industry growth, the surrounding situation, and subsequent policies, we believe the adjustment brings investment opportunities. We will subsequently watch catalyst factors such as reform of the defense industry system and industrial policies on general aviation. Our recommended portfolio remains AVIC Electronics, China Satellite, and Aero Engine.

    Risk warning: Changes in the macroeconomy may cause large fluctuations in demand for machinery products; rising raw material prices may suppress the profitability of machinery companies; exchange rate changes may cause profit fluctuations for companies with a relatively high proportion of exports.