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Machinery Industry: Solving The Mystery Of The Cycle Mar 29, 2018

 The cyclical fluctuation of market space in construction machinery and equipment industry is essentially derived from the limited life cycle of equipment, which is also applicable to other subdivision industries. In our study, we found that the shorter the product life, the higher the frequency of the cyclical fluctuations in the industry, the earlier the cycle occurs, and the greater the amplitude, the initial fluctuations will be transmitted along the timeline to the future, forming a cycle of economic cycles, and the general trend of the rise, mainly due to economic development, macro-level such as GDP growth can be sustained, Industry levels such as infrastructure and real estate investment growth can be maintained. On the other hand, the upgrading of the manufacturing industry, the continuous improvement of equipment quality, reliability and service life can make the economic development smoother and reduce the time and amplitude of the economic cycle.


The trend of the axis in the industry converges to the growth of macroeconomic growth. The faster the investment growth rate, the faster the equipment cycle dispersion, the more obvious the growth characteristics, on the contrary, the industry will face more ups and downs, growth, cycle-led. We found in the simulation, with the continuous growth of the economy, the cyclical characteristics of the industry will continue to weaken, the ultimate energy dissipation, completely let the transition to growth.


If the investment rate of industry declines or is less than expected, the cyclical characteristics of the required products will be further strengthened, the time passed by the time is longer, the slope of growth is flat, the amplitude of vibration is also increased, and the growth will be compromised in periodicity. The demand for construction machinery equipment corresponding to the unit capital Construction + real estate investment is decreasing in trend. We judged that from the macroscopic statistical point of view, the lower proportion of gross fixed capital formation means that the execution cycle of fixed assets investment projects is stretched, and the turnover rate of finished items is decreasing. Generally speaking, construction machinery and equipment procurement volume over time gradually decay. Therefore, we speculate that the distribution of the engineering machinery in the project construction time axis is uneven (before the high and low) influence, with the extension of project execution period in macroscopic statistics, the amount of construction machinery equipment retained by unit investment will also decrease with time, which may be the microcosmic explanation of the decrease of total amount of construction machinery equipment.


It led to the growth of construction machinery equipment has been less than infrastructure + real estate investment year-on-year growth, but the growth rate is narrowing in the trend. We forecast that in 2018 the construction machinery industry grew 34.3% year-on-year, maintaining high growth, reaching a new period of highs near 2021 and then falling back. In general, 2014-2017 construction machinery began to build a new cycle of the bottom, while gradually cyclical recovery ramp, cycle length and equipment life cycle is basically consistent; but as the trend of macro-investment growth declines, the cycle will increase by 2021


In the vicinity of the industry will reach more than before the highest value, replacement equipment accounted for the annual sales ratio will be maintained in 50% or so, the industry development axis Slope gradually converge to infrastructure + real estate investment growth, after the peak period, will again enter the cycle of the downward section. According to the reasonable assumption condition, it is estimated that the reasonable PE in construction machinery industry should be 17.3X at the end of 2018, if the market occupancy rate of the leading company is considered, the reasonable PE at the end of the year is about 20X. We try to estimate the reasonable price/earnings ratio of construction machinery and equipment industry at the end of 2018. According to the industry cycle characteristics, the future time period is disassembled into two sections 2019-2021 and 2021, and according to the calculation formula pe0=pek* (1+g) t/(1+k) T, as well as H-model, estimates the entire industry at the end of 2018 average reasonable P/e ratio of 17.3X, the leading premium can give 20X.