The mechanical equipment industry that has benefited from China's accession to the WTO has already passed its golden decade. Now, in the context of the macroeconomic slowdown, this old Chinese-style myth has gradually entered a transition period.

      Perhaps this is not obvious from the overall profit report of the machinery and equipment industry in 2011. After all, in the industry statistics last year, the average operating income of mechanical equipment reached 2.412 billion yuan, an average compound growth of 23.79% in the past three years, and an average increase of 21.43% in 2010. From the perspective of net profit last year,the industry's average level has exceeded 200 million with a compound growth rate of 27.31% in the past three years.

      Industry gross margin fell for three consecutive years

     Let us look at the derivative financial indicators of the mechanical equipment industry.

     However, if the net interest rate is examined, the signs of slowing down in the machinery and equipment industry will be more obvious. The average net profit margin of the industry is 12.13%, and the profit margin of 142 companies is less than 10%, accounting for 49.13% of the total of 289, and 9 of them are negative.

      As a strong cyclical industry, debt ratios and cash flows reflect their financial capabilities more objectively than profits. In 2011, the asset-liability ratio of the machinery and equipment industry reached 34.15%. Although this figure was 13% and 4.45% lower than that of 2009 and 2010 respectively, the asset-liability ratio of more than 30% indicates that the industry is still facing a lot of pressure.

    From the cash flow, the tension in the mechanical equipment industry is more intuitive. According to statistics, the net cash flow from operating activities in 2011 was -443.34 million, showing an outflow greater than the inflow of ecology. Among the 289 industry companies, there were 136 in this state, accounting for 47.05%.

    In particular, Liugong (12.84, -0.18, -1.38%) and Chaori Sun (12.04, 0.05, 0.42%), the two companies have a value of -2.02 billion and -1.07 billion respectively. The 2011 annual report shows that Liugong's net profit fell by 14.38% year-on-year, and the net profit of Chaoyang Sun jumped to 125.29%. The reason is that the cost of the two companies in their main business is too high, and Liugong 81.5% and the ultra-sun 80.3% squeezed their respective profit margins, which ultimately affected the net amount of operations.

    However, in order to truly understand the machinery and equipment industry, this industry is a cyclical industry for the gross profit margin is a truly non-negligible indicator. Take 19.01% and 19.69% of Liugong and Chaori Sun as an example, the low gross profit margin is not only Directly leading to the dilution of profits, but also the company's security value will also be lost.

   The gross profit margin of the machinery and equipment industry has been in the downward channel for nearly three years, and fallen from 30.14% to 28.1% last year. This year-on-year decline in data is suggesting because China's machinery manufacturing industry has reached a critical crossroads.

   Construction machinery in the down channel.

   In the mechanical equipment industry, the benefits are mainly the national macro policy and the pull of investors. Since China joined the WTO in 2001, the mode of driving the heavy industry to drive the rapid development of the economy has become the main theme. During the past 10 years, the State Council's series of policies have supported the unprecedented development of the machinery manufacturing industry.

     However, under the influence of the macroeconomic downturn, the machinery and equipment industry has entered the downward channel. Especially construction machinery, due to the winter of real estate and the stall of railway projects, the field has to slow down its own pace. Under the trend of market saturation becoming more obvious, the average net interest rate of 13 listed companies of construction machinery fell to 7.38 last year, which is far below the average of 12.13% in the mechanical equipment industry, 10 of which are already below 10%.

    From the perspective of gross profit margin, the downward trend of construction machinery also highlighted for three consecutive years, compared with 28.52% in 2010. Last year's gross profit margin fell below 27%.

     Even the big companies like Xugong Machinery are not ideal. Although last year's net profit increased by 30.77% year-on-year, the 10.25% net interest rate did not stand in the field's average, and the gross profit margin fell from 21.69% in 2010 to 20.68%, which is about 6 percentage points lower than the industry average.

      Moreover, Xugong Machinery's net cash flow from operating activities last year was -2.03 billion yuan, while the asset-liability ratio climbed from 51.39% in 2010 to 56.34%.

    However, for the construction machinery industry, this year may be the bottom of the year. According to the "12th Five-Year Plan" Comprehensive Transportation System Plan, this year is to build a number of major railway projects. Recently, South China and North China have shown obvious signs of returning to work. There are more than 40 railway construction projects in the Guangdong and Guangxi regions starting working again. The return of downstream demand will boost the performance of construction machinery, and the most difficult period is about to pass.

     Focus on machine instrumentation.

    In the past, the machinery and equipment industry has mushroomed in the past ten years, relying on China's cheap labor. Although this can save the cost of the industry, due to excessive dependence and lack of innovation, China has been in the value chain of manufacturing. The low-end, unreasonable structure has brought about extensive industrial development.

       An industry analyst told the Financial Weekly reporter that the way to break through this bottleneck is to achieve industrial upgrade and gradually replace the labor force with high-end machinery and equipment. The sensitive machinery and equipment industry are greatly affected by the macro-economy, and the state's reform trend of supporting high-tech manufacturing technology will not only bring new growth points to the industry, but also this can be seen as a safety cushion for optimizing the industry because of its high quality. The technical resources are the core competitiveness of the manufacturing industry. 

     According to the judgment of the aforementioned analysts, in the mechanical equipment industry, metal products, machine tool tools, and instrumentation manufacturing will be the sub-sectors of key innovation and development of high-end equipment. So what we want to focus on is what is going on in these areas, and what are the potential good companies.

    The first is metal products, whose average gross profit margin of this field last year was 27.15%, lower than the level of the machinery and equipment industry in the past three years, and it is in a state of further development.

    From the statistical data, Furui Telecommunications may become the future star in this field. It is one of the few companies whose gross profit margin has risen steadily year by year. Last year, 30.49% of the gross profit margin was at the forefront of metal manufacturing and the key is that It has been accredited by the AQSIQ by the self-supercharging system of the LNG vehicle bottle that has been independently researched and undertaken by the national "863" project. The relevant standards have also passed the overseas assessment and certain technical advantages.

         Machine tools have been the focus of research and development due to the clear support of the national "Twelfth Five-Year Plan". It is predicted that the demand for medium and high-end CNC machine tools will be over four times than those similar low-end products in 2020. Taking Nippon Digital (26.95, 0.19, 0.71%) as an example, the gross profit margin has remained at around 38% in the past three years. Last year's net profit increased by 98.34% year-on-year. Moreover, in the first quarter of this year, it was also under government. More than 8.6 million financial subsidies have a large space for development in the high-end CNC machine tools.

          Finally, in terms of instrumentation manufacturing, it is a typical high-tech, high-output, and low-energy industry. Under the background of energy conservation and emission reduction, its downstream environmental protection industry is moving from manual sampling and experimental analysis to the automation, intelligence, and network direction. 

In 2011, 12 listed companies in this field had gross profit margins of more than 40% last year. For example, Yuanfang Optoelectronics (43.000, 0.45, 1.06%) (300306.SZ), which was just listed in the first quarter of this year, has a gross profit margin for three years. Gradually, it has reached 68.29% last year, and its net profit has also increased by 47.48% year-on-year. Its main business, LED and lighting light detection equipment, has recently been supported by national tax reduction and intellectual property protection policies, downstream demand will be in the explosive growth stage, and the company will also benefit greatly from the advantages of technology research and development.