Among the 26 listed companies we cover, energy-saving environmental protection equipment saw an average year-on-year performance growth of 68.9%; oil and gas & energy equipment, third-party testing, intelligent equipment, and agricultural machinery grew by 10%–20% year-on-year; rail transit equipment grew by a single digit; while construction machinery , coal machinery, and shipbuilding & marine engineering declined year-on-year.

    Key Points

    1) Construction machinery: small companies see growth, large companies continue to adjust; the industry is expected to achieve over 10% growth in 1Q14 on a low base;

    2) Rail transit equipment: deliveries surged in 4Q, striving to meet the full-year 2013 targets; stable growth is expected in 2014;

    3) Oil and gas equipment: due to factors such as natural gas price reform since 3Q13, personnel changes at CNPC, and changes in capital expenditure by the three major oil companies, demand growth for some sub-segments of oil and gas equipment slowed somewhat in 2H13, but leading listed companies (Jerry Shares, CIMC Enric, Jinka Shares) are still expected to achieve steady performance growth in 1H14;

    4) Intelligent equipment: intelligent manufacturing will safeguard China's position as a major manufacturing country; in 2013, foreign enterprises began to release large-scale demand for industrial robots, and domestic demand is expected to explode in 2014;

    4) Shipbuilding and marine engineering: the industry chain is expected to continue recovering in 2014 (order volume may decline somewhat, but prices will continue to rise); due to the long-cycle nature of shipbuilding orders, major companies are expected to remain marginally profitable in 1H14, but大概率 will continue to improve in 2014-15; CIMC is expected to rebound significantly in 1H14, with attention to Qianhai development catalysts;

    5) Third-party testing: market-oriented reform of the quality inspection system in 2014 will drive expansion of the third-party testing industry, with demand growth in life science-related testing services exceeding 20%.

    Valuation and Recommendations

    We maintain the 2014 strategy theme of "following policy, picking up cyclical, seeking growth." Having passed through the policy-driven sectors at the turn of the year, we are relatively more optimistic about trading opportunities in cyclical sectors such as construction machinery after the Spring Festival sales season. Throughout the year, intelligent equipment, energy-saving and environmental protection equipment, testing services and equipment, and oil and gas equipment will remain our firm long-term choices; we recommend investors focus on Liugong, Zoomlion, Sany Heavy Industry, Siasun Robot, Changrong, Jerry Shares, Jinka Shares, Kaishan, Nanfang Pump, and Centre Testing.

    Risks

    Macroeconomic recovery weaker than expected; industry support policies below expectations.