Sinolink: The domestic substitution space is large, and the opportunities for the machine tool sector configuration are becoming more prominent.

Sinolink released a research report stating that the structural judgment of this round of the cycle is that the fundamentals are stable and moving upward. Demand in emerging areas such as liquid cooling continues to drive, and companies with high product overlap will benefit more. The market space for five-axis machine tools is growing rapidly, with leading companies' technology becoming mature and domestication rates increasing rapidly. Currently, the turning point of the machine tool industry's prosperity is pointing upwards, with still large room for domestic replacements. It is recommended to focus on the core numerical control system link Wuhan Huazhong Numerical Control (300161.SZ), as well as Neway CNC Equipment (Suzhou) Co., Ltd (688697.SH) and Ningbo Haitian Precision Machinery (601882.SH), which are expected to accelerate their performance growth due to the industry's improving prosperity. It is also suggested to pay attention to Kede Numerical Control (688305.SH), which benefits from the accelerated domestic substitution of five-axis machine tools. Sinolink's main points are as follows: Cyclical Perspective: Industry data is improving, the cycle is accelerating upward, especially focusing on high prosperity in specific sectors. Domestic data has shown an acceleration of the cycle moving upward: The machine tool industry typically has a cycle of upswing/downturn every 2-3 years. This cycle hit bottom in 2023, with recovery appearing in 2024/2025. However, weakened performance due to negative PPI growth. In 2026, with PPI year-on-year turning positive coupled with continuous industry prosperity, the revenue of Chinese metal cutting machine tools in January-February increased by 15.3% year-on-year, and exports increased by 16.9% year-on-year, with companies performing excellently. This round of upswing cycle has shown an obvious acceleration. Japanese data for 1Q26 is also positive: New orders for Japanese metal cutting machine tools began to recover following a low in 2023, currently showing a gradual acceleration. In 1Q26, overall new orders increased by 26% year-on-year, export new orders increased by 35% year-on-year, and export order growth in March was as high as 40%. The global machine tool leader, DMG Mori Seiki, achieved a record high of 155.4 billion yen in new orders in 1Q26, a significant increase of 28.8% year-on-year, with double-digit growth in all sales regions. The company also raised its revenue and new order forecasts for the whole year. The performance of domestic general machine tools in 1Q26 has generally improved, especially focusing on opportunities in high prosperity sectors such as liquid cooling: Benefiting from the recovery of industry prosperity, the performance of domestic general machine tool companies in 1Q26 has also generally improved, with accelerated revenue growth and profits. The structural judgment of this round of the cycle is that the fundamentals are stable and moving upward. Demand in emerging areas such as liquid cooling continues to drive, and companies with high product overlap will benefit more. Growth Perspective: Domestic substitution is ongoing, focus on core links of numerical control systems and five-axis machine tools Firstly, focus on the link with the highest barrier and highest value share, the numerical control system link, with large domestic substitution space: The numerical control system typically accounts for about 20% of the raw material procurement costs of machine tools, making it the core component with the highest value share. At the same time, it also has the highest barrier in terms of software attributes. According to the calculations of this study, the market space for numerical control systems in China in 2025 is 20.8 billion yuan, while the revenue related to the system business of the domestic leading enterprise Wuhan Huazhong Numerical Control is only 901 million yuan, with a still low domestication rate. However, the surge of domestic substitution of numerical control systems has been seen since the start of the last round of Sino-U.S. trade frictions, with continued increase in downstream customer acceptance and potential benefits from the industry reshuffle brought by AI. At present, the Huazhong 10 AI numerical control system has reached deep cooperation with over 30 well-known domestic machine tool manufacturers such as Wuhan Heavy-Duty Machine Tools and Qinchuan Group, jointly developing more than 50 sets of intelligent numerical control machine tools. Domestic substitution is expected to accelerate. The market space for five-axis machine tools is growing rapidly, with leading companies' technology becoming mature and domestication rates increasing rapidly: According to the prospectus data of Toopur Numerical Control, the market space for five-axis machine tools in China in 2025 is 12.9 billion yuan, with a year-on-year growth of 19.44%, and the market space is expected to reach 35.2 billion yuan by 2030, with a compound growth rate of 22.2% from 2025 to 2030. Particularly in emerging areas such as aerospace and Siasun Robot & Automation, the current scale is small, but it is expected to maintain a rapid growth rate of 42.9% CAGR from 2025 to 2030. After years of development, the leading domestic five-axis machine tool companies now have strong self-made capabilities for core functional components, further reducing the impact of supply chain disruptions. At the same time, there has been a significant improvement in the maturity of their products, providing a solid foundation for domestic substitution. The domestication rate of five-axis machine tools is rapidly increasing, from 18% in 2020 to 59.5% in 2025, and is expected to exceed 78% in 2030. Headquartered companies like Kede Numerical Control have seen a significant increase in revenue in recent years. With rapid growth in the industry's total volume and opportunities in specific areas, the future growth prospects are still broad. Risks: Risks include the industry's economic recovery falling short of expectations and the progress of domestic substitution falling short of expectations.