P. 1
SocGenChinaConstruction

SocGenChinaConstruction

Ratings: (0)|Views: 1,564 |Likes:
Published by leithvanonselen

More info:

Published by: leithvanonselen on Jun 24, 2011
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

03/19/2013

pdf

text

original

 
 
Macro Commodities Forex Rates Equity Credit Derivatives
23 June 2011
Equity
Sector Review
www.sgresearch.com
Capital Goods
Chinese construction bubble
Preparing for a potential burst
Overweight
 
Construction in China - boom or bubble?
The exponential growth of real estate andinfrastructure spending in China over the past decade has raised concerns over theemergence of a construction bubble that could burst any time soon. Various data indicate
that China has ‚over built‛ over the past decade; China is consuming 1,400kg of cement per
 head per annum, more than 4x higher than the world average and above the level consumedby Spain ahead of its housing crisis. China is building almost 2 billion sqm of new housingper annum, enough to accommodate 60 million people while around 20 million are migratingto the cities every year. In terms of roads and railways, we found that China is also ahead ofits development curve. While we acknowledge the long-term prospects offered by theChinese economy and its urbanisation, we believe the current pace of construction activity isunsustainable and a painful adjustment will come sooner or later. The recent weakness inChinese construction equipment data could be a first warning signal that the Chineseconstruction growth story might not go on forever. Such concerns have been partly reflectedin the weakness of Chinese construction machinery stocks (-16%) and commodities (-13%for main base metals on average) since early April.
 
Biggest near-term risk for capital goods lies in mining
European capgoods companies havea limited direct exposure to the Chinese construction market. The stocks with the strongestexposure are Assa Abloy (9% of group sales), Volvo (8%) and Schneider (4%). The biggestrisk relates to the mining industry, in our view. Any construction downturn in China wouldhave severe consequences on commodity demand and prices, leading to lower capex plansfrom miners. Stocks with the highest exposure to the mining industry are Sandvik (36% ofgroup sales) and Atlas Copco (26%). We now believe mining capex could peak at a recordhigh level in 2011 with latest consensus forecasts for the top five miners suggesting a declinein capex post-2011.
 
Key recommendation
Trading at a premium to the sector despite significant exposure to theChinese construction risk, Atlas Copco (rating lowered from Buy to Hold) and Sandvik (ratinglowered from Hold to Sell), now have unappealing risk/reward profiles. Although decliningconstruction equipment sales in China could hurt sentiment, we maintain our Hold rating on Volvo but lower our TP to SEK110. Schneider would not be immune to a collapse in theChinese construction market; however, the shares remain good value with significantexposure to the energy efficiency and industrial productivity themes.
Stock selection
Preferred
Siemens
Least preferred
Sandvik
Key recommendations
Price TP Reco P/E EV/EBIT Div. yield Comments21/06 12m 12e (x) 12e (x) 11e
 Atlas Copco 161 150 Hold 14.0 10.0 3.2 Sizeable exposure to mining capex and to ChinaSandvik 108 90 Sell 12.4 9.5 3.9 Sizeable exposure to mining capex and highly sensitive to volumeSchneider 113 140 Buy 11.4 8.4 3.5 Exposed to Chinese construction but appealing play on energy efficiency Volvo 106 110 Hold 9.1 6.5 3.3 Exposed to Chinese construction equipment but low valuation
Sébastien Gruter Gaël de Bray, CFA Adrien de Susanne Colin Campbell
(33) 1 42 13 47 22 (33) 1 42 13 84 14 (33) 1 42 13 01 61 (44) 20 7762 5609
sebastien.gruter@sgcib.com gael.de-bray@sgcib.com adrien.de susanne@sgcib.com colin.campbell@sgcib.com
Societe Generale (‚SG‛) does and seeks to do business with companies covered in its rese
arch reports. As a result, investors should beaware that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only asingle factor in making their investment decision.
 
PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S)CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.
 
 
Capital Goods
23 June 20113
Sector
leading indicators
China PMI is weakening China FAI and IP growth (yoy, %)
4042444648505254565860
   M  a  y  -   0   5   A  u  g  -   0   5   N  o  v  -   0   5   F  e   b  -   0   6   M  a  y  -   0   6   A  u  g  -   0   6   N  o  v  -   0   6   F  e   b  -   0   7   M  a  y  -   0   7   A  u  g  -   0   7   N  o  v  -   0   7   F  e   b  -   0   8   M  a  y  -   0   8   A  u  g  -   0   8   N  o  v  -   0   8   F  e   b  -   0   9   M  a  y  -   0   9   A  u  g  -   0   9   N  o  v  -   0   9   F  e   b  -   1   0   M  a  y  -   1   0   A  u  g  -   1   0   N  o  v  -   1   0   F  e   b  -   1   1   M  a  y  -   1   1
 
Chinese PMIis on adownwardtrend albeitremainingabove thecritical mark (50). May datawas slightlybetter thanexpected
0510152025303540
   M  a  y  -   0   6   A  u  g  -   0   6   N  o  v  -   0   6   F  e   b  -   0   7   M  a  y  -   0   7   A  u  g  -   0   7   N  o  v  -   0   7   F  e   b  -   0   8   M  a  y  -   0   8   A  u  g  -   0   8   N  o  v  -   0   8   F  e   b  -   0   9   M  a  y  -   0   9   A  u  g  -   0   9   N  o  v  -   0   9   F  e   b  -   1   0   M  a  y  -   1   0   A  u  g  -   1   0   N  o  v  -   1   0   F  e   b  -   1   1   M  a  y  -   1   1
FAI yoy growthIP yoy growth
 
Despiteweakening PMIdata, Chinesefixed assetinvestment andindustrialproductiongrowth keptsurprising on theupside over pastthree months
Source: Datastream Source: National Bureau of Statistics
Chinese real estate growth (yoy, %) Excavator deliveries in China
10%15%20%25%30%35%40%20032004200520062007200820092010Q1 11
 
Growth inChinese realestate hasaveraged 25%from 2003 to2010.
-4,0008,00012,00016,00020,00024,00028,00032,00036,00040,00044,000
   A  p  r  -   0   1   O  c   t  -   0   1   A  p  r  -   0   2   O  c   t  -   0   2   A  p  r  -   0   3   O  c   t  -   0   3   A  p  r  -   0   4   O  c   t  -   0   4   A  p  r  -   0   5   O  c   t  -   0   5   A  p  r  -   0   6   O  c   t  -   0   6   A  p  r  -   0   7   O  c   t  -   0   7   A  p  r  -   0   8   O  c   t  -   0   8   A  p  r  -   0   9   O  c   t  -   0   9   A  p  r  -   1   0   O  c   t  -   1   0   A  p  r  -   1   1
 
Following asurge inexcavator deliveries over the past threeyears, weaker data areemerging (-12%yoy in May)
Source: National Bureau of Statistics Source: CCMA 
Chinese construction equipment market ($bn) Chinese CE market shares
0102030405060702001200220032004200520062007200820092010
 
The Chineseconstructionequipmentmarket hasgrown by 25%p.a. on averageand has reached$60bnaccording toCCMA.
Caterpillar9%Volvo7%Komatsu5%Hitachi4%Kobelco1%HunanSunward1%Liugong5%Lonking4%Sany Heavy11%Shantui4%XCMG8%Zoomlion11%XGMA3%OtherChinese18%Others9%
 
The Chineseconstructionequipmentmarket isdominated bydomesticplayers and their control of themarket hastended toincrease.
Source: CCMA Source: SG Cross Asset Research
Exposure to China (2010 revenues) China -
Contribution to group’s growth 04
-10
0%2%4%6%8%10%12%14%16%
   A   B   B   S   K   F   S  c   h  n  e   i   d  e  r   A   t   l  a  s   V  o   l  v  o   A  s  s  a   A   b   l  o  y   S   i  e  m  e  n  s   S  a  n   d  v   i   k   P   h   i   l   i  p  s   A   l  s   t  o  m   L  e  g  r  a  n   d
 
 ABB, SKF,Schneider and Atlas Copcoderive morethan 10% oftheir revenuesfrom China
0%10%20%30%40%50%60%
   V  o   l  v  o   C   E   S  c   h  n  e   i   d  e  r   S   K   F   A  s  s  a   A   b   l  o  y   A   t   l  a  s   S  a  n   d  v   i   k   A   B   B   S   i  e  m  e  n  s
 
China has beena key driver oforganic salesgrowth for Europeancapgoodscompanies.
Source: SG Cross Asset Research, Company Data Source: SG Cross Asset Research, Company Data

Activity (12)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
unalank liked this
BP liked this
javier_pereiro liked this
shashwat panda liked this
shashwat panda liked this
maxwelton9938 liked this
maxwelton9938 liked this
GildoParvus liked this

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->