The mechanical sector experienced weaker gains compared to the broader market index and remained in a phase of valuation correction and consolidation. From the start of 2017 through December 15, 2017, the Shenwan Machinery Index declined by 10.74%, underperforming the CSI 300 Index by 31 percentage points. Among sub-sectors, construction machinery, lithium battery equipment, and 3C automation showed relatively better performance, driven by strong downstream demand and investment in infrastructure. The overall underperformance of the machinery industry was largely attributed to its high valuation levels. The sector is currently in a valuation digestion phase: the median P/E ratio for the machinery industry dropped from 98.7 times at the beginning of the year to 54.1 times by the end of the year, nearing the 10-year historical median of around 46 times, placing it in the middle of historical valuations.
The turning point for the machinery industry in 2017 became evident, with a cyclical recovery expected to continue. Following six years of decline after the 2011 peak, the sector reached a bottom this year. Overall industry revenue grew by 24.3%, while net profit surged by 80.7%. On a median basis, revenue growth stood at 25.6%, and net profit growth at 24.0%. Out of 316 companies, 229 reported positive growth, representing 72.5% of the total. Looking ahead, the performance trend for 2018 is expected to remain strong.
In 2018, we are firmly shifting focus toward advanced manufacturing. The transition from quantitative expansion to qualitative development will lay a stronger foundation. The recovery in machinery performance has been driven by supply-side reforms that improved industrial profitability, increased capital spending by downstream equipment users, and the cumulative impact of periodic equipment upgrades. We believe that the manufacturing sector will maintain a high level of momentum in 2018. Equipment and technology upgrades, cyclical replacement needs, and growing demand from emerging industries will continue to support the performance of the machinery and equipment sector.
As a cyclical industry, the focus remains on industry leaders. With economic growth entering a gear-shift stage, the previous model of quantity-driven expansion has come to an end. Traditional equipment industries are now evolving based on stock updates and product competitiveness determining market leadership. After deep industry adjustments, leading companies have significantly increased their market share and gradually reduced balance sheet risks. In 2018, we expect lighter earnings pressure and greater performance elasticity. With the global economy recovering and overseas demand expected to rise, domestic construction firms are well-booked, and railway investment plans are set to rebound after hitting a low. The peak of equipment investment is approaching, making construction machinery and rail transportation sectors particularly promising.
For emerging growth industries, we recommend focusing on companies with high performance certainty. The 19th National Congress report emphasized accelerating the development of advanced manufacturing and moving Chinese industries toward the mid-to-high end of the global value chain. With strong domestic demand and the logic of import substitution for high-end equipment driving the upgrading of the equipment manufacturing industry, we recommend targeting sub-sectors aligned with national priorities and representing advanced productivity. From the ground up, we are identifying emerging growth areas with strong demand and significant development potential. Key sectors to watch include lithium battery equipment, aerial work platforms, and precision instruments.
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