The manufacturing industry is generally in a passive restocking state, with weak profit growth and a need for a boost in prosperity.
As of July 2024, the overall revenue growth rate of the manufacturing industry has been maintained at 2.9% for three consecutive months, which is a decline compared to the beginning of the year, while inventory has increased year-on-year.
In July, the year-on-year growth rate of industrial enterprise inventory was 3.70%.
Judging from the inventory cycle, combined with the PMI and the year-on-year growth rate of industrial profits, which are two indicators of the prosperity of the manufacturing industry, the industry is still weak.
China's manufacturing industry is in a passive restocking state, with weak demand.
The profit drivers of the midstream equipment industry are different.
This article uses the DuPont method to analyze the driving force of ROE in each secondary industry.
In our observation, the improvement of profitability in industries such as decoration, construction machinery, and ground military equipment is mainly due to the increase in net profit margin; the improvement of operational capacity in industries such as automation equipment, special steel, and marine equipment is reflected in the acceleration of total asset turnover; the construction industry drives its ROE growth through the adjustment of asset structure, that is, the increase of equity multiplier.
Other industries such as professional engineering, cement, and glass fiber are facing the dual drag of net profit margin and total asset turnover rate, which indicates that these industries have encountered challenges in profitability and asset operation efficiency.
Industry cycle analysis: Construction Decoration: The construction decoration industry is generally in a downward cycle, which is highly related to the completion of fixed asset investment.
Sub-segments such as decoration and professional engineering have a significant correlation between their revenue growth and the completion of real estate investment and infrastructure construction investment.
In terms of capacity cycle, most sub-segments such as professional engineering, basic construction, and housing construction have a declining proportion of capital expenditure in operating income, showing the characteristics of the capacity downturn period.
Building materials and steel: The building materials and steel sectors may experience a weak recovery in the short term, but they are still bottoming out in the long term.
In terms of capacity cycle, different sub-segments show different performances, such as steelmaking raw materials are in the period of capacity recovery, while cement and general steel are in the transition period from the downturn to the clearing period.
Mechanical equipment and environmental protection equipment: The mechanical equipment and environmental protection equipment industry is generally in a bottom repair state.
In terms of capacity cycle, the prosperity of the construction machinery industry has increased, while automation equipment, special equipment, etc., are in the transition period from the downturn to the clearing.
Power equipment: In the power equipment sector, the revenue growth rate of wind power equipment and other power sources has warmed up, while photovoltaics and batteries are in a declining phase.
In terms of capacity cycle, the capital expenditure of most sub-segments has decreased, but FCFE has not shown a significant improvement, indicating that most sub-segments are still in the transition period from the downturn to the clearing.
Industry competition pattern analysis: We use the Herfindahl-Hirschman Index (HHI) to measure the concentration of the industry.
The photovoltaic equipment, power grid equipment, and motor segments are more competitive, with a higher HHI value.
The HHI value of segments such as decoration, batteries, and military electronics shows an improved competitive pattern, with a marginal decline in the HHI value.
Risk warning: Macroeconomic fluctuations, market competition intensification, cost increases, and policy adjustments.
The overall weak repair of the manufacturing industry, there is a significant temperature difference within the industry.
The overall manufacturing industry is in a passive restocking state, with weak profit growth and a need for a boost in prosperity.
Taking the operating income, profit, and inventory year-on-year of enterprises above the industrial standard as observation indicators, as of July 2024, the overall revenue growth rate of the manufacturing industry has been maintained at 2.9% for three consecutive months, which is a decline compared to the beginning of the year, while inventory has increased year-on-year.
In July, the year-on-year growth rate of industrial enterprise inventory was 3.70%.
Judging from the inventory cycle, combined with the PMI and the year-on-year growth rate of industrial profits, which are two indicators of the prosperity of the manufacturing industry, the industry is still weak.
China's manufacturing industry is in a passive restocking state, with weak demand.
The performance growth rate of the manufacturing industry's sub-segments is quite different, with more industries in the continuous deterioration/continuous increase range of revenue growth.
According to the standard of the National Bureau of Statistics, we selected industries in the secondary industry of Shenwan that belong to the manufacturing industry for calculation.
In order to observe the situation of each industry in the past year, we used the overall method to calculate the corresponding year-on-year growth rate of operating income_TTM and net profit_TTM, for example, the mid-year report of 2024 operating income growth rate = (2023H2 operating income + 2024H1 operating income) / (2023H1 operating income + 2022H2 operating income) -1.
It should be particularly noted that our calculation has excluded individual stocks in the secondary industry classification that do not belong to the manufacturing industry, such as after excluding coal mining in the coal industry, the coal sector only includes the coke secondary sub-industry, so we use coke to represent the manufacturing industry in the coal industry.
Industries with increased revenue growth rate: mechanical equipment, national defense and military, light industry manufacturing, household appliances, textile and apparel, communication, computer, electronics.
Industries with continuous downward revenue growth rate: environmental protection, pharmaceutical and biological, agriculture, forestry, animal husbandry and fisheries, beauty care, upstream materials.
Based on the profit driving force decomposition and industry cycle judgment of the midstream equipment manufacturing industry sub-segments.
Profit driving - based on DuPont analysis.
We selected the manufacturing industry segments in the secondary industry of Shenwan according to the "National Economic Industry Classification" (GB/T 4754-2011), and further divided the manufacturing industry into upstream materials, midstream equipment, and downstream consumption according to the industrial chain position and attributes.
In this article, we focus on the profit driving, industrial cycle, and competitive pattern of each sub-segment in the midstream equipment segment.
In A shares, the industries belonging to the midstream equipment segment involve seven Shenwan first-level industries of building decoration, building materials, mechanical equipment, environmental protection, national defense and military, and steel.
Overall, most of the midstream equipment sub-segments' revenue growth rate (yoy) and ROE are declining, which may require us to further look for structural opportunities at the industry level.
In order to further explore which factors are dragging down the ROE of each industry, and which factors are making a positive contribution to ROE, this article uses the DuPont method to analyze the profitability, operational capacity, and solvency of each secondary industry.
Industries mainly driven by the improvement of profitability (reflected by the increase in net profit margin): decoration, construction machinery, ground military equipment, construction machinery; industries mainly driven by the improvement of operational capacity (reflected by the acceleration of total asset turnover): automation equipment, special steel, marine equipment; industries mainly driven by the adjustment of asset structure (reflected by the increase in equity multiplier): housing construction.
Industries simultaneously dragged down by net profit margin and total asset turnover rate: professional engineering, cement, glass fiber, rail transit equipment, military electronics, aerospace equipment, batteries, photovoltaic equipment, general steel, steelmaking raw materials.
Industrial cycle judgment.
In order to analyze the position of each sub-industry in the midstream equipment industry cycle, we decompose the industry cycle into industry cycle, capacity cycle, and inventory cycle for observation.
In the analysis of the capacity cycle, we use ROE to represent the profitability of the enterprise, use capital expenditure/operating income and capital expenditure/depreciation and amortization to represent the overall situation of the enterprise's capital expenditure, and use the absolute value of FCFE to represent the cash flow situation of the enterprise.
1.
Construction decoration industry cycle: From the perspective of market volume, the construction industry is in a downward cycle.
The construction decoration industry can be further divided into four Shenwan secondary industries: decoration, professional engineering, basic construction, and housing construction.
From the industry characteristics, the revenue growth rate of the construction decoration industry is highly related to the completion of China's fixed asset investment.
Among them, as a leading indicator, the cumulative year-on-year growth rate of real estate investment completion leads the revenue growth rate of housing construction by 0.5 years, the revenue growth rate of decoration by 1.5 years, and the cumulative year-on-year growth rate of infrastructure construction investment completion leads the revenue growth rate of professional engineering by 1.5 years, basic construction by 1 year.
According to the Kuznets cycle, the last long cycle of the construction industry was around 2000-2015, and now it is in the second long cycle since 2000.
In the medium cycle dimension, the last medium cycle was 2005-2015.
After smoothing the violent fluctuations before and after the epidemic, it is still in the stage of a downward cycle.
Capacity cycle: From the three major judgment indicators of the capacity cycle (capital expenditure/operating income, capital expenditure/depreciation and amortization, FCFE absolute value change) and the industry prosperity, the secondary sub-industries of construction decoration are still in the capacity downturn period.
Since the end of 2021, with the pressure on real estate, the return on capital of professional engineering, basic construction, and housing construction has declined, while the decoration industry has narrowed its losses after the credit loss caused by a large amount of bad debt provision in 2022H1, and has completed the turnaround by 2024H1.
In terms of capacity, the capital expenditure/operating income, capital expenditure/depreciation and amortization, and FCFE of each construction decoration sub-segment are in the downturn period, and the capacity has not been completely cleared.
2.
Building materials and steel industry cycle: In the short term, the building materials and steel sectors are in the recovery stage of a weak cycle, and they are still bottoming out in the long term.
From the perspective of industry revenue growth and the PPIRM year-on-year growth rate representing the prosperity of building materials and steel, the cycle regularity of glass fiber, cement, decoration building materials, and steel is relatively strong, and the cycle length is generally 3-4 years.
Since 2023H2, building materials and steel have shown a trend of increasing revenue growth, but the PPIRM is still at the bottom, and the industry prosperity may recover to a certain extent in the short term.
However, due to the decline in the growth rate of the real estate industry and infrastructure investment, the degree of recovery may be relatively weak.
Capacity cycle: The sub-segments of building materials and steel show the characteristics of capacity cycle differentiation.
Steelmaking raw materials are in the period of capacity recovery, cement and general steel are in the transition period from the downturn to the clearing period (FCFE has not yet risen), and glass fiber, special steel, and decoration building materials are in the initial stage of clearing.Inventory Cycle: Observing the three key indicators of debt repayment cash flow, replenishment cash flow, and inventory turnover rate, the building materials and steel sub-sectors are both in the destocking cycle.
3.
Machinery Equipment and Environmental Protection Equipment Industry Cycle: Looking at the overall revenue growth rate of the industry, the machinery equipment and environmental protection equipment are currently in a state of bottoming out and repairing.
Compared with the first half of 2022 to the second half of 2022, the revenue growth rate of each sub-sector of machinery equipment has been repaired to varying degrees.
According to the annual report of Yingfeng Environment, a leading company in environmental protection equipment, in the second half of 2023, the demand for environmental protection equipment in the market remained at a high level under the catalysis of policies, and the long-term development continued to be positive.
However, affected by the decline in macroeconomic conditions and government fiscal payment capacity, as well as the downward trend in customer budgets, the environmental protection equipment market continued the downward trend of the previous year.
Therefore, the revenue growth rate (TTM) of the environmental protection equipment industry is still negative.
Capacity Cycle: The prosperity of the construction machinery industry has been lifted, the proportion of capital expenditure to operating revenue has decreased, and FCFE has shown a trend of stabilizing and rising, which is at the end of the clearing period.
However, the ROE, relative proportion of capital expenditure, and FCFE of automation equipment, special equipment, and general equipment all show a downward trend, which is in the transition period from declining to clearing.
Against the backdrop of the decline in the environmental protection equipment and rail transit equipment, the capital expenditure has not shown signs of reduction, and the industry is still in a declining state.
Inventory Cycle: Looking at the year-on-year increase in inventory, the machinery equipment and environmental protection equipment sub-sectors are in a destocking state.
However, from the perspective of debt repayment and replenishment cash flow year-on-year and inventory turnover rate, the cash constraint of automation equipment and environmental protection equipment has decreased, the inventory turnover rate has risen, and the replenishment cash flow has shown signs of stabilizing.
The replenishment turning point of these two sub-sectors may be approaching.
4.
Power Equipment Industry Cycle: In the past year, the revenue growth rate of wind power equipment and other power sources has warmed up, while the revenue growth rate of photovoltaic, battery, motor, and power grid is in a declining stage.
Looking at the raw material prices of photovoltaic and lithium batteries, the power equipment sector has been more competitive since 2022.
The weak recovery of domestic macroeconomic conditions coupled with changes in overseas new energy policies, the industry as a whole is under pressure.
Capacity Cycle: The capital expenditure of the power equipment sub-sector has entered a declining state, but only the prosperity and FCFE of other power sources have been repaired to a certain extent.
Overall, other power sources are in the clearing period, and other sub-sectors are in the transition period from declining to clearing, waiting for the marginal improvement of the industry's FCFE.
Inventory Cycle: The year-on-year increase in inventory of batteries and motors has risen, but the inventory turnover rate of batteries has fallen from a high level, and the downward trend of replenishment cash flow is more obvious than that of debt repayment cash flow.
It is possible that the replenishment of batteries will temporarily end.
III.
Concentration of the Midstream Equipment Industry: To avoid the problem of inaccurate description of concentration caused by too few enterprise samples in the industry, we use HHI (Hirschman-Herfindahl Index) to measure the industry concentration by the square sum of the proportion of operating income of listed companies in the industry.
According to the definition of HHI, the larger the HHI value, the higher the industry concentration, and the competition tends to be oligopolistic.
Industries with more intense competition: photovoltaic equipment, power grid equipment, motors, environmental protection equipment, cement, professional engineering, steelmaking raw materials, special steel, ground armament, other power sources; Industries with marginal improvement in competitive pattern: decoration, batteries, military electronics, automation equipment, wind power equipment, general steel, general equipment, aviation equipment.
Risk warning: Macroeconomic fluctuations: If there are fluctuations in the macroeconomy or a slowdown in economic growth, it may lead to a decrease in demand for midstream equipment, which will affect the revenue growth of the industry.
Market competition intensifies: With more companies entering and technological progress, the competition in the industry may become more intense, which may lead to price wars, thereby compressing the profit margins and revenue growth rate of enterprises.
Cost increases: The rise in raw material prices or other cost factors (such as labor costs, logistics costs, etc.)
may also squeeze the profit space of enterprises, affecting the revenue growth rate.
Policy adjustments: Policy adjustments by national or local governments for the power industry (such as changes in subsidy policies, improvements in environmental protection standards, etc.)
may affect the operation of enterprises, thereby affecting the revenue growth rate.
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