CMSC has released a research report stating that the construction machinery sector is currently moving towards a comprehensive upswing. The domestic market continues a moderate recovery driven by supply-side renewal, while the overseas market shows a combined demand surge from both emerging and developed markets. The firm believes the sector will return to an upward earnings trajectory after short-term fluctuations, with strong fundamentals and attractive valuations for capital allocation. It strongly recommends bottom-fishing investments, suggesting a focus on leading construction machinery OEMs, component manufacturers, and high-altitude/forklift equipment makers. CMSC's key views are as follows:

Since the beginning of 2026, excavator sales, both domestic and international, have exceeded expectations, indicating the sector's broad positive trend remains intact. Leading OEMs reported steady revenue growth in Q1 2026, with operational performance elasticity still significant. The firm notes that the sector's short-term high-frequency data is impressive, mid-term industry trends are certain, long-term global competitiveness is steadily improving, external disturbances are gradually easing, and valuations are attractive.

The firm selected 15 companies as research samples for the A-share construction machinery sector, including Sany Heavy Industry, Zoomlion, XCMG, Liugong, Shantui, Sunward Intelligent, Xiamen XGMA, Jiangsu Hengli Hydraulic, Edifier, Changling Hydraulic, Zhejiang Dingli, Nuoli, Anhui Heli, and Hangcha Group. It analyzed their 2025 annual reports, 2026 Q1 reports, and current industry developments.

**Market Review: Stock Prices Adjusted, Fund Holdings Fell to Lows** Using the Construction Machinery II (CITIC) Index as a reference, in 2025, the construction machinery sector and the CSI 300 gained +36.87% and +21.19%, respectively, with the sector achieving significant excess returns. Key drivers included: 1) stronger-than-expected domestic demand recovery, 2) a demand inflection point in overseas developed markets, 3) earnings elasticity release from leading companies, and 4) catalysts from major infrastructure projects like the Yalong River hydropower station. Since the start of 2026, the construction machinery sector and CSI 300 have returned -10.14% and +2.86%, respectively, with the sector underperforming the broader market, mainly due to non-operational factors like rising oil prices and exchange rate fluctuations. The firm judges that as various external disturbances gradually subside, the sector's consistently positive high-frequency data is expected to rebuild market confidence in its upswing. Institutional positions have already bottomed out, with existing selling pressure cleared, while there is also potential for increased allocations. The sector's upward fundamental certainty and the cost-effectiveness of capital deployment highlight the value of bottom-fishing.

**Potential Catalysts: Sector Continues to Outperform, High-Quality Development Attributes Stand Out** (1) Industry Performance: In 2025, the most significant marginal change for the industry was the return to positive growth in domestic non-excavator demand and the confirmation of an inflection point in overseas developed markets, signaling a shift to comprehensive sector prosperity. From January to April 2026, domestic excavator sales reached 56,500 units, up 15.04% year-on-year, while exports were 45,600 units, up 32.49% year-on-year. After fluctuations in January-February, domestic sales exceeded expectations consecutively in March-April, aligning with initial annual forecasts. Overseas outperformance was due to sustained strength in emerging markets alongside a clear improvement in developed market demand. The firm maintains its view that the sector is moving towards comprehensive prosperity across all domestic product categories and all export markets, emphasizing the sustainability of the domestic recovery and the potential for further export surprises.

(2) Operational Performance: 1) Synchronized growth in domestic and international sales revenue: In 2025 and Q1 2026, sector revenues were CNY 369 billion and CNY 101.9 billion, up 10.45% and 12.81% year-on-year, respectively. In 2025, domestic and international revenues increased by 6% and 17% year-on-year, showing a resonant structure and overall marginal acceleration. 2) Release of operational profit elasticity: In 2025 and Q1 2026, sector net profit attributable to shareholders was CNY 29.5 billion and CNY 8.3 billion, up 16% and down 5% year-on-year, respectively. Factors like strengthened cost control, optimized business structure, and improved operational efficiency continued to enhance operational performance. The Q1 2026 profit decline was mainly affected by non-operational factors like exchange losses. 3) Evidence of high-quality development: In 2025, the sector's operating cash flow was CNY 49.4 billion, up 50% year-on-year, with a net cash flow ratio of 1.68. Additionally, leading OEMs initiated a wave of price increases starting May 2026, marking the industry's entry into a new phase of high-quality development.

**Risk Warnings:** Domestic demand recovery may fall short of expectations; overseas expansion slowdown could lead to weaker-than-expected exports; trade frictions may hinder the global development of Chinese brands; rising raw material costs or intensified market competition could reduce profitability; the statistical sample may only partially reflect the sector's full picture and could be distorted.