M IdeaChina Industrials | Asia Pacific2024 Outlook: Cycle Recovery Takes TimeMorgan Stanley Asia Limited+Sheng ZhongEquity Analyst Sheng.Zhong@morganstanley.com +852 2239-7821 Joy ZhangEquity Analyst Joy.Zhang@morganstanley.com +852 3963-0338 Chelsea WangEquity Analyst Jinlin.Wang@morganstanley.com +852 2239-1118 Serena ChenResearch Associate Serena.Chen@morganstanley.com +852 2848-7107 Morgan Stanley appreciates your support in the 2024 Institutional Investor All-Asia Research Team Survey. Voting will open early January 2024. China IndustrialsAsia PacificIndustry ViewAttractive Related Report: China Industrials: 2024 Outlook - Stock Implications Capital goods demand is likely to remain at a cyclical low in 2024. Traditional and staples-related capex demand could be better than new energy. We prefer names with market share gains in China, overseas expansion and less new energy exposure: Weichai H, Dingli, Haitian, LK Tech, Hengli, Inovance.Where are we in the cycle? We think the China industrials segment will remain at a cyclical low in 2024, given a backdrop of subpar macro growth and overcapacity issues in China. Overseas expansion is a common strategy for industrials companies, and we think this will be a critical long-term growth driver, albeit with challenges. Various sub-sectors are at slightly different parts of the cycle curve ( Exhibit 1 ):• Bottomed out – Heavy-duty trucks and railway equipment reached lows in 2022, and turned around in 2023. We expect the recovery to continue in 2024. Laser is likely to bottom in 2024, but we think the uptrend will be flatter than before. • Bottoming at cyclical low – General machinery, automation, testing equipment and lithium battery equipment (ranked in order of cycle position) need more time to recover. Traditional industries' subpar recovery is being dragged by a slowdown in new energy capex. • Down-cycle – Construction machinery is in the later phases of a four- to five-year down-cycle that is set to continue in 2024, while solar equipment has fallen from the peak cycle since 2H23, and should see a down-cycle for 2024. What's our framework for stock picking? Segment cycle, company growth potential (share gains in China, competitive product to expand overseas, new initiatives), operational efficiency, balance sheet and valuation all matter in a challenging environment. • Key OW stocks – Weichai H (2338.HK), Focuslight (688167.SS) should be market share gainers amid China demand recovery. Dingli (603338.SS), Hengli Hydraulic (601100.SS), Haitian (1882.HK), LK Tech (0558.HK) are key plays on overseas expansion with solid track records. Inovance (300124.SZ) should continue to gain share in China, and increase activity in overseas markets. • Key UW stocks – We remain negative on all solar equipment stocks (Maxwell (300751.SZ), Autowell (688516.SS), etc.). Sany (600031.SS) is still seeing industry cycl...
