China Construction Machinery – Earnings Recovery in Sight

In our previous report published in June 2026, we highlighted replacement demand, mining activities and overseas expansion as the key drivers of a sustained recovery in China’s construction machinery sector. The 1H26 results confirmed our view with the four major OEMs delivering revenue growth while underlying momentum continued to strengthen despite FX headwinds affecting reported earnings.

Moreover, underlying operating profit and cash flow continued to improve, suggesting that the recovery is increasingly visible in core operations. With pricing stabilizing and global machinery demand improving, we expect earnings momentum to strengthen in 2H26.

Domestic Recovery is Gradual as Volumes Lead Earnings: Excavators remained the strongest category in 1H26, with solid demand for small excavators supported by municipal works, agriculture, forestry and urban renewal.  Medium-to-large excavators are benefiting from infrastructure and mining demand. This is expected to benefit Sany Heavy Industry, where excavators account for around 40% of its revenue, helping it to deliver the strongest domestic growth among the four major OEMs.

Loaders have also benefited from replacement demand and electrification, although intense pricing competition continues to limit earnings upside. By contrast, cranes, concrete machinery and road machinery are recovering more gradually.  Tower cranes remained weak amid subdued property activity. In our view, the current domestic cycle could prove to be a more durable recovery rather than the previous property-led upcycle, with volume recovery likely to precede improvements in pricing and profitability.

Overseas Expansion Reshapes the Industry’s Earnings Profile. Over the past few years, the four major OEMs have increasingly relied on overseas expansion to offset weaker domestic demand.  The share of overseas revenue has since risen to more than half of total revenue. More importantly, solid demand from Europe, the US and Australia have broadened overseas growth beyond market share gains in emerging markets.

For Chinese OEMs, overseas orders typically carry a higher mix of premium products, translating into better margins.   However, Zoomlion is an exception.  Although its overseas margin remained higher than its domestic margin, its 1H26 overseas GPM was pressured by a weaker sales mix of high-margin Middle East/Central Asia market as well as a trade-off of margin for cash flow.

FX losses meant a much stronger underlying earnings trend. Despite decent revenue growth in 1H26, FX losses weighed on profits, causing reported earnings growth to lag the operating recovery. Excluding FX and one-off effects, underlying earnings at Sany, XCMG and Zoomlion improved at a much faster pace, showing that higher volumes, overseas expansion and operating leverage are beginning to feed through to profits. LiuGong remains the weaker exception, as domestic pricing pressure, higher raw-material costs and lower margins continued to weigh on profitability.

Our views: We believe the outlook for the machinery sector will continue to improve.  The sector appears to be entering the next stage of recovery, in which earnings growth is expected to catch up with volume growth. It is because domestic pricing has gradually stabilized since May while overseas prices began to improve in July.  With the volume recovery largely confirmed, a rising mix of overseas sales and easing FX headwinds will likely result in margin expansion.

We prefer Sany Heavy Industry (6031 HK, HK$19.93, HK$14.3bn) among the four major OEMs. Its core excavator franchise is likely beneficiary of the current product cycle, while its high overseas exposure and improving margins give it a more favorable product and geographic mix. As price increases flow through and sector profitability recovers, we expect Sany to deliver stronger earnings leverage. The counter is trading at 15x 2026E P/E.  (Research Department)