Metallurgy / Chemicals / Rubber & Plastics

With the rising prices of upstream raw materials, construction machinery has experienced two rounds of price increases since 2021. We believe that the construction machinery industry will once again raise prices across the board, especially the cost-passing capabilities of leading companies are underestimated by the market.

1. After two rounds of price increases this year, construction machinery will once again be fully increased in price

Since the beginning of this year, the domestic construction machinery market has experienced two rounds of "price increases":

① The first round of price increases was due to the bottoming of price competition + rising upstream costs. The profit margin of agents was compressed to the extreme, and agents initiated the first wave of price increases.

② The second round of price increases was due to the increase in steel prices by more than 50% and the spread of price increases for all products from OEMs.

In the follow-up, the price of construction machinery will be raised again.

At present, the profit margin of agents has bottomed out, the downstream demand side continues to be strong, and costs such as superimposed steel continue to rise. Small and medium-sized enterprises first raised their prices due to cost pressure, which has now spread to OEMs such as Zoomlion and Xugong. Both will increase the sales prices of concrete machines, tower cranes, and elevators from June 1st.

2. The industry price war risk is controllable, and the leading cost transfer ability may be underestimated

①Risks in price wars are controllable, and higher profit margins are expected to be maintained

The industry concentration in this business cycle has increased significantly. The industry is highly cautious about price war competition and is expected to maintain a relatively high level of profitability in the future.

②The ability of leading companies to pass on costs is underestimated

It is expected that the gross margin pressure caused by the increase in raw materials of leading companies is less than 1-3%, which is lower than market expectations.

The top five customers/suppliers of Sany, Zoomlion, and XCMG are all low in concentration, and they have strong bargaining power for upstream and downstream. From the Q1 financial report of Hengli Hydraulics, the actual gross profit margin has changed much more than expected, and it has shown a strong ability to pass on costs.

The market may overestimate the impact of rising raw material prices and underestimate the ability of companies to transfer costs. It is expected that in 2021, the leading net profit margin will maintain a steady rise, and the profitability side may improve or the market may exceed expectations.