China construction machinery sector maintained robust growth momentum. According to the China Construction Machinery Association (CCMA), excavator sales units grew 51% y-o-y in August (vs. a 55% increase y-o-y in July). China’s excavator sales amounted to 210,474 units in 8M20, up 29% y-o-y. We reiterate our positive view on China’s excavator and construction machinery demand, supported by replacement demand, new demand in rural areas, environmental emission standard upgrades, and a pick-up in infrastructure investment.   Lift earnings forecasts and target prices for Hengli and Dingli. Year-to-date, the share prices of Hengli and Dingli have continued to outperform substantially, up 115% and 99%, respectively. We think the stocks can continue to outperform, supported by a robust EPS CAGR with high visibility, continued ahead-of-consensus industry growth, acceleration in import substitution, global-standard product quality, and robust corporate governance. We raise Hengli’s EPS estimates by 17.0%/12.7%/6.4% over 2020-22e, in light of a fast ramp-up of its hydraulic pumps and valves business, accelerated import substitution, and margin improvement. We raise Dingli’s EPS estimates by 17%/20%/22% over 2020-22e, considering its surging sales in the domestic market (up 171.7% y-o-y in 1H20), capacity expansion of boom AWP (aerial working platform), and structural growth of China’s AWP industry. In this report, we also update our forecasts for Great Star, and downgrade both Hangzhou Oxygen and Jack Sewing Machine to Hold from Buy largely on valuation. Preferred Buy-rated stocks: Hengli Hydraulic, a key beneficiary of accelerating import substitution and global expansion due to its global-standard product quality and superior industry reputation. Zhejiang Dingli, a key beneficiary of China’s booming AWP industry and rising import substitution. Sany Heavy, an industry leader with strong defensive characteristics, boosted by its market share gains, superior operational and management efficiencies, as well as rising dividend payout. Eddie Precision, supported by China’s robust excavator demand and import substitution in the hydraulic component business, and much higher trading liquidity of USD15m YTD vs USD9m before. 

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