Engineering machinery sector monthly tracker in Nov. 2008: business climate trending down  quickly, the dawn is to break － Guo Yaling and Xue xiaobo – Outperform (Reiterate)

Growth of industry decreased quickly, export was relatively well. Although from January to September, sales growth of the industry reached 43%, the growth decreased quickly, and sales of some kinds of products shew negative growth in September and October. Compared to domestic demand, export was relatively well. The growth of export remained about 70% from January to August, and decreased slightly to 60% in September.

Modulate down the expectation of industry and company in 08 and 09 year. The prosperity in 09year faces threats such as global economy crisis, domestic economy decrease, increasingly pressure of inventory and cash flow in company and so on. Although there are some good news such as “guaranteeing increase” policy, government investment increase and so on, these can not compensate the negative effects of investment decrease and global economy crisis, so change down the expectation of industry and company in 08 and 09 year. Considering the base, we estimate that the growth of industry will present “from low to high”, and will be about 15% in all year.

The “guaranteeing increase” policy and the increase of government investment inject cardiotonic to the industry development. With the deteriorating of outside environment and the slowing down of domestic economy increase, investment has become the most important part of “guaranteeing increase”. In addition, the decrease of steel price will alleviate cost.

The prosperity of industry has already reached the bottom, and the long run outlook of the industry is beautiful. Because of the high base in first half year of 08, the industry has not reached the bottom from the year-to-year perspective, but the 4th quarter may be the bottom from the month-to-month perspective. Considering that the domestic infrastructure construction, the improvement of urbanization and new countryside construction are guarantees of the long run development of the industry, and that the export market are very huge, so the long run outlook of the industry is beautiful.

The valuation has reflected the market expectation in advance, so reiterate the investment rating “outperform” for the industry. Although we downgrade the EPS of some companies, given that the valuation level has reached the historical low and that the “spring” is coming under the “guaranteeing increase” policy, so we reiterate the investment rating “outperform” for the industry and “buy” for the key companies.