Soochow: Engineering machinery resonates upwards at home and abroad, with a focus on the recovery of overseas industry prosperity.

Soochow released a research report stating that the engineering machinery sector is a typical cyclical industry, and judging the position of the cycle is crucial. Currently, both domestically and internationally are at the starting point of an upward cycle, with the sector's profit growth expected to be around 20%+ in the next 2-3 years. The core stocks are expected to have profits in 2026 corresponding to a current valuation of only 10-16X, and it is recommended to focus on these stocks. Looking ahead to 2026, in the domestic market, this cycle will exhibit the characteristics of a lower slope but longer duration, showing a moderate recovery trend overall; while in the export market, under the backdrop of the Federal Reserve's rate cuts, overseas demand is expected to enter a new upward cycle in 2026, creating a resonating situation domestically and internationally. Key points from Soochow: - In 2025, the engineering machinery sector in China experienced a comprehensive recovery and a mild recovery in exports, with the revenue gradually accelerating. - The scale effect is becoming evident and the speed of cost reduction is continuously advancing, leading to the sector's profitability continuing to improve. Looking ahead to 2026: 1. In the domestic market: According to calculations based on existing inventory and the theory of cycle updates and replacements, the annual average demand growth rate for excavators in China from 2025 to 2028 is expected to be above 30%. This cycle should peak in 2028, with sales reaching 250,000 units. However, the actual sales performance in 2025 was not as strong as the theoretical values, with the main reason being the impact of the capital availability rate on the conversion of demand to sales. 2. In the export market: Similar to domestic trends, the sales of excavators overseas also experience cycle disturbances. Overseas demand has been declining for the past 4 years (from 2022 to 2025) after peaking in 2021, mainly due to the Federal Reserve's interest rate cycle. Soochow predicts that under the rate cuts by the Federal Reserve, overseas demand is expected to enter a new upward cycle in 2026, aligning with the domestic market. Risk factors: Industry cycle fluctuations; infrastructure and real estate projects falling short of expectations; unexpected policy changes; heightened geopolitical risks.