Construction Machinery Industry: Excavator Sales Growth Rate Increases, Reversing Continuous Decline Expectations

According to data from the China Construction Machinery Industry Association, the sales of excavators in July 2019 were 12,346 units, a year-on-year increase of 11.0%. Among them, domestic market sales were 10,190 units, a year-on-year increase of 9.1%. Export sales were 2,156 units, a year-on-year increase of 20.7%.

　　1. July excavator sales exceeded expectations

In July, domestic excavator sales were 10,190 units, a year-on-year increase of 9.1%, with growth rates higher than those in May and June, reversing the industry's continuous decline expectations. By category, the sales of large, medium, and small excavators were 1,720, 2,741, and 5,729 units respectively, with year-on-year growth rates of -3.0%, 2.0%, and 17.5%, mainly driven by small excavators. According to the latest industry survey, there is optimism about domestic sales in August, with expectations of year-on-year stability or slight growth, estimating a growth rate range of 0-10%. In terms of exports, sales in July were 2,156 units, a decrease compared to June, but we believe there is still potential for further increases.

　　2. Overall construction activity improved in July

According to the construction indicators we track, there was a significant improvement in construction activity in July. According to Komatsu's official website, the working hours for Komatsu in July were 130.1 hours, a year-on-year decrease of 2.9% but a month-on-month increase of 4.9%. The improvement in construction activity is partly due to the special bond financing of 438.5 billion yuan in July, the highest scale since January this year, indicating an improvement in project funding. Additionally, industry feedback suggests that this may be related to recent environmental inspections and crackdowns on illegal activities. According to grassroots research, local governments in regions like Guangdong and Zhejiang have strong financial capabilities, and the demand for infrastructure projects in the Greater Bay Area and within the province remains robust, continuing to maintain high growth. After experiencing negative growth in the first half of the year, regions like Guangxi and Hunan have seen a significant acceleration in growth.

　　3. The Ministry of Ecology and Environment issued a notice on registration coding work

The "Three-Year Action Plan for Winning the Blue Sky Defense War" issued by the State Council in July 2018 and the "Action Plan for the Pollution Control of Diesel Trucks" issued by the Ministry of Ecology and Environment in January 2019 clearly require that by the end of 2019, all regions complete the survey and registration of non-road mobile machinery, delineate emission control areas for non-road mobile machinery, and strictly control high-emission non-road mobile machinery. On July 29, the Ministry of Ecology and Environment issued a notice on accelerating the survey and registration work for non-road mobile machinery, which is a specific implementation of the aforementioned documents. According to our communication with industry experts, this policy will not have a significant impact on the industry in the short term. However, after the registration coding work is completed, there may be strengthened control over non-road mobile machinery that illegally enters emission control areas or exceeds emission standards, increasing penalties for violations and promoting the elimination of equipment that exceeds emissions. We believe this will have far-reaching effects in the future.

　　4. Strict checks on the import of second-hand excavators benefit the healthy development of the industry

According to media reports, starting in June, the General Administration of Customs deployed a special action to combat the smuggling of second-hand excavators. According to current policies, China allows the import of second-hand excavators, but the import tax rate is relatively high (8% tariff and 13% value-added tax). In recent years, a phenomenon has emerged where domestic buyers purchase second-hand excavators abroad, hand them over to agents in Hong Kong, and after a series of operations, report a lower price for smuggling imports, thus gaining a price advantage over domestic products. This phenomenon is currently being targeted for crackdown. At the same time, the "Action Plan for the Pollution Control of Diesel Trucks" issued by the Ministry of Ecology and Environment requires that by the end of 2020, the fourth phase of emission standards for non-road mobile machinery be implemented nationwide, and imported second-hand non-road mobile machinery and engines must meet the current emission standards for newly produced non-road mobile machinery. This requirement also strongly promotes the regulation of second-hand excavator imports.