As China’s economy further gains momentum in 2021 and overseas economies are likely to restart helped by vaccines, we are optimistic on China’s manufacturing capex and industrial machinery demand, thanks to an industrial profit rebound and high capacity utilisation rates. CS analysts in tech, auto, renewables and consumer goods are positive on their sectors, supporting our view. We expect manufacturing upgrades and technology progress to drive advanced machinery to further proliferate among various industries.

Localisation is a multi-year trend in advanced industrial machinery markets and domestic companies would benefit more from the upcycle. We have seen share expansion by domestic companies in the automation sector for years and it clearly accelerated in 2020.

We believe the landscape change is sustainable, thanks to a narrowing technology gap, tailored product solutions, better sales service and large exposure to emerging sectors.

Fibre laser is following a similar trend, where local makers are gaining market share from international competitors. After dominating in the low-power market, they have started to penetrate high power and other high-end fields.

We initiate coverage on Estun, Xinje, Leadshine, Raycus, Haitian and Yizumi with OUTPERFORM, and Leader and Friendess with NEUTRAL ratings. We keep OUTPERFORM ratings on Inovance and Han’s Laser. Among sectors, we prefer automation to laser equipment and PIMM (plastic injection moulding machines). Our top picks are Estun in automation, Raycus in laser and Yizumi in plastics machinery. Estun is the largest local robot maker and we are confident on its high growth of robot shipments in 2021. We expect its margin to significantly improve in the next three years. Raycus, as the largest fibre laser manufacturer, should enjoy laser equipment growth and gain market share from global giants. We believe a pricing decline would have a smaller impact and its margin gradually recover. Yizumi is the second-largest PIMM maker in China. We like its attractive valuation and recovering demand from the auto and home appliance sectors. Key risks: slower vaccination rates; a weaker-than-expected economy.