Construction Machinery Sector:Stricter environmental policy to drive replacement demand

Shandong province to follow stricter environmental policy for constructionmachinery In line with the “2017-2018 Action Plan for Autumn/Winter Air PollutionTreatment in the Jingjinji Region and Surrounding Areas”, Shandong province hasannounced a stricter environmental projection policy to control construction machinery:1) it will stop the use of old construction machinery that cannot meet National IIIemissions standards; 2) it will speed up the elimination of outdated constructionmachinery.

    Several cities have already implemented stricter environmental policies As well asShandong province, several cities including Beijing, Jiangsu, Zhengzhou, andChongqing, have already announced stricter environmental policies for constructionmachinery.

    Extra replacement demand for construction machinery According to ChinaConstruction Machinery Association (CCMA), total existing construction machinerystood at 6.72-7.28m units at the end of 2016. Among these, 22% were excavators, 24%loaders and 33% forklifts. More importantly, around 2m construction machinery unitsonly meet National 0 emissions standards, while 400k units meet the National 1standard. As such, we expect stricter environmental policies to lead to higherreplacement demand for contraction machinery.

    Maintain positive view on construction machinery We have done scenario tests ondemand for excavator and loaders in China next year. We estimate that all oldmachinery that does meet National III emissions standards will be eliminated by 2020.

    Meanwhile, considering the discarding rate and replacement needs, we expectexcavator sales volume to grow 20% YoY and loader volume to rise 30% YoY in Chinanext year (our base case scenario). Our bull case scenario sees sales volume ofexcavators and loaders increasing by 28% and 39% YoY respectively. Thus, we arepositive on the construction machinery market next year.