XCMG: Industry Upturn Meets Operational Improvements, Initiate with Buy

Overview

Nomura Orient International Securities initiates coverage on XCMG (000425.SZ) with a Buy rating and target price of RMB 13.60. The report believes the company is at a resonance period of industry upturn and operational improvements: domestic construction machinery industry enters new upturn cycle, overseas market expansion provides growth space, mining machinery business expected to become second growth curve, SOE reforms enhance operational quality. Forecasts 2026-28 revenue and net profit CAGR of 13.5% and 28.7%, current valuation below peer average with medium-to-long-term allocation value.

Core views

Industry cycle perspective: Report judges China's construction machinery industry is transitioning from export-driven phase to balanced growth phase combining domestic cycle recovery and overseas expansion. Domestically, policy support, equipment replacement demand and electrification trends will drive new upturn cycle; overseas, global construction machinery market sees over 80% sales from overseas markets while China's leading OEMs have only ~12% overseas share with significant penetration space. Excavators as core industry indicator have seen 22 consecutive months of YoY growth since April 2024, with Jan-Apr 2026 industry sales at 102,100 units (+22.2% YoY), domestic sales at 56,500 units (+15.0% YoY), exports at 45,600 units (+32.5% YoY). Company alpha perspective: XCMG holds ~28.4% domestic market share among China's top four players (XCMG, SANY, Zoomlion, LiuGong), leading in lifting machinery. Overseas expansion becomes dual driver for revenue and profits, overseas revenue ratio rising from 29.67% in 2022 to 48.20% in 2025, expected overseas market share to increase from 2.3% to 5.4% by 2028. Overseas gross margins consistently significantly higher than domestic, expected to steadily rise to 27.36%/28.58%/29.14% in 2026-28. Mining machinery business: Report views mining machinery as XCMG's most differentiated business segment and potential second growth engine. In May 2025, company acquired 51% stake in group's heavy vehicle company, integrating wide-body dump trucks etc. to complete mining machinery product portfolio. Targets mining machinery revenue exceeding RMB 40 billion by 2030 (RMB 9.377 billion in 2025), report forecasts 2026-28 CAGR of 33.7% with revenues of RMB 13.55/17.71/22.43 billion. Mining machinery gross margins typically higher than other product lines, scale-up expected to lift overall company gross margins. SOE reforms and incentives: Company's reform path follows "mixed-ownership reform introducing strategic investors, group holistic listing, equity incentives" three-step process. December 2025 announced equity incentive plan incorporating net profit, ROE, operating cash flow as core KPIs, 2028 net profit KPI floor of RMB 12 billion implies 2026-28 CAGR ~22.2%. Post-reform risk exposure narrowed, guarantee balance reduced from RMB 67.275 billion in 2022 to RMB 30.194 billion in 2025, debt ratio declined from 68.78% to 64.01%. 2025 ROE at 11.0%, among higher levels for domestic OEMs.

Analysis framework

Report adopts "industry beta + company alpha" dual-dimensional analysis framework. Industry beta perspective: judges industry at start of new upturn cycle via excavator sales cycle, equipment replacement cycle (8-10 years), policy catalysts (urban renewal, water projects, special bonds etc.); calculates global and China construction machinery market size and growth via Frost & Sullivan data to analyze domestic/overseas demand structure changes. Company alpha perspective: forecasts revenue CAGR and gross margins by business line (earthmoving, lifting, concrete, mining etc.), analyzes profit elasticity via overseas revenue ratio increase and gross margin differences; assesses operational quality improvements via SOE reform progress, equity incentive KPIs, risk exposure changes. Valuation uses PE method, selecting SANY Heavy Industry, Zoomlion, LiuGong, Shantui, Hengli Hydraulic as comparables, assigning 18x 2026F P/E (in line with peer average), deriving target price of RMB 13.60 based on 2026F EPS of RMB 0.76.

Methodology notes

• Industry Analysis FrameworkSupply-demand framework

  Construction Machinery Industry Cycle Analysis

  Report uses excavator sales as core industry indicator combined with equipment replacement cycle (8-10 years) to judge industry at start of new upturn cycle, typical cyclical industry supply-demand analysis method.

• Industry Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Construction Machinery Product Demand Transmission Sequence

  Report notes in typical construction cycle, crane and concrete machinery demand usually lags earthmoving equipment, so after earthmoving machinery recovery becomes visible, lifting and concrete machinery will also enter bottoming recovery phase.

• Valuation methodsPE/PEG valuation

  PE Relative Valuation

  Report uses 18x 2026F P/E for valuation, in line with comparable company average, considering company's legacy risk exposures (guarantees and financing lease repurchase obligations) still being cleaned up, no valuation premium assigned.

• Company Fundamentals & Financial FrameworkROIC–WACC spread

  ROE & Profit Quality Analysis

  Report incorporates ROE and operating cash flow into equity incentive KPIs, emphasizing transition from scale expansion to high-quality development, ROE improvement relies on simultaneous net margin and total asset turnover improvement.

• Competition & Strategy FrameworkMoat/Competitive Advantages

  Mining Machinery Business Differentiation Advantages

  Report views mining machinery as having high technical barriers, stable gross margins and strong customer stickiness, full lifecycle after-sales service generates stronger customer loyalty and anti-cyclicality, representing company's differentiated competitive moat.

• Event Gaming & Behavioral FinanceExpectation Gap/Expectation Management

  Equity Incentive KPI Targets Implied Growth Expectations

  Equity incentive plan's 2028 net profit KPI floor of RMB 12 billion implies over 80% growth from 2025's RMB 6.572 billion, 2026-28 CAGR ~22.2%, providing clear growth guidance to market.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• XCMG (000425.SZ)

  Beneficiary: Domestic construction machinery cycle recovery + overseas expansion + mining machinery second growth curve

  Strengths

  Domestic leadership in lifting machinery, complete mining machinery product portfolio, significantly higher overseas gross margins, ROE among higher levels for domestic OEMs

  Weaknesses

  Legacy risk exposures like guarantees and financing lease repurchase obligations still being cleaned up, no valuation premium assigned versus peers

  Comparison

  China's top four players (XCMG, SANY, Zoomlion, LiuGong) collectively held ~67% domestic market share in 2025, XCMG domestic share ~28.4%; SANY remains domestic leader in earthmoving machinery, XCMG continuously narrowing gap

  Risks

  Competitive landscape changes, R&D capabilities falling short, mining machinery expansion slowing, downstream demand weakness, geopolitical and overseas operational risks, raw material price fluctuations, currency volatility

Key data

• 2025 RevenueRMB 100.823 billionYoY +8.37%
• 2025 Net ProfitRMB 6.572 billionYoY +8.96%
• 2025 ROE11.0%YoY +0.63pp
• 2026-28F Revenue CAGR13.5%Nomura Forecast
• 2026-28F Net Profit CAGR28.7%Nomura Forecast
• 2026F EPSRMB 0.76Nomura Forecast
• Target Valuation Multiple18x 2026F P/EIn line with peer average
• Overseas Revenue Ratio48.20% (2025)29.67% in 2022
• Mining Machinery 2026-28F CAGR33.7%Nomura Forecast
• Jan-Apr 2026 Excavator Sales102,100 unitsYoY +22.2%

Impact & implications

Report views XCMG's current share price level as attractive, with industry beta improvement and company alpha emergence forming resonance. Domestic cycle recovery provides stable demand support, overseas expansion provides dual revenue and profit elasticity, mining machinery business scale-up expected to lift overall gross margins, SOE reforms and equity incentives drive continuous operational quality improvements. Key catalysts include sustained YoY improvement in domestic monthly industry data, commodity price uptrend supporting mining machinery demand. Report expects company's 2026-28 net profit CAGR of 28.7% to outperform peers, but valuation multiple assigned peer average 18x P/E to reflect legacy risk exposures still being cleaned up.

Risks

• Global and regional competitive landscape changes, company may fail to successfully adapt to industry competition trend shifts
• R&D capabilities falling short, product competitiveness constraints affecting business development and long-term growth prospects
• Mining machinery business expansion slower than expected, commodity price declines or major economies' monetary policy tightening may impact overseas miners' capital expenditures
• China and overseas market demand below expectations, macroeconomic recovery falling short affecting downstream customers' investment growth
• Complex global operating environment and geopolitical risks, overseas business expansion faces uncertainties
• Raw material price fluctuations, costs impacted by market supply-demand, supplier changes, substitute material availability etc.
• Currency volatility risks, rising overseas revenue ratio exposes company to USD, EUR, JPY etc. foreign currency business exchange risks

What to watch

• Sustained YoY improvement in domestic monthly construction machinery industry data
• Mining machinery demand strength supported by commodity price uptrend and mining capital expenditures
• Overseas revenue ratio and overseas gross margin improvement progress
• Equity incentive KPI (net profit, ROE, operating cash flow) achievement status
• Risk exposure cleanup progress for guarantee balances and financing lease repurchase obligations