Machinery industry: high-end hydraulic pressure period optimistic about the flexibility of domestic

After a hundred years of development, the hydraulic industry has spiraled upward. The global scale reached 245.7 billion yuan in 2018, and the market is concentrated in major industrial countries. The scale of the Chinese market has reached 71 billion yuan, but the market is large but not strong, and the supply of high-end products is insufficient. The global hydraulic giant has a deep accumulation of technology and relies on steady cash flow to achieve development through the cycle. Domestic hydraulic faucet brands have entered the stage of tackling high-end hydraulic products, and construction machinery is one of the breakthroughs, thanks to the strong recovery of the industry and the increase in the share of domestic OEMs. It is recommended to focus on Hengli Hydraulics (601100, shares) and Eddie Precision (603638, shares).

1. The global hydraulic industry spirals upward

The sales volume of the global hydraulic market in 2018 reached 245.7 billion yuan/+2.61%. The global hydraulic market is showing a "screw-up" trend. During 2010-18, it was in a cycle every three years. The sales scale CAGR reached 10.06%, 7.14%, 10-12 years, 13-15 years, and 16-18 years. 6.64%.

The rapid urbanization of emerging markets and the renewal of infrastructure in developed markets have driven continued growth in the demand for mobile machinery. Hydraulic parts are an important part of mobile machinery. The latter include construction machinery, agricultural and forestry machinery, material handling equipment and commercial vehicles. After a sustained downturn in 2010-15, the global construction machinery industry has ushered in a recovery. Taking representative excavators as an example, according to the statistics of Kawasaki Heavy Industries, global sales of excavators increased from 177,000 units to 331,000 units in 2015-2018, with a CAGR of 23.2%. Among them, the Chinese market leads the global market recovery, and the North American and Indian markets outperform the Western European and Japanese markets (2017-2018).

The hydraulic market is concentrated in major industrial countries around the world. In 2018, the sales volume of the United States, China, Europe and Japan accounted for 97% of the total. In 2018, the sales volume of China's hydraulic market reached 71 billion yuan, but the market is large but not strong. It is manifested in the insufficient localized supply of high-end products and the overall low level of product added value. The technical difficulty of hydraulic pumps, valves, and motors is relatively high, and it is a key area for the Chinese hydraulic industry to be localized.

2. Breakthrough of domestic brands to high-end fields

The pattern of the global hydraulic industry is relatively concentrated. In 2018, the global hydraulic industry market CR4 exceeded 50%, and the overall share gap of domestic brands was relatively large. Most of the global hydraulic giants were founded more than 100 years ago. They have accumulated deep technology and the hydraulic business has entered a mature period. Judging from the history of the development of Rexroth and Parker, the two companies have stable cash flows, and have expanded their product layouts around the main industry through self-research or acquisitions to achieve cross-cycle development.

There are five major barriers for domestic brands to enter the high-end hydraulic field: 1. Product design and manufacturing barriers, which involve the research and development of new materials, new processes and new structures. The research and development cycle is long, the production process is complicated, and the company’s management capabilities are tested; 2. The market presence barriers, The quality of the hydraulic system directly affects the quality, performance and operating stability of the host product. The customer chooses more carefully, and the inspection period of the supplier is long and it is not easy to replace; 3. Product development time and investment barriers. It takes a long time to test hydraulic products before entering the market. And market verification, manufacturing and testing equipment are mostly dedicated equipment with large investment; 4. capital barriers, the hydraulic industry is a capital-intensive industry, requiring large-scale fixed asset investment, long production time, and testing the adequacy of corporate liquidity 5. Talent barriers. The hydraulic industry is a technology-intensive industry. Enterprises must have high-level R&D teams and technical personnel with rich practical experience to ensure the continuity of research and development and the advanced level of manufacturing.

The strong recovery of the construction machinery industry provides a good growth environment for domestic hydraulic components. From 2017 to 2019, the boom of the domestic construction machinery industry increased rapidly, and the sales of major varieties achieved rapid growth. According to data from the Construction Machinery Industry Association, in 2019, sales of excavators were 235,700 units/yoy +15.9%, and sales of truck cranes were 42,500 units/yoy +31.4%. Affected by the epidemic in 2020, we believe that subsequent counter-cyclical investment will be more inclined to stabilize demand. Among them, the real estate demand may be delayed, which will drag down the new construction and construction; the growth rate of infrastructure investment is expected to rise, and the epidemic disturbance is limited. The downstream demand of domestic construction machinery is expected to remain stable, and the construction machinery industry may enter a period of stable development. From 2011 to 2019, after the Chinese construction machinery industry experienced a decline, the share of domestic OEMs began to increase during the period, while the Japanese and Korean shares declined. We believe that with the increase in the share of domestic OEMs, the localization of core components such as hydraulic pumps and valves is the general trend.