China Merchants Securities has released a research report stating that the construction machinery sector's beta is progressively moving toward comprehensive prosperity. The domestic market is experiencing a steady moderate recovery driven by supply-side upgrades, while overseas markets are seeing a demand resonance between emerging and developed economies. The brokerage believes the sector will resume its upward earnings trajectory after short-term fluctuations, with sustainable fundamental improvement and attractive valuation positioning, strongly recommending bottom-fishing opportunities. It suggests focusing on leading construction machinery OEMs, component manufacturers, and high-altitude platform/aerial work vehicle and forklift producers.

Market Review: Share Prices Have Not Fully Reflected the Upward Beta

Using the Construction Machinery II (CITIC) index as a reference, from the start of 2026 to date, the construction machinery sector and the CSI 300 have returned -14.95% and -3.6%, respectively, with the sector underperforming the broader market. Fundamentally, the industry's prosperity has not declined; instead, it has consistently beaten expectations in both Q1 and Q2. The primary reasons for the weak share price performance are foreign exchange losses impacting reported earnings and macro factors such as geopolitical conflicts. Looking ahead to H2, the brokerage believes the construction machinery beta remains sustainable. As the pressure from the high FX loss base diminishes, an EPS+PE re-rating could emerge, and it expects the sector to outperform the broader index.

Operational Performance: Flaws Do Not Dim the Luster — High-Quality Development Despite FX Losses

① Revenue growth remains dual-core, driven by both domestic and overseas sales: In H1 2026, the sector's revenue reached RMB 240.306 billion, up 12.7% year-on-year. Domestic and overseas revenue grew by 7.46% and 15.32% year-on-year, respectively, with steady domestic growth and robust overseas momentum.

② FX fluctuations weighed on profitability: In H1 2026, the sector's net profit attributable to shareholders was RMB 18.763 billion, down 5.28% year-on-year. The profit pressure was primarily due to exchange losses from RMB appreciation. The sector's gross margin and net margin were 24.47% and 8.27%, changing by +0.07 percentage points and -1.5 percentage points year-on-year, respectively. The period expense ratio was 16.58%, up 2.63 percentage points year-on-year, mainly driven by a 3.54 percentage point increase in the financial expense ratio. Operating expense ratios all narrowed year-on-year.

③ Operational quality continues to improve: In H1 2026, the sector's operating cash flow stood at RMB 19.07 billion, with a net-to-cash ratio of 1.07, marking the first time the half-year ratio has exceeded 1.

Industry Performance: Beta Exceeds Expectations, with Potential Positive Surprises in Overseas Sustainability

In 2025, the most significant marginal change for the industry was the positive turn in domestic non-excavator machinery demand and the confirmation of a turning point in developed overseas markets, shifting the industry beta toward comprehensive prosperity. From January to August 2026, domestic excavator sales reached 94,600 units, up 17.35% year-on-year; exports were 96,900 units, up 31.79% year-on-year. Domestic Q1 and Q2 results consistently beat expectations, while Q3 saw a seasonal slowdown in growth, aligning with the brokerage's initial forecast. The overseas outperformance stems from sustained momentum in emerging markets alongside a clear recovery in developed market demand. The firm maintains its view that the beta is moving toward comprehensive prosperity across all product categories domestically and all markets for exports, firmly believing that the domestic recovery and strong export growth are sustainable and present potential positive surprises.

Risk Factors

Domestic demand recovery may fall short of expectations; overseas expansion may slow, leading to weaker-than-expected exports; trade frictions could hinder the global development of Chinese brands; rising raw material costs or intensified market competition could erode profitability; the statistical sample may not fully represent the entire sector and could be subject to distortion.