According to the Zhitong Finance APP, CITIC Construction Investment has released a research report stating that the cyclical attributes of the process industry are evident, with capital expenditure in the petrochemical sector expected to decline significantly by over 20% in 2024. Investment planning in the northwest coal chemical sector is being vigorously promoted, which is expected to bring marginal changes to the new market. In the existing market, equipment renewal policies continue to be implemented, and subsidies are gradually being realized, providing medium- to long-term resilience for investment in process industry equipment. The process equipment combines "dynamic + static" elements and has a large system, involving many links such as compressors, pumps, seals, air separation equipment, valves, instruments, and control systems, all of which have developed leading enterprises with domestic and international competitiveness. As the recovery of the industry's fundamentals is yet to be gradually verified, it is recommended to grasp four main logical lines: coal chemical, existing updates, going overseas, and domestic substitution.

CITIC Construction Investment's main viewpoints are as follows:

Process Industry: A representative of cyclical fields, equipment renewal builds medium- to long-term resilience

The process industry primarily focuses on liquid, gas, or powder materials through continuous complex production involving physical changes and chemical reactions, providing raw materials and energy for manufacturing industries, including petrochemicals, chemicals, papermaking, cement, non-ferrous metals, steel, pharmaceuticals, and food and beverages. The process industry is the cornerstone of China's real economy, with its output value once accounting for about 47% of the national industrial output value above a designated size, showing clear cyclical attributes.

Since 2018, the petrochemical and metallurgy industries have driven the overall investment growth in the process industry. By 2023, the capital expenditure of listed companies in the petrochemical and metallurgy (steel + non-ferrous) sectors reached CNY 298 billion and CNY 278.8 billion, respectively. During this period, the rise of private refining and integrated projects has led to a rapid increase in demand for process industry equipment. Since 2024, investment in traditional advantageous fields has begun to accelerate its decline, with capital expenditure in the petrochemical and basic chemical sectors expected to decline significantly by 20.66% and 19.34% for the whole year, respectively, resulting in a gap of over CNY 100 billion.

With the deployment of the national energy security strategy, investment planning in the northwest coal chemical sector is being vigorously promoted, which is expected to bring marginal changes to the new market. According to incomplete statistics, the total investment in coal chemical projects in Xinjiang starting around 2024 is expected to reach at least CNY 557.943 billion, with the total investment in the entire northwest coal chemical sector expected to reach at least CNY 840.568 billion. Combining the preliminary plan for the Xinjiang Zhuandong coal-to-oil gas strategic base, it is estimated that the cumulative investment in the northwest coal chemical sector is expected to exceed CNY 1 trillion in the next 5-10 years; a simple calculation suggests that the average annual investment in the northwest coal chemical sector in the long term will be between CNY 100 billion and CNY 200 billion, effectively compensating for the gap caused by the decline in petrochemical investment.

In the existing market, the reduction of energy consumption and emissions, as well as the achievement of dual carbon goals, rely on the implementation of specific measures such as capacity replacement and equipment renewal; the equipment renewal policy continues to be implemented, and subsidies are gradually being realized, providing medium- to long-term resilience for investment in process industry equipment.

Process Equipment: A combination of "dynamic + static," with a large system and a clear trend towards intelligent control

Production in the process industry is achieved through complete process units. These units consist of a series of unit process equipment (static equipment) and process fluid machinery (dynamic equipment), connected by pipelines, valves, etc., in a certain process manner, along with necessary control instruments and devices, allowing process materials to undergo necessary physical and chemical processes within the unit to manufacture the required products Process fluid machinery mainly includes pumps, compressors, and centrifuges; unit process equipment mainly includes storage equipment, heat exchange equipment, reaction equipment, tower equipment, and other static equipment; industrial valves and automation instruments serve as important components, connecting pipelines to control fluid transport and adjust fluid physical quantities.

Compressors as core main equipment provide high pressure and gas power, with a solid leading position in the domestic market

The value of high-end turbines exceeds 10 million yuan per unit, with a total domestic market scale exceeding 10 billion yuan. In the field of axial compressors, one company dominates, with ShaanGu Power's market share long approaching 100%; centrifugal compressors are widely used, with diversified products, showing a clear "one strong, many strong" pattern. Compared to turbine compressors, volumetric compressors have smaller exhaust volumes, lower unit values, and broader application scenarios, with a market space exceeding 26 billion yuan; screw compressors are representative products that can provide air power not only in process fields but also in discrete scenarios such as machinery manufacturing, mining, and refrigeration. Companies like Kaishan Shares, Baoshu Shares, Hanzhong Precision Machinery, Binglun Environment, and Dongya Machinery are all leading enterprises in screw compressors, with a relatively concentrated market for screw main engines.

Mechanical seals are important components of compressors, pumps, and other main equipment, with a broad existing market space

The working conditions in process industries such as chemicals are harsh, and sealing components have consumable attributes; in addition to initially equipping the main engine, they also need to be replaced regularly and irregularly, thus facing both incremental and existing market demands. It is estimated that by 2025, the domestic broad mechanical seal market scale is expected to reach 8.336 billion yuan, with a 5-year CAGR of 5.81%; Zhongmi Holdings has maintained the number one market share in China for seven consecutive years from 2017 to 2023. In the international market, there is a significant gap in scale between domestic and the three major international giants, indicating substantial room for global market share improvement. According to John Crane, in 2024, the existing market business will account for 72%, and Zhongmi Holdings still has 25 percentage points of improvement space; the gross profit margin of existing market business is as high as 60%-70%, and its increase will significantly boost the overall gross profit margin.

Pumps and valves exhibit the characteristics of "large industry, small companies," with a clear "stronger getting stronger" pattern

Pumps are the "heart" of process industries, with centrifugal pumps being the most widely used. Leading companies like Southern Pump Industry have both scale and growth, with stable gross profit margins, fully reflecting the advantages of diversified downstream application scenarios. Industrial valves, as control components for fluid transport, have a broad overseas market space, with the pattern awaiting further concentration. Leading company Neway focuses on the mid-to-high-end valve market, benefiting fully from the development of overseas oil and gas extraction, transportation, and refining industries, with overseas revenue and gross profit margins increasing simultaneously, creating a good demonstration effect for the export of process industrial equipment.

Air separation equipment is a culmination of dynamic and static equipment, with a stable domestic pattern and rising overseas demand

Air separation equipment consists of eight major systems, including dynamic equipment such as compressors and static equipment such as heat exchangers, testing the capability of complete sets and the production capacity of key components. The air separation equipment industry has a high market concentration, with the international market mainly consisting of a few large multinational corporations such as Linde and Air Liquide, while there are currently more than ten participants in the domestic market. Hangyang Co., Ltd. ranks first globally in the production and sales of large and extra-large air separation equipment, holding over 50% of the domestic market share. Hangyang has previously won bids for six sets of 100,000-level air separation units from Shenhua Ningmei and six sets of 110,000-level air separation units from Inner Mongolia Baofeng, demonstrating outstanding advantages in the large coal chemical field In the overseas market, Fostar is one of the earliest private enterprises to venture into the field of cryogenic technology. Since 2023, its overseas revenue has surpassed Hangyang, making it the company that benefits the most from the development of the overseas market among domestic air separation manufacturers. The company has ample orders on hand and is expected to welcome development opportunities with simultaneous increases in volume and profit.

Automation control of instrumentation and control systems supports Industry 4.0, with broad space for domestic substitution

Automated instruments, devices, and DCS systems work together, each indispensable, to achieve automation in process industries, with an overall market size exceeding 100 billion yuan by 2024. 1) Instruments and devices are at the perception layer of industrial automation systems, regulating and controlling temperature, pressure, level, flow, and composition during the production process. Foreign giants are numerous, while domestic firms are "one strong and many powerful"; the broad product line layout and domestic champions in single product categories create a cliff-like leading advantage for CCA among domestic automation instrument manufacturers. CCA has become one of the few manufacturers globally whose pressure transmitters achieve an accuracy of 0.04%, gradually realizing domestic substitution in the mid-to-high-end field. Currently, the largest single product in automated instruments and devices is control valves, with the domestic substitution rate increasing from 37.61% in 2017 to 43.03% in 2024, with further room for improvement in the long term. 2) The DCS system is the "brain" of process industrial automation, with the domestic market space reaching 11.757 billion yuan by 2024; the leading company SUPCON has a domestic market share of 40.36%, significantly ahead of foreign giants like Emerson, Siemens, and Yokogawa. From 2019 to 2024, the domestic substitution rate of DCS has cumulatively increased by 20.68 percentage points to 63.76%, progressing significantly faster than the hardware of automated instruments and devices, with a clear trend towards self-control.

Industry logic and individual stock analysis

The incremental market in the process field is expected to welcome marginal changes, with ongoing updates of existing equipment. Coupled with the trends of domestic self-control and the enhancement of Chinese enterprises' competitiveness overseas, it is recommended to grasp four main logical lines. 1) Major equipment line in the coal chemical industry: recommend Hangyang Co., Ltd. and ShanGu Power. 2) Existing market update line: recommend CCA and pay attention to SNS. 3) Overseas market expansion line: recommend Fostar, Zhongtai Co., Ltd. (small and medium-sized coverage), and Neway Valve. 4) Domestic substitution line: recommend SUPCON.

Risk analysis: 1) Risk of declining investment growth in downstream traditional process industries; 2) Risk of coal chemical investment construction progress falling short of expectations; 3) Risk of equipment update progress not meeting expectations; 4) Risk of domestic substitution progress not meeting expectations