**Investment Highlights**
The machinery industry is experiencing both opportunities and challenges. On the positive side, the government is planning to establish an industrial development fund aimed at revitalizing the equipment manufacturing sector, which signals continued support for the industry. However, there are concerns as well—rising international iron ore prices have led to significant price hikes by major domestic steel producers like Baosteel, which in turn has pressured the profit margins of machinery companies.
Despite short-term headwinds, the long-term outlook for the machinery industry remains strong. The surge in steel prices can be viewed as part of a broader asset revaluation process. While it may temporarily squeeze profits, it could also mark a turning point in the industry’s shift toward more sustainable growth. For investors, we recommend focusing on companies with stronger cost management capabilities that can better withstand these pressures.
Looking at the construction machinery sector, import and export data show improving competitiveness of domestic products. This suggests that Chinese manufacturers still have a bright future in overseas markets. Even with rising steel prices, after considering factors such as gross margin, industry competition, and company valuation, we recommend paying close attention to Sany Heavy Industry and Zoomlion.
In the machine tool industry, import substitution remains a key investment theme. With strong demand from downstream sectors, high-end CNC machines are in short supply, giving manufacturers strong pricing power. These companies are better positioned to pass on cost increases to customers. Kunming Machine Tools is one such company worth watching.
**Risk Factors**: Investors should remain cautious about potential risks, including broader market volatility, tightening macroeconomic policies, the appreciation of the RMB, and continued increases in raw material prices, particularly steel. These factors could pose challenges for the industry’s growth.
**Government Support Continues**
Recent statements from Li Ye, director of the State Council's Office of Major Technical Equipment Coordination, indicate that the National Development and Reform Commission is working with the China Development Bank to set up an industrial development fund to boost the equipment manufacturing sector. While the technical plan is complete, final approval is still pending.
Additionally, the National Development and Reform Commission has released a special plan outlining the development of major technical equipment and industrial technologies during the "Eleventh Five-Year" period. The plan aims to develop eight key pieces of equipment and master four critical technologies, gradually reducing China’s reliance on foreign technology and promoting industrial upgrading.
**Steel Price Increases Impact Profit Margins**
Baosteel recently reached an agreement with Brazil’s CVRD on the 2008 iron ore benchmark price, leading to a 65% increase in southern Brazil’s mine prices. Following this, Baosteel significantly raised steel prices in Q2, with hot-rolled, cold-rolled, and heavy plates increasing by RMB 800 per ton. These price hikes far outpaced cost increases. Given Baosteel’s market influence, its price adjustments have further driven up domestic steel prices.
Since steel is a major cost component for machinery companies, rising prices are putting pressure on the entire industry, squeezing profit margins. Companies with high-value products and strong gross margins are less affected, but those operating in highly competitive environments or engaged in price wars face greater challenges.
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