Slight Industry Recovery

Recovery is a precious word for the construction machinery industry. Since 2011, the adjectives used for the entire industry have been filled with “harsh winter” and “downturn.” Many construction machinery enterprises have also felt that moving forward is difficult, lacking confidence in the market and unable to see when they will get through the severe cold.

Even so, signs of industry recovery had long been traceable and are becoming increasingly clear. According to the latest statistics, in November 2013, sales of domestic-brand excavators were significantly higher than those of foreign brands. In addition, compared with the same period in 2012, the decline in sales of major construction machinery products in the Chinese market was gradually narrowing, and by October 2013 cumulative sales had achieved positive growth. By sector, from January to October 2013, loader sales grew by 1.18%, industrial vehicle sales by 10.96%, and road roller sales by 17.3%, while excavators, graders, and construction cranes also showed a narrowing trend in declines. Sales of eight mainframe product categories grew by 3.6% from January to October 2013.

Specifically, in November 2013, excavator industry sales increased by 20% year on year, maintaining positive growth since May. Sany Heavy Industry's year-on-year growth rate rose sharply for four consecutive months, but its cumulative growth rate remained negative. Liugong's year-on-year growth rate turned from positive to negative, while Xiamen Engineering Machinery and Zoomlion continued to show negative growth.

In the November excavator market, although domestic excavator brands still played the leading role, the market share of foreign brands rose slightly. Komatsu's performance was particularly outstanding, with a year-on-year growth rate of 58%, continuing to maintain high growth.

From the perspective of the external environment, the main downstream industries of the construction machinery industry—new housing starts, railway infrastructure investment, water conservancy investment, and mining investment—grew by 7%, 6%, 28%, and 12% year on year, respectively, from January to October 2013. According to analysis by experts in the construction machinery industry, the single-quarter revenue growth rate of construction machinery enterprises had bottomed out and rebounded slightly in the third quarter of 2013.

Mounting Debt Remains a Concern

According to statistics, judging from the third-quarter 2013 financial reports of 12 construction machinery listed companies on China's A-share market, accounts receivable increased rather than decreased compared with the past, while operating revenue showed a declining trend. In the third quarter of 2013, the total operating revenue of the 12 construction machinery companies was 113.9 billion yuan, down 19% from the same period in 2012, and net profit fell 47% from the same period in 2012. Their total accounts receivable at the end of the third quarter was 85.2 billion yuan, an increase of 11.6 billion yuan over the same period in 2012. Persistently high accounts receivable and shrinking net profit indicate that the spring of the entire industry has not yet truly arrived.

At present, the global construction machinery industry is still in a stage of adjustment, with shrinking market demand and increasingly fierce industry competition. Irrational competition within the industry is undoubtedly making the financial situation of enterprises across the industry even worse.

XCMG and Sany Heavy Industry reported third-quarter 2013 operating revenue of 18.6 billion yuan and 29.9 billion yuan, respectively, both down 25% to 26% year on year. Xiamen Engineering Machinery Co., Ltd. had third-quarter 2013 operating revenue of 5.4 billion yuan, down 14% from the same period in 2012, and recorded a loss. In addition, Changlin Company and Tianye Tonglian also suffered losses in the third quarter of 2013.

Persistently high accounts receivable have reduced the quality of industry net profit, causing some enterprises to face difficulties in capital turnover and increased interest expenses. Among them, XCMG's financial expenses increased by 157% compared with 2012. Sany Heavy Industry's comprehensive gross profit margin in the third quarter of 2013 was 28.56%, down 4.85 percentage points year on year. Relevant industry insiders said that unhealthy marketing methods such as zero down payment and price wars in construction machinery are also key factors driving the surge in accounts receivable.

Although industry difficulties remain, with the steady implementation of the decisions of the Third Plenary Session, the push to expand domestic demand will gradually release market demand. China's urbanization process means that by 2025 there will still be greater room for expansion in infrastructure such as highways and airports. Projects approved in the second half of 2013 are also gradually showing their driving effect. Therefore, the inventory pressure currently facing the construction machinery industry is expected to be released in the coming years, thereby helping the industry escape its bottom-hovering state.

New Year Expected to Halt the Decline and Rebound

In 2013, mergers and acquisitions occurred frequently among construction machinery enterprises. Carrying out their own structural adjustments at a time when the industry was operating in a relatively sluggish period can also be regarded as a relatively good way to ease downward pressure.

Among the many M&A cases, Sany Heavy Industry was undoubtedly one of the most eye-catching. On the evening of July 1 last year, the company announced that its wholly owned subsidiary Sany International Development Co., Ltd. would pay US$54.8977 million to acquire the remaining 10% equity of Germany's Putzmeister, thereby achieving 100% control of the company. The acquisition of Putzmeister was an important step for Sany Heavy Industry in building its leading position as the “world's largest concrete machinery manufacturer.”

On December 11, 2013, Sany Heavy Industry announced again that the company had signed a formal cooperation framework agreement with Palfinger and its shareholders and other relevant parties: Sany Heavy Industry would subscribe to 5% of Palfinger's newly issued shares through a direct or indirect wholly owned subsidiary, and would also directly purchase 5% of existing shares from some Palfinger shareholders. After the transaction was completed, Sany would ultimately hold 10% of Palfinger's shares, and Palfinger would also indirectly hold 10% of Sany Crane's equity. It is understood that Palfinger was founded in 1932, specializes in the manufacture of loader cranes, and is a world-renowned provider of loading and unloading equipment.

Earlier in 2013, Shantui also planned to spend 217 million yuan to acquire Dongyue Heavy Industry in order to obtain a 51% stake in Manitowoc Dongyue Heavy Industry Co., Ltd. Shantui would thereby enter the crane industry, but the acquisition was later terminated.

2013 was a year of stabilization for the construction machinery industry. The successive introduction of national policies and regulations played a positive role in promoting the healthy development of the industry. The advancement of remanufacturing, the rollout of the National IV standards, and the enthusiasm for no-reserve auctions were also focuses of industry attention. Although operations were sluggish, the industry was not quiet.

Last year, China's engineering construction and excavator market conditions were closely related to national policies. At the beginning of last year, excavator sales were not large. Starting in March, with the convening of China's Two Sessions and the start of various projects, excavator sales rose for a time, and then entered a relatively slack season. By November, excavator sales climbed again with the introduction of relevant favorable national policies. In addition, in 2013 there was a notable change in sales of various excavator models: sales of small excavators suitable for urban interiors and rural construction increased significantly. Relevant industry experts said that at the end of 2013 the construction machinery industry had negative growth of about 3%, but monthly data in the second half of 2013 showed that the industry had begun to show positive growth, and the entire industry is expected to halt the decline and rebound in 2014.