汇丰银行-中国-机械行业-中国四家全球或国内行业领导企业研究-2019.6-67页 (2).pdf

Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it.Equity Research ReportChina IndustrialsInitiate coverage on four industry leadersIndustrialsJune 2019By:Bonan Li(S1700518070001)The four companies are global or domestic market leaders in industrial sewing machines,environmental monitoring systems,and railway construction equipmentValuations appear attractive and the stocks have relatively strong defensive qualities at a time of growing trade tensions and uncertaintyWe initiate coverage of Jack Sewing Machine,Beijing SDL Technology,China Railway Hi-Tech Industry and CRCC High-Tech Equipment(all rated Buy);we prefer Jack Sewing Machine and China Railway Hi-Tech IndustrySP OTLIGHT 1 Equities Industrials June 2019 The main points This report looks at industry leaders in three sub-sectors:industrial sewing machines,environmental monitoring instruments,and railway construction equipment.We find common themes in terms of demand growth,market share trajectory,the global competitive landscape,and defensive qualities.We initiate coverage of four stocks:Jack Sewing Machine,Beijing SDL Technology(SDL),China Railway Hi-Tech Industry(CRHIC),and CRCC High-Tech Equipment(CRCCE)all rated Buy.We highlight the following:There is significant potential for market share gains for leaders in industrial sewing machines in China.Long-term growth should be supported by an increase in exports triggered by the relocation of manufacturing bases.The environmental monitoring instrument industry in China is highly fragmented.The leaders should be able to increase their market share.Domestic makers of railway construction equipment are well-positioned to benefit from Chinas continued investment in infrastructure and railways and also gain market share.Overall,we see a good buying opportunity for the four stocks.The valuation of the four stocks looks attractive versus historical levels,given the solid earnings growth and rising ROE outlook.The companies also have relatively strong defensive qualities at a time of growing trade tensions and uncertainty.Why read this report?We identify three industrial sub-sectors with common themes:sector demand growth,market share trends,and R&D investment Valuations look attractive compared to historical levels;the four stocks also have relatively strong defensive qualities at a time of growing trade tensions and uncertainty We initiate coverage of four leading companies(all rated Buy)in the industrial sewing machine,environmental monitoring equipment and railway construction equipment sub-sectors Bonan Li*(S1700518070001)Head of A-share Industrials&Environmental Research +86 755 8898 3139*Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulations Equities Industrials June 2019 2 Why read this report?1 Facts and figures 3 Related research 4 Industrial giants ready to flex their muscles 5 Chinas industrial sewing machines 16 Chinas environmental monitoring equipment 20 Chinas railway construction equipment 23 Company Section 27 Jack Sewing Machine(603337 CH)28 SDL(002658 CH)37 CRHIC(600528 CH)46 CRRCE(1786 HK)55 Disclosure appendix 61 Disclaimer 64 Contents 3 Equities Industrials June 2019 Facts and figures 8.5m units Chinas industrial sewing machine sales volume in 2018+6.0%y-o-y Industrial sewing machine export unit growth in 3M19 Jack Sewing Machine is Chinas largest industrial sewing machine manufacturer.Its domestic market share surged to 22%in 2018 from 9%in 2013 in terms of number of units sold.It differentiates itself with superior supply chain management,efficient delivery,and solid after-sales service.25%CAGR Our forecast for Jack Sewing Machines EPS CAGR over 2019-21e,with rising ROE 10%Our forecast for Chinas investment CAGR in environmental protection through 2020e 7.0%SDLs R&D-to-sales ratio in 2018 20%Our estimate for the EPS CAGR of SDL over 2019-21e RMB800bn-plus Chinas railway investment in 2019 we see upside risks to this number We think the government could boost infrastructure investment to cushion the economy and shore up market confidence amid renewed US-China trade tensions.27%CRHIC has the largest market share in the tunnel shield machine industry in China,according to 2016 public data 37%CAGR Our forecast for CRCCEs EPS CAGR during 2019-21e Equities Industrials June 2019 4 Related research Relevant series or topic China Industrials:Initiate coverage:Going up,April 2019 China Machinery:Initiate coverage:Plenty to build on,November 2018 China Environmental:Initiate coverage:How to monetise Beautiful China,August 2018 5 Equities Industrials June 2019 Why invest in Chinas industrial sewing machine sector?Industry leader is set to see market share gains Domestic industrial sewing machine bellwether Jack Sewing Machine continues to grab market share in China.In terms of unit sales,according to our calculations,its domestic market share reached 22%in 2018,up from only 9%in 2013.We believe Jack Sewing Machine will continue to consolidate the domestic market,given its solid product quality and after-sales service,efficient delivery,effective solutions for small customers,improving R&D and innovation,as well as the gradual penetration into the high-end market.We expect Jack Sewing Machines market share in China to rise to 26%in 2019e,maintaining an upward trend based on its historical trajectory.Industrial giants ready to flex their muscles We believe the four domestic industry leaders will benefit from sector growth,rising market share,and R&D investment,as well as improving product quality and innovation.Valuations appear attractive versus historical levels,with solid earnings growth and rising ROE.The four stocks also have relatively strong defensive qualities at a time of growing trade tensions and uncertainty.We initiate coverage of four industry giants:Jack Sewing Machine Chinas largest industrial sewing machine manufacturer,SDL Chinas major environmental monitoring equipment producer,CRHIC Chinas largest manufacturer of tunnel shield machines,CRCCE Chinas largest railway track maintenance machinery manufacturer,all rated Buy.We prefer Jack Sewing Machine and CRHIC.We believe Jack Sewing Machine will continue to consolidate the domestic market Equities Industrials June 2019 6 Exhibit 1.Jack Sewing Machines market share in China continues to rise Source:Company data,China Sewing Machinery Association,HSBC Qianhai Securities estimates for 2019e Overseas exports are a long-term driver Chinas industrial sewing machines export unit volume rose by around 10.0%y-o-y in 2018 to 4.1m units.The trend continued so far in 2019 with 3M19 export unit volume up 6.0%y-o-y.We believe overseas markets will serve as a long-term growth driver,considering the attractive average selling price(ASP)and the improving product quality of domestic manufacturing leaders.With manufacturing sites continuing to be relocated away from China to other emerging markets,demand from these regions will likely become an incrementally important growth engine that will support the revenue outlook of domestic sewing machine manufacturers,in our view.Exhibit 2.China industrial sewing machinery export value Exhibit 3.China industrial sewing machinery export volume Source:General Administration of Customs of China,HSBC Qianhai Securities Source:General Administration of Customs of China,HSBC Qianhai Securities Why invest in Chinas environmental equipment sector?A fragmented industry with the potential for market share gains Chinas environmental monitoring equipment industry is fragmented.Many domestic participants compete in the low-to medium-end range and a few global giants control the high-end market.We believe domestic leaders,which only have single-digit market shares,can grow their market share supported by rising product quality,broadening product coverage,solid after-sales service and customer relationships,as well as gradually offering more high-end products.9%11%14%16%19%22%26%0123456789102013201420152016201720182019eChina industrial sewing machine unit salesJack industrial sewing machine unit salesUnits m-60%-40%-20%0%20%40%60%80%100%0.000.200.400.600.801.001.201.40China industrial sewing machine export valuey-o-y(RHS)USDbn-30%-20%-10%0%10%20%30%40%50%0.001.002.003.004.005.00China industrial sewing machine export volumey-o-y(RHS)m units 7 Equities Industrials June 2019 Exhibit 4.Market share of domestic environmental monitoring equipment leaders Source:Wind,HSBC Qianhai Securities Rising competitiveness supported by R&D investment SDLs R&D-to-sales ratio has been on the rise in the past five years.The ratio jumped from 3.7%in 2013 to 7.0%in 2018,reflecting the companys increasing commitment to product innovation and technology upgrades.We believe the consistent focus on R&D will enable SDL to enhance its product quality and strengthen its competitiveness in the long run.Exhibit 5.SDL R&D-to-sales ratio has risen substantially during the past five years Source:Bloomberg,HSBC Qianhai Securities Why invest in Chinas railway construction equipment sector?Upside risks to the 2019 railway investment budget At China Railway Corporations(CRC)annual working conference in January 2019,the company highlighted that railway infrastructure investment in 2019 would be maintained at a high level to support the central governments policy to increase infrastructure investment.Given the heightened US-China trade tensions,we think the government could further boost infrastructure investment to cushion the economy and shore up market confidence.This implies upside to our RMB800bn estimate for the 2019 railway budget;this could increase demand for railway construction equipment as well.0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%05,00010,00015,00020,00025,00030,000201220132014201520162017Chinas environmental monitoring equipment sales%of SDL%of FPI%of SailheroRMBm0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%201320142015201620172018SDLFPISailheroTMODanaher Equities Industrials June 2019 8 Exhibit 6.CRCs annual railway investment budget Source:Wind,HSBC Qianhai Securities estimates Positive signs from urban rail construction as well Urban rail transit construction is a locally funded business.The funding situation has shown signs of improvement in early 2019 as municipal bond issuance has rebounded substantially to RMB1.633trn in 4M19 from RMB521bn in 4M18.We believe urban rail transit construction and approvals will maintain good momentum in 2019e on the back of improving funding conditions and the need for local governments to deliver economic growth targets.As such,demand for railway(including urban rail)construction equipment could be boosted.Exhibit 7.China municipal bond issuance surged in 4M19 y-o-y Source:Wind,HSBC Qianhai Securities Relatively defensive amid the US-China trade tensions The share prices of Jack Sewing Machine,SDL and CRHIC have underperformed the CSI 300 Index YTD.We think the market has overreacted and believe the risk of further downside is limited.In terms of the current US-China trade tensions,we believe all four stocks,especially SDL,CRHIC and CRCCE,are relatively well-positioned.Regarding Jack Sewing Machine,we admit the US-China trade tensions could be a sentiment concern for some of its domestic customers,an issue which we believe has been well-flagged in 5866316648098248028018000100200300400500600700800900201120122013201420152016201720182019eActual railway infrastructure investmentOriginal budget of 2018CRCs budget of 2019RMBbn02004006008001,0001,200Jan-16 Apr-16Jul-16Oct-16 Jan-17 Apr-17Jul-17Oct-17 Jan-18 Apr-18Jul-18Oct-18 Jan-19 Apr-19Municipal bondRMBbn 9 Equities Industrials June 2019 the market.On the other hand,Jack Sewing Machines fundamentals appear to be sound as the company generates limited revenue from US exports and,according to our understanding,it procures its core components from Japan or Europe,rather than the US.In terms of SDL,CRHIC and CRCCE,the companies should be largely immune from the US-China trade tensions as their respective business is primarily domestically oriented and policy-driven with little exposure to the US.We think the companies could even be beneficiaries as the government may boost infrastructure investment and accelerate the approval of railway/subway and environmental projects to cushion the economy from the effects of the trade tensions.Exhibit 8.Share performance vs CSI 300 Index YTD Source:Wind,HSBC Qianhai Securities.Price as of 10 June 2019.Initiate coverage Jack Sewing Machine(603337 CH,RMB20.42,Buy TP RMB29.82)Jack Sewing Machine is Chinas largest industrial sewing machine manufacturer,making lockstitch,overlock and interlock sewing machines.We think the company has good supply chain management and efficient delivery,after-sales service and cost control.The management teams focus is on the core business,with a strong emphasis on product quality,innovation and R&D investment.We forecast Jack Sewing Machine to deliver a 25%EPS CAGR over 2019-21e.We expect ROE to rise from 19.7%in 2018 to 24.2%in 2021e on the back of a solid earnings growth outlook.We believe the stock should re-rate,considering its rising ROE outlook,firm earnings growth,and continued market share expansion.Share price catalysts over the near and medium term include:1)faster-than-expected market share gains in China,2)overseas M&A with good business synergies and reasonable valuations;and 3)potential rise in foreign shareholding through the Shanghai-Hong Kong Stock Connect.Beijing SDL Technology(SDL)(002658 CH,RMB7.27,Buy,TP RMB10.42)SDL is a major manufacturer of environmental monitoring instruments and a provider of environmental protection solutions in China.The company differentiates itself with a light-asset business model and limited exposure to public-private partnerships(PPP)projects,which avoids potential financial problems linked to PPP cancellations or liquidity issues.-20%-10%0%10%20%30%40%50%2-Jan17-Jan1-Feb16-Feb3-Mar18-Mar2-Apr17-Apr2-May17-May1-JunCSI 300 IndexJackSDLCRHICWe forecast Jack Sewing Machine to deliver a 25%EPS CAGR over 2019-21e Equities Industrials June 2019 10 We forecast SDL to deliver a 20%EPS CAGR in 2019-21e.We expect the company to continue generating positive FCF with a net cash position.We estimate ROE to improve from 8.9%in 2018 to 12.1%in 2021e,supported by solid earnings growth.Potential catalysts over the near and medium term include:1)strong environmental investment and supportive policies from the government;2)rising market share in this fragmented industry;and 3)product quality improvement and new product launches.China Railway Hi-Tech Industry Corporation(CRHIC)(600528 CH,RMB10.03,Buy,TP RMB13.87)CRHIC,a state-owned enterprise(SOE),is the worlds largest manufacturer of railway turnout(points and switches)and bridge steel structures and the second largest manufacturer of tunnel shield