China Construction Machinery Sector

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

25 January 2011Asia Pacific/ChinaEquity Research

Construction & Farm Machinery

China Construction Machinery Sector

COMMENT

Fixed asset investments dead? No! Figure 1: Post-Rmb4 tn era�planned investments in newly started projects continue rising

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■ FY11 demand could be stronger. The upcoming strong season could be stronger than expected, as investments in newly started projects surged from November 2010. Manufacturers have turned more bullish recently on their own equipment sales and industry demand outlook for 2011. Even the industry growth of wheel loaders, expected to be the weakest among major equipment, is estimated at 15% in FY11.

■ Infrastructure should drive growth. Infrastructure should drive equipment demand, given the central government�s target of taking GDP growth above 8% this year. Local governments are keen to start new projects to raise their urbanisation rates and economic growth. The expected interest rate hikes should not impact customers� purchase intentions significantly, given strong downstream demand.

■ Top pick. We prefer Sany A, as: (1) it has the highest exposure to high-growth products; (2) it should continue gaining market share in the excavator and truck-mounted crane markets; (3) on a five-year view, the company is ahead of its competitors on overseas expansion strategy. It has two production bases � one in India and another in Brazil. Based on our revised earnings estimates, Sany A is trading at 12x 2011E P/E, implying 34% potential upside. The upcoming strong season should lead to consensus upgrades and trigger stock price performance.

Research Analysts Victoria Li

86 21 3856 0326 [email protected]

25 January 2011

China Construction Machinery Sector 2

Focus charts and tables Figure 2: Inland China FAI accounted for 64% in 2010E Figure 3: And growth is stronger than East China

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Figure 4: Investment growth for newly started projects trends up

Figure 5: Estimated sales growth for major equipment

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YoY growth of new s tarted projects' planned investment (L)Loader sales growthExcavator sales growthBulldozer sales growthTruck-mounted c rane sales growthCrawler crane

(%) (%) (%) 2006 2007 2008 2009 2010 2011EExcavators 59 46 16 22 78 25Crawler cranes -31 50 40Concrete machines* 50 10 30 60 30Wheel loaders 14 33 3 -13 51 15Bulldozers 19 21 17 -2 63 20Truck-mounted cranes 26 37 12 27 29 20

Source: CEIC * Estimated based on leaders� data; Source: China construction machinery network, Credit Suisse estimates

Figure 6: Target price and earnings forecast changes CS Price TP (%) Up/dn EPS change (%) Company Ticker rating Local Target change (%) 2010 2011 2012 Sany 600031 CH O 19.06 25.59 12 34 4 6 4 Liugong 000528 CH O 32.61 45.87 7 41 0 7 7 Shantui 000680 CH O 16.01 21.90 13 37 1 2 2 Lonking Holdings 3339 HK O 4.45 5.66 25 27 17 26 22 Anhui Heli 600761 CH N 14.78 18.42 0 25 7 5 5

Source: Company data, Credit Suisse estimates

Figure 7: Sector earnings forecast and success factor scorecard Sales Net profit Market Implied 2015 Success factor score (Rmb mn) (Rmb mn) cap Price�to-sales Mkt cap (1-10, from best to worst) 2010E 2015E 2010E 2015E (US$ mn) 2010 (x) (US$ mn) Marketing/service R&D/brandSany 35,661 81,390 5,835 11,771 14,620 2.71 33,367 3 3Liugong 14,388 19,801 1,544 2,277 3,212 1.47 4,421 5 5Lonking 11,828 20,040 1,541 2,313 2,506 1.40 4,246 4 6Shantui 11,150 17,868 814 1,464 1,842 1.09 2,951 5 6

* Earnings growth and valuations based on our estimates; Source: Company data, Credit Suisse estimates

25 January 2011


Fixed asset investments dead? No! Leading indicator shows positive signal The leading indicator, planned investments in newly started projects, saw its YoY growth accelerating to 47% in November 2010 from 17% in October 2010. and it continued to rise 2% MoM in December 2010. We think it�s a positive signal that sales growth YoY of major equipment in 1H11 could be higher than expected. Meanwhile, manufacturers have turned more bullish on major equipment demand recently. They raised their sales guidelines for 11E. They also estimate China�s construction machinery industry growth for 2011 at 20-25%, up from 15-20%. Even the industry growth of wheel loader, expected to be the weakest among major equipment, is estimated at 15% for 2011, versus 5-10% several months ago.

Infrastructure to play a leading role Local governments are taking up the central government�s role of increasing investments in infrastructure. In developed areas, or coastal China, local governments target to raise their urbanisation rates by expanding the scales of smaller cities. In inland China, there�s still huge demand for basic infrastructure construction and basic housing. Demand for construction machines should be supported mainly by: (1) infrastructure projects in inland China and mid-to-small cities and towns, including railways, highways, public facilities and BDAs (business development areas); (2) urban railway construction and overhead road construction in tier 1-3 cites; (3) construction projects for wind farms, nuclear power plants, hydro power plants, ports and shipyards; (4) residential houses in tier 2 and smaller cities, and towns; and (5) expansion and construction of petrochemical plants.

We expect China to hike interest rates further to control CPI inflation this year, but the impact should be low. Based on history and our checks with distributors, a small interest rate hike should not impact customers� purchase intention significantly, as long as equipment demand from downstream is strong. On the other hand, a 10% drop in new banking loans is acceptable and should not impact local governments� investment plans significantly, in our view.

Stock picks The construction machinery sector achieved a strong sales performance in 2010. Almost all the major players reported stronger than expected sales on some major equipment. On the other hand, manufacturers have turned more bullish on sector growth outlook and their own equipment sales in 2011. We revise up our earnings forecasts for major players.

Sany A is our top pick, as: (1) it has the greatest exposure to high-growth products; (2) it should continue gaining market share in the excavator and truck-mounted crane markets; (3) based on a five-year view, the company is ahead of its competitors on overseas expansion strategy. It has two production bases � one in India and another in Brazil. We believe it would be a conservative choice, should the worst case happen, i.e., FAI loses its power to drive China�s economic growth in 2011-12. Based on our revised earnings forecasts, Sany A is trading at 12x P/E 2011E, implying 34% potential upside. The upcoming strong season should lead to consensus upgrades and trigger stock price performance.

25 January 2011


Leading indicator shows positive signal Thanks to the Rmb4 tn stimulus package, the entire construction machinery sector achieved strong sales performance in 2010. Among major equipment, excavator was the winner with 78% YoY growth, followed by bulldozer (+64% YoY), wheel loader (+51% YoY), crawler crane (+50% YoY) and truck-mounted crane (+30% YoY). Now the whole sector is in the post-Rmb4 tn era. Obviously, the high growth in 2010 will not repeat in 2011, but 2011 should be a good year for construction equipment, in our view.

In 4Q10, YoY sales growth of major equipment didn�t slow down as much as the market had expected, given the high sales base in 4Q09. And in November, the leading indicator, YoY growth of newly started projects� planned investment, surged to 47% from 17% in October 2010. Although the YoY growth slowed to 23% in December due to the high base in December 2009, planned investments in newly started projects rose 2% MoM. We think it�s a positive signal that YoY sales growth of major equipment in 1H11 could be higher than expected.

Meanwhile, manufacturers have turned more bullish on major equipment demand this year. They now estimate China�s construction machinery industry growth at 20-25%, up from 15-20%; loader industry growth estimated at 15%, bulldozer demand growth at 20-25%. We as well as consensus might have had underestimated demand for construction machinery for 2011, in our view.

Figure 8: Investment growth for newly started projects trends up

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Newly started project investment growth surged to 47% YoY in November 2010

Some manufacturers raised their sales guidance

25 January 2011


Figure 9: Infra investment didn�t fall in 2H10 Figure 10: Property investments recovered strongly

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Figure 11: Major equipment sales in FY10 Sales volumes (units) 2010 YoY growth (%) 2009 YoY growth (%) Wheel loaders 216,597 51.2 143,290 -12.7 Excavators 166,759 77.8 93,793 21.5 Bulldozers 13,918 63.5 8,513 -1.7 Truck-mounted cranes 35,423 29.5 27,360 27.2 Crawler cranes 1,749 49.9 1,167 -30.8

Source: China Construction Machinery Network

Figure 12: Sales performance of major brands Sales volumes (units) YoY growth Market share (%) 2010 2009 (%) 2010 2009 Lonking Loaders 40,142 25,179 59 18.5 17.6 Excavators 4,045 2,026 100 2.4 2.2 Forklifts 9,873 5,518 79 Liugong Loaders 38,968 28,977 34 18.0 20.2 Excavators 5,595 2,985 87 3.4 3.2 Truck-mounted cranes 2,210 1,300 70 6.2 4.8 Sany Heavy Industry Excavators 14,154 6,126 131 8.5 6.5 Truck-mounted cranes 2,038 1,199 70 5.8 4.4 Crawler cranes 411 309 33 23.5 26.5 XCMG Truck-mounted cranes 18,145 15,659 16 51.2 57.2 Crawler cranes 434 181 140 24.8 15.5 Shantui Bulldozers 8,686 4,849 79 62.4 57.0


25 January 2011


Figure 13: Excavator monthly data Figure 14: Wheel loader monthly data

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Figure 15: Bulldozer monthly data Figure 16: Truck-mounted crane monthly data

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Figure 17: Crawler crane monthly data Figure 18: Concrete machines production data (till Aug 10)

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25 January 2011


Infrastructure to play a leading role After the high-growth period of 2006-10, the China government targets to maintain its GDP growth at above 8% in 2011. Fixed asset investments should continue to be a major contributor to this growth, in our view. China�s fixed asset investments have been an important driver of China�s rapid economic growth. According to the National Bureau of Statistics of China, total fixed asset investments in China increased from Rmb3.7 tn in 2001 to Rmb22.5 tn in 2009, at a 25.3% CAGR, while total fixed asset investments for urban areas in China increased from about Rmb3.0 tn in 2001 to about Rmb19.4 tn in 2009, at a 26.3% CAGR. During the financial crisis, increase in fixed asset investments contributed 74% and 196% of GDP increment in 2008 and 2009, respectively.

Figure 19: FAI increment contribution (%) to GDP increase Figure 20: FAI total value and FAI YoY growth

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Although the effect of the Rmb4 tn stimulus package is fading, local governments are taking up the central government�s role of increasing investments in infrastructure. In developed areas, or coastal China, local governments are targeting to raise their urbanisation rates by expanding the scales of the smaller cities. In inland China, there�s still huge demand for basic infrastructure construction and basic housing. The central government has shown its intention on encouraging fixed asset investments in middle and west China. We also see investments in these areas surging. In infrastructure, fast-growing sectors include urban railway system construction, power industry investments (including investments in new energy and power grids), and utility management. Property investment growth is estimated to slow down in 2011, but will likely be supported by basic housing demand from small and medium-size cities and local governments� economy housing plans. Mining investment growth is estimated to accelerate, with the world economy heating up and industry consolidation in China.

25 January 2011


Figure 21: China will likely accelerate its urbanisation

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Figure 22: Inland China FAI accounted for 64% in 2010E�

Figure 23: �growth was stronger than that in east China

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25 January 2011


Figure 24: Local governments� regional development plans Region Plan Details Bejing, Tianjin, Hebei

Jingjinyi city group development plan

To build an important city group in north China, Beijing plans to develop it as a service and financial centre; Tianjin to be the most important harbour city and economic centre; Heibei to build important raw materials and modern agriculture base in the area; to set up three different directions of development for the entire area and finally have a great influential economic area in north China

Tianjin Binhai new district development plan

Deepen technology innovation and improve the ability of companies to innovate; give great support to technology innovation and let R&D reach 3% of GDP in 2010; to build an international-level research transformation base; speed up high-tech park construction and strengthen cooperation with the Beijing Zhongguancun high-tech park

Shandong The yellow river delta efficient ecological economy district development plan

Complete infrastructure and build the most important modern agriculture park, logistics area and tech innovation district in the province; to cooperate with the Binhai new district, develop a chemical, electricity power, harbour industry and modern logistic area, completing the traffic system and developing an ecological cycle economy as a model

Shanghai To build a global financial and shipping centre

Stimulate Shanghai's modern service and manufacturing industries, to improve the ratio of the services industry in Shanghai, and the efficiency of capital employment; to build an influential international financial centre with sound rules and regulations before 2020 and a shipping centre before 2020

Jiangsu, Zhejiang The Yangtze river delta district plan

To build a globally competitive leading city group, Asia-Pacific's important door and the world's important service centre and advanced manufacturing centre

Fujian The west of Taiwan Straits economic area

To cooperate with Taiwan economically and to become an important base for eastern coastal advanced manufacturing; to become a tourist centre for nature and culture; strive to develop electronic information, equipment manufacturing, and the petrol and chemical industries; speed up adoption of high tech, to be a more efficient and low resource-using industry, to become a national leading industry base and a pioneer in terms of cooperation with Taiwan

Guangdong The delta area of the Zhujiang river

To build 100 innovation platforms for national laboratory and project centre; R&D expenses to reach 2.5% of GDP and will have 280,000 researchers by 2012; to have a 3,000 mile highway in the area, 1,100 miles of urban transportation, port throughput to reach 900 mn t, container throughput ability to reach 47 mn containers and airport throughput to reach 80 mn passengers by 2012; to have 2,200 miles of urban transportation, port throughput to reach 1.4 bn t, container throughput to reach 72 mn containers and airport throughput to reach 150 mn passengers by 2020; to reach GDP of Rmb4 tn by 2012, GDP per capita of Rmb80,000 (US$11,500) and an urbanisation rate of about 81.0%; the service industry to reach 53% of total area; to reach GDP of Rmb7.25 tn by 2020, GDP per capita of Rmb135,000 (US$19,400) and urbanisation of about 85.0%; the services industry to reach 60% of total area

Hainan International tour island To build the most important tourist base in south China; to complete east circle railway at the end of 2010, and west circle railway at the end of 2015; speed up highway road construction to complete the traffic system of the whole island To reach 31.6 mn person-time per day in 2012, tourist income to reach Rmb31.4 bn To reach 47.6 mn person-time per day in 2015, tourist income to reach Rmb54 bn To reach 76.8 mn person-time per day in 2020, tourist income to reach Rmb124 bn

Huibei and Hunan Chang-Zu-Tan cities group two oriented society development plan

To develop an environment and resources protecting society, using cycle economy system to get sustainable growth in area; to complete the ecological system to protect the resources of the area; to get rapid development in advanced manufacturing and high-tech industries; to maintain the services industry as more than 50% of the whole economy and reach urbanisation of 70% in 2011

Jiangxi Poyang Lake ecological economy plan

To develop electronic, new resource, bio-tech, and raw material industry bases in the area; to strengthen road, railway and airport development and make the transportation system complete; GDP per capita to reach Rmb45,000 and Rmb 80,000 in 2015 and 2020, respectively; urbanisation rate to reach 50% and 60% in 2015 and 2020, respectively

Anhui Wan River area industry plan

To develop an integrated modern transportation system; speed up railway and infrastructure construction to meet the needs of further development; GDP to reach Rmb1.35 tn, urbanisation to reach 55% in 2015; R&D expenses to reach 2.2% of total GDP in 2015

Liaoning Coastal economic area development plan

To make Dalian the centre to drive up the entire area�s economy and industry; further develop advanced manufacturing, such as transportation, telecommunication and equipment-making industries; GDP per capita to reach Rmb50,000 and urbanisation to reach 65% in 2012

Jilin Tumen River area cooperate develop plan

As a door and platform for economic cooperation for north-east Asia, Tumen River is the new development point in north-east China. It will provide help to infrastructure construction such as transportation, water conservancy, energy, and information service. It aims to strengthen the cooperation with north-east Asian countries outside and interact with other areas in inner China, especially north-east China. Taking Yanji, Longjing and Tumen as the centre of the area, to make fair progress in competitive advantage and general strength.

25 January 2011


Figure 24: Local governments� regional development plans (continued) Region Plan Details Guangxi Beibu Gulf economic

zone development plan To complete entire road network, especially on national highway network projects; speed up the development of a convenient road to port; take Nanning as the transportation centre and get great traffic coverage in the related area; focus on the metallurgy, petrochemical and high-tech industries to develop the economy; to reach 60% urbanisation rate in 2020 and R&D expenses to reach 4% of total GDP

Gansu, Shaanxi Guanzhong-Tianshui economic zone plan

To develop an inland economic strategy zone, to be an important base for advanced manufacturing; GDP to reach Rmb660 bn and Rmb1.64 tn in 2012 and 2020, respectively; GDP per capita to reach Rmb22,500 and Rmb53,000 in 2012 and 2020, respectively; urbanisation rate to reach 50% and 60% in 2012 and 2020, respectively

Sichuan Chengdu, Chongqing economic zone plan

To develop an advanced economic zone surrounding Chengdu and Chongqing as two centres in the area; to develop a nationwide important equipment manufacturing base for motors, national aviation and spaceflight; to reach 6.5% of national GDP, with urbanisation reaching 52% in 2015 and 60% in 2020; GDP per capita to reach Rmb47,000 in 2020

Chongqing Two river new district plan

The only dual functional (airport and harbour) tax saving area and the transportation hub of south-east China; to turn it into a gateway to Europe (as stated in the nation-wide strategy) and to be the centre of the next ten years� national west development plan; GDP to reach Rmb160 bn, Rmb320 bn and Rmb640 bn in 2012, 2015 and 2020, respectively


Infrastructure investments supported by government policies

Our channel checks show market demand in 2010 would move from coastal China to inland China, and from tier 1-2 cities to smaller cities and counties, driven mainly by infrastructure investments. We think this is driven by the China government�s encouragement for developing middle and west China. During the Western Development Working Conference held in July 2010, both Mr Hu Jintao and Mr Wen Jiabao gave important speeches. According to the speeches, western development is considered one of the key objectives to building a well-to-do society in China and has a priority status in China�s regional development strategy. In the next ten years, the government stated that it will aggressively promote western development. The areas of development will include people�s livelihood, environmental protection, construction of a transportation and information system and water conservancy. According to the National Development and Reform Commission (NDRC), 23 new projects will be started in west China in 2010, with total investments estimated at Rmb682.2 bn, or 10% of infrastructure investments in 2010.

In August 2010, the NDRC released �Opinions on implementing programmes for promoting the rise of central China�, which require the governments of six provinces in central China to finish detailed plans for their provinces by end-December 2010. It also requires the related departments of the State Council to hand in detailed opinions on the implementation of such a programme. This programme sets a clear development target for central China for the next 5-10 years. Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan are the six provinces that will be supported by this programme.

Golden period of urban railway construction is coming

As of end-September 2010, China had only 1,086 km of urban railway services. However, local governments have shown great enthusiasm for building on this system. The Chinese government has granted approval to 28 cities to have their own urban railway system (a total of 50 cities have the capability and requirement to construct urban railway systems). Based on approved projects, total length of urban railway is estimated to see a 30% CAGR to 4,012 km by 2015, and further see an 11% CAGR to 6,776 km by 2020. So, during the next ten years, nearly 5,690 km of new railway lines are expected to be built, indicating total investments of Rmb2.85 tn.

Railway and highway investments have large growth potential

We also expect the China government to continue expanding the coverage of highway and railroad networks in China. Compared to some other developed and developing countries, the coverage of highway and railroad networks in China is relatively low and has huge

25 January 2011


growth potential. We believe all such construction projects will contribute significantly to continued growth in China�s construction machinery industry.

Figure 25: : Railway length/total land area of major countries

Figure 26: China�s railway investment and YoY growth

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Source: PRC Department of Railway

Figure 27: Highway length/total land area of major countries

Figure 28: China�s highway investment and YoY growth

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Source: PRC Department of Transportation

New energy development

According to the Development Planning Department of the National Energy Bureau, China will speed up construction of hydro power plants and nuclear power plants, and will develop wind power, solar energy and bio-energy in an orderly fashion during 2011-15E. According to the National Energy Bureau, total installed capacity of hydro power, nuclear power and wind power will reach 250GW, 39GW and 110GW by 2015, at a CAGR of 4%, 28% and 28%, respectively. Among different forms of alternative energy being considered, nuclear power will have the highest growth. Total installed capacity of nuclear power would

25 January 2011


go to 86GW by 2020 and 200GW by 2030, indicating Rmb600 bn in investments in nuclear power during 2011-20E. On the other hand, according to the Economic Forecast Department of the State Information Centre, a new development plan on renewable energy will be made public soon with total investments of Rmb5 tn for 2011-20E.

Figure 29: Nuclear capacity estimated to increase by at least 850% by 2020

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Source: CEC, Credit Suisse estimates

To build smart grid system by 2020

China has two national power grid companies: (1) CSG (China Southern Power Grid) that owns the grids of six provinces in south China, and (2) SGCC (State Grid Corporation of China) that operates grids in all the other provinces. According to SGCC�s long-term plan, it targets to invest Rmb4 tn during 2011-20E to build ultra-high-voltage (UHV) lines and improve grid intelligence. Compared with Rmb1.5 tn investments during 2006-10E, grid investments in 2011-15E are estimated to grow 33% to Rmb2 tn, assuming even investments in the 12th and 13th Five-Year Plans. Moreover, a significant portion of the construction of UHV lines is targeted to be completed by 2015, including seven UHV AC lines and 11 UHV DC lines, with total estimated investments of Rmb270 bn. This implies total investments during 2011-15 may be more than Rmb2 tn.

Figure 30: SGCC�s UHV AC lines plan for 2011-15E Total investments DistanceVoltage grade Transmission lines (Rmb bn) (km)±1000kV AC Ximeng, Inner Mongolia-Nanjing, Jiangsu 27.72 1,653±1000kV AC Zhangbei, Hebei-Nanchang, Jiangxi 29.71 1,772±1000kV AC North Shaanxi-Changsha, Hunan 28.51 1,700±1000kV AC West Inner Mongolia-Weifang, Shandong 21.98 1,311±1000kV AC Middle Shanxi-Xuzhou, Jiangsu 13.08 780±1000kV AC Yaan, Sichuan-South Anhui 33.54 2,000±1000kV AC Double circle in Yangzi River Delta, Huainan-Nanjing-Taizhou-Suzhou-Shanghai-North

Zhejiang-South Anhui-Huainan 26.83 1,600

Total 181.36 10,816

Source: SGCC, Credit Suisse estimates

25 January 2011


Figure 31: Power grid investments estimated to rise

-

50100150

200250

300

350400

450

2004 2005 2006 2007 2008 2009 2010 2011E

(Rmb bn)

-20

-10

0

10

20

30

40

50

Power grid investment YoY growth

(%)

-

50100150

200250

300

350400

450

2004 2005 2006 2007 2008 2009 2010 2011E

(Rmb bn)

-20

-10

0

10

20

30

40

50

Power grid investment YoY growth

(%)

Source: SGCC, National Bureau of Statistics of China, Credit Suisse estimates

Expected money supply tightening has limited impact We expect China to raise interest rates further to control CPI inflation this year, which should have a negative impact on construction machinery customers� purchase costs. As construction machinery manufacturers sell equipment through credit sales, instalment payments, financial guarantees and finance lease services, we believe higher interest rates will delay demand to some extent, due to increase in purchase costs for customers. Fortunately, based on history and our checks with distributors, a small interest rate hike should not impact market demand significantly, as long as equipment demand from downstream is strong.

On the other hand, the government estimates new banking loans this year will fall 10% YoY, which is acceptable and should not impact local governments� investment plans significantly, in our view. But if the central government tightens money supply further during the year, infrastructure investments could be impacted. Further, tightening on property continues. Investments in property could be lower than expected, should more macro-tightening polices are introduced in the near future.

25 January 2011


Top picks Product preference in 2011 In 2011, we prefer players with high exposure to excavators, concrete machines and cranes. Our channel checks show market demand for construction machines in 2011 should come mainly from: (1) infrastructure projects in inland China and middle-to-small cities and towns, including railway, highway, public facilities and BDAs (business development areas); (2) urban railway construction and overhead road construction in tier 1-3 cites; (3) construction projects for wind farms, nuclear power plants, hydro power plants, ports and shipyards, (4) residential houses in tier 2 and smaller cities, and towns; and (5) expansion and new construction of petrochemical plants. Based on the projects above, industry experts (distributors and manufacturers) expect sales growth of concrete machines, crawler cranes and excavators to be stronger than that of other equipment. We estimate 20-30% YoY sales growth for concrete machines, 40% for crawler cranes, 25-30% for excavators, 20-25% for truck-mounted cranes, 15% for wheel loaders and 20% for bulldozers.

Concrete machines, especially concrete mixing equipment, should benefit from infrastructure investments in inland China. It should also benefit from further promotion of government policies: �Notice forbidding the mixing of concrete on urban job sites� and �Regulation on Bulk Cement�. In the past few years, these two polices were well promoted by tier 1 cities, and China concrete consumption ratio to total cement went up to 30% from 20%. We believe this ratio has huge potential upside in China, with the spread of ready-mixed concrete use, compared to 70-90% in developed countries.

We expect demand for cranes to slow down in 2011, but remain solid. In the next few years, a stable domestic demand for cranes is likely to come from high-speed railway, wind farms (onshore and offshore), nuclear power plants, city infrastructure construction projects (including urban railway systems, overhead roads and bridges, and other general public infrastructure) with further urbanisation, and capacity expansion in the petrochemical and energy industries. Market demand trends indicate more large-size truck-mounted cranes are likely to be used in the next few years, with more construction projects. Crawler cranes have seen weak demand since 2008, hurt by the financial crisis, as local companies switched their product models to small-size cranes for domestic demand after global demand for large-size cranes shrank. Fortunately, local market demand for large-size crawler cranes is expected to increase in the near future, with the upcoming construction of nuclear power plants, construction of energy-saving and emission reduction projects of steel plants, and upgrades in the MW level of wind farms�all of which are expected to speed up industry revenue growth.

Excavator is still partially substituting demand for wheel loaders. Local brands are gaining market shares from foreign brands. In the past years, we saw significant market share gains by local brands, indicating their products� good performance-to-price ratios. Comments from Japanese brands such as Komatsu and Hitachi indicate an industry view that Chinese brands now have the capability to gain market share from Korean brands (who used to have a 50% market share in China several years ago). We expect the excavator market size to double in five years, and local brands� market share to rise to 50% eventually from 30% in 2009. The leading players such as Sany, Liugong and Lonking should benefit, in our view.

Concrete machines, crawler cranes and excavators should see better growth

Forbidding concrete mixing on job sites in smaller cities should increase related equipment demand

Local excavator brands are gaining market share quickly

25 January 2011


Figure 32: Major global excavator brands saw their market share drop in FY10 Top 10 Sales volumes (units) Market share (%) 2010 2009 (%) 2010 2009 (↑↓) Komatsu 24,020 14,537 65 14.4 15.5 ↓ Doosan 22,112 14,615 51 13.3 15.6 ↓ Hyundai 18,467 11,222 65 10.5 12.0 ↓ Hitachi 17,581 9,946 77 11.1 10.6 ↑ Kobelco 14,777 7,283 103 8.9 7.8 ↑ Sany 14,154 6,126 131 8.5 6.5 ↑ Caterpillar 10,326 5,923 74 6.2 6.3 ↓ Volvo 7,538 3,260 131 4.5 3.5 ↑ Yuchai 7,483 4,332 73 4.5 4.6 ↓ Liugong 5,595 2,985 87 3.4 3.2 ↑


Sany A: Our top pick The construction machinery sector achieved a strong sales performance in 2010. Almost all the major players reported stronger than expected sales on some major equipment. On the other hand, manufacturers have turned more bullish on sector growth outlook and their own equipment sales in 2011. We revise up our earnings forecasts for major players.

Figure 33: Target price and earnings forecast changes CS Target TP Up/dn EPS change (%) Company Ticker Rating Local Price change (%) (%) 2010 2011 2012 Sany 600031 CH O 19.06 25.59 12 34 4 6 4 Liugong 000528 CH O 32.61 45.87 7 41 0 7 7 Shantui 000680 CH O 16.01 21.90 13 37 1 2 2 Lonking Holdings 3339 HK O 4.45 5.66 25 27 17 26 22 Anhui Heli 600761 CH N 14.78 18.42 0 25 7 5 5


Among the major players, we prefer Sany Heavy Industry, as: (1) it has the highest exposure to high-growth products; (2) it should continue gaining market share in the excavator and truck-mounted crane markets; (3) on a five-year view, the company is ahead of its competitors on overseas expansion strategy. It has two production bases � one in India and another in Brazil. It would be a conservative choice, should the worst case happen, i.e., FAI loses its power to drive China�s economic growth during 2011-12.

Figure 34: Sector earnings forecast and success factor scorecard Sales Net profit Market Implied 2015 Success factor score (Rmb mn) (Rmb mn) cap Price�to-sales Mkt cap (1-10, from best to worst) 2010E 2015E 2010E 2015E (US$ mn) 2010 (x) (US$ mn) Marketing/service R&D/brandSany 35,661 81,390 5,835 11,771 14,620 2.71 33,367 3 3Liugong 14,388 19,801 1,544 2,277 3,212 1.47 4,421 5 5Lonking 11,828 20,040 1,541 2,313 2,506 1.40 4,246 4 6Shantui 11,150 17,868 814 1,464 1,842 1.09 2,951 5 6


25 January 2011

China C

onstruction Machinery Sector

16

Figure 35: Sector valuation metrics Market CS +/- Last cap EPS (LC) P/E (x) P/B (x) EV/EBITDA ROE (%) Ticker Company rating TP (%) price (US$ mn) 10E 11E 12E 10E 11E 12E 10E 11E 10E 11E 10E 11E600031.SS Sany Heavy Industry O 25.59 34 19.06 14,620 1.11 1.50 1.73 17.18 12.74 11.00 6.46 4.40 12.50 8.75 50 41000528.SZ Liugong O 45.87 41 32.61 3,212 2.38 2.79 3.20 13.69 11.68 10.19 3.93 3.22 10.73 8.62 33 30000680.SZ Shantui O 21.90 37 16.01 1,842 1.06 1.43 1.70 15.10 11.20 9.41 1.69 1.45 11.13 7.54 12 14600761.SS Anhui Heli N 18.42 25 14.78 799 0.89 1.09 1.25 16.56 13.59 11.80 2.17 1.94 8.90 7.29 14 153339.HK Lonking O 5.66 27 4.45 2,506 0.31 0.34 0.36 12.24 10.98 10.42 3.40 2.82 9.91 8.50 30 27Average 14.95 12.04 10.56 3.53 2.77 10.63 8.14 28 26CAT Caterpillar Inc. O 110 19 92.75 58,869 4.20 6.75 8.05 22.09 13.73 11.52 5.92 4.62 10.62 7.27 0 0DE Deere & Co. O 91 2 89.26 37,731 4.65 5.75 6.84 19.18 15.52 13.06 6.24 4.64 9.93 8.39 31 24TEX Terex Corporation O 44 41 31.19 3,372 (1.79) 0.80 2.35 (17.31) 38.89 13.20 2.33 2.20 121.71 13.21 -13 6VOLVb.ST Volvo U 84 -25 111.60 152,954 5.13 7.74 9.85 21.77 14.43 11.33 3.09 2.73 8.50 6.69 14 19SAND.ST Sandvik U 110 -13 125.90 149,354 5.82 8.13 9.83 21.62 15.49 12.81 4.28 3.63 11.17 8.69 20 23ATCOa.ST Atlas Copco N 155 -1 156.50 129,551 8.24 9.80 11.00 19.00 15.98 14.23 5.98 4.80 8.53 7.13 31 30Average 14.39 19.01 12.69 4.64 3.77 28.41 8.56 14 17Source: Company data, Credit Suisse estimates

25 January 2011


Asia Pacific / ChinaConstruction & Farm Machinery

Sany Heavy Industry (600031.SS / 600031 CH)

The strong will be strong ■ 2010 earnings preview: Net profit in 2010E may beat consensus and our

estimates based on its major equipment sales volumes. Sany�s excavator sales volumes surged 131% YoY to 14,154 units in 2010, from estimated 12,000 units. Revenue growth of concrete machines could be higher than expected, too, given stable growth in 4Q10. Accordingly, we revise up our earnings forecast for 2010-12E by 4- 6%.

■ Earnings growth upside from market share gain: Sany has the highest exposure to high-growth equipment in 2011. Its strong capability on R&D and marketing should continue to help it to expand market share in the excavator and crane markets. While concrete machines, which should contribute 44% of total revenue, should see a healthy growth. By applying a discount to the company�s guidance, we expect Sany to see a 38% income growth in 2011E.

■ Catalysts: The company just raised its excavator sales guidelines for 11E to 30,000 units, vs. 25,000 units. But the market still doesn�t fully concur with the company�s guidance on product revenue growth and industry demand growth, in our view. With the coming hot season in March, we expect more earnings upgrades and valuation reratings.

■ Valuation: By raising earnings forecast and rolling over our DCF model to 2011, our target price rises to Rmb25.59, implying 16x 2011E P/E. We maintain an OUTPERFORM on Sany.

Share price performance

010203040

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-100100200300400

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the MSCI China Free index which closed at 66.77 on 24/01/11 On 24/01/11 the spot exchange rate was Rmb6.59/US$1

Performance Over 1M 3M 12M Absolute (%) -9.8 -8.9 80.4 Relative (%) -11.8 -5.8 66.0

Financial and valuation metrics

Year 12/09A 12/10E 12/11E 12/12ERevenue (Rmb mn) 16,495.9 35,660.7 52,015.6 64,339.8EBITDA (Rmb mn) 3,072.1 8,052.0 11,268.2 12,838.4EBIT (Rmb mn) 2,785.2 7,708.7 10,809.5 12,262.9Net income (Rmb mn) 1,962.6 5,835.4 8,039.4 9,117.7EPS (CS adj.) (Rmb) 0.42 1.15 1.59 1.80Change from previous EPS (%) n.a. 4.0 6.2 4.0Consensus EPS (Rmb) n.a. 1.80 2.25 2.67EPS growth (%) 59.3 175.8 37.5 13.4P/E (x) 45.5 16.5 12.0 10.6Dividend yield (%) � 0.20 0.60 0.83EV/EBITDA (x) 31.5 12.0 8.3 6.9P/B (x) 11.9 6.4 4.3 3.1ROE 29.4 51.5 42.6 34.1Net debt/equity (%) 1.7 2.7 net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).



Rating OUTPERFORM* [V] Price (24 Jan 11, Rmb) 19.06 Target price (Rmb) (from 22.90) 25.59¹ Chg to TP (%) 34.3 Market cap. (Rmb mn) 96,491 (US$ 14,662) Enterprise value (Rmb mn) 96,939 Number of shares (mn) 5,062.47 Free float (%) 44.60 52-week price range 24.37 - 7.84

25 January 2011


Key charts and tables Figure 36: Revenue breakdown in 2011E Figure 37: Net profit to grow 38% in 2011E

Concrete machines

45%

Ex cav ators26%

Pile driv ing machines

4%

Craw ler crane9%

Road construction machines

3%

Fittings 2%

Others 4%

Truck-mounted crane7%

01,000

2,0003,0004,0005,000

6,0007,0008,000

9,00010,000

2008 2009 2010E 2011E 2012E0

2

4

6

8

10

12

14

16

18

Net profit Net margin

(Rmb mn) (%)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 38: Key assumptions 2008 2009 2010E 2011E 2012E Sales revenue (Rmb mn) Concrete machines 6,791 9,475 16,121 23,414 28,076 Excavators 0 0 8,492 13,588 17,664 Crawler crane 2,402 2,738 3,277 4,588 5,735 Truck-mounted crane 0 0 2,129 3,831 4,981 Road construction machines 765 691 1,129 1,315 1,809 Pile driving machines 927 1,117 1,668 2,002 2,403 Revenue growth (%) Concrete machines 26 40 70 45 20 Excavators 0 0 n.m 60 30 Crawler crane 172 14 20 40 25 Truck-mounted crane 0 0 n.m 80 30 Road construction machines 17 -10 63 17 38 Pile driving machines 115 21 49 20 20


25 January 2011


Figure 39: P&L statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Turnover 13,745 16,496 35,661 52,016 64,340 Concrete machines 6,791 9,475 16,121 23,414 28,076 Excavators 0 0 8,492 13,588 17,664 Crawler cranes 2,402 2,738 3,277 4,588 5,735 Truck-mounted cranes 2,129 3,831 4,981 Road construction machines 765 691 1,129 1,315 1,809 Pile driving machines 927 1,117 1,668 2,002 2,403 Fittings 482 578 925 1,110 1,221 Others 2,379 1,897 1,919 2,167 2,451 COGS (9,645) (11,210) (22,946) (33,927) (43,085) Gross profit 4,100 5,286 12,715 18,089 21,255 Operating expense-promotion (1,331) (1,681) (3,316) (4,837) (5,984) Operating expense-administrative (772) (771) (1,640) (2,393) (2,960) Finance costs (142) (87) (94) (74) 54 Share of profit of associates 0 0 0 0 0 Investment income (64) (73) 0 0 0 Others (250) (46) (42) (39) (37) Pre-tax profit 1,541 2,629 7,622 10,745 12,329 Taxation (66) (259) (915) (1,504) (1,849) Minorities (242) (407) (872) (1,201) (1,362) Net profit after minorities 1,232 1,963 5,835 8,039 9,118 EPS (Rmb) 0.26 0.42 1.15 1.59 1.80 DPS (Rmb) 0.06 0.00 0.04 0.12 0.16


Figure 40: Balance sheet Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Non-current assets Property, plant and equipment, net 2,420 2,949 3,295 5,116 5,259 Construction in progress 729 1,063 1,800 1,000 500 Investment in associate 186 207 207 207 207 Intangible assets 314 632 2,701 2,682 2,662 Others 243 253 253 263 263 Current assets Cash & equivalents 2,952 3,080 5,039 4,005 8,739 Inventory 3,013 2,940 6,556 10,281 14,362 Trade accounts receivables 3,102 3,852 9,282 13,538 16,746 Other accounts receivables 150 166 359 542 670 Other current assets 859 696 1,410 1,959 2,423 Total assets 13,967 15,837 30,901 39,591 51,831 Current liabilities Short-term loans 1,030 1,402 3,000 300 60 Accounts payable 1,201 1,264 2,588 3,826 4,859 Other amounts payable 2,343 2,853 5,840 8,635 10,965 Long-term liabilities Long-term loans 2,532 1,336 2,000 700 140 Other long-term liabilities 677 698 698 698 698 Total Liabilities 7,782 7,552 14,125 14,158 16,722 Share capital 1,488 1,488 5,062 5,062 5,062 Reserves 4,350 6,039 10,084 17,540 25,853 Minorities 347 758 1,630 2,831 4,193 Total liabilities & shareholders' funds 13,967 15,837 30,901 39,591 51,831


25 January 2011


Figure 41: Cash flow statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Net profit before minorities 1,474 2,370 6,707 9,241 10,480 Depreciation & amortisation 203 287 343 459 575 Change in working capital (1,043) 44 (5,643) (4,680) (4,517) Others (100) (319) (778) (1,127) (1,417) Operating cash flow 535 2,382 629 3,892 5,121 Capex (1,167) (1,132) (1,400) (1,460) (200) Investment in associate (17) (20) 0 0 0 Others (255) (436) (2,188) (84) 54 Investment cash flow (1,440) (1,588) (3,588) (1,544) (146) Dividends paid (50) (268) 0 (196) (584) Share issues 0 0 0 0 0 Change in debts 938 (823) 2,263 (4,000) (800) Others (56) 425 2,656 814 1,142 Financing cash flow 832 (666) 4,919 (3,382) (242) Cash surplus/(deficit) (73) 128 1,959 (1,034) 4,734 Opening cash/(debt) 3,025 2,952 3,080 5,039 4,005 Closing cash/(debt) 2,952 3,080 5,039 4,005 8,739


Figure 42: Financial ratios Year to 31 Dec. (%) 2008 2009 2010E 2011E 2012E Growth Turnover 50 20 116 46 24 Gross profit 30 29 141 42 18 Pre-tax profit (26) 71 190 41 15 Net profit (23) 59 197 38 13 EBITDA (0) 59 162 40 14 EBIT (3) 61 177 40 13 EPS (25) 59 176 38 13 Profitability EBITDA margin 14 19 23 22 20 EBIT margin 13 17 22 21 19 Gross margin 30 32 36 35 33 Net profit margin 9 12 16 15 14 ROE 21 26 39 36 29 ROA 10 13 25 23 20 Leverage Total debt/total assets 56 48 46 36 32 Total debt/equity 133 100 93 63 54 Net debt/equity 19 2 3 (11) (26) Interest coverage (x) 10 26 54 94 371


25 January 2011



Lonking Holdings Ltd. (3339.HK / 3339 HK)

Slowing down ■ 2010 profit preview: In 2010, Lonking sold 40,139 loaders (up 60% YoY),

4,045 excavators (up 100% YoY), 9,873 forklifts (up 79% YoY) and 2,612 rollers (up 93% YoY), better than expected. Its market share in the loader market rose to 18.5% from 17.6% in 2009, and became the no. 1 in China. Accordingly, we raise our earnings forecasts for 2010-12E by 17-26%.

■ Profit growth should slow down: As a leading loader manufacturer, loader growth still largely determines the company�s earnings growth, although its excavator sales could be strong in the near future. We estimate the company�s earnings growth at 20% in 2011E, which is much less interesting than others�.

■ Catalysts: Due to concerns about FAI growth slowdown, we had earlier expected loader sales growth to be weak in 2011E. However, the company raised its loader revenue growth guidance from 15% to 20% recently. And feedback from manufacturers is more positive than before. If the real demand for loader is stronger than market expectations, it would trigger Lonking�s stock price performance.

■ Valuation: By raising our earnings forecast and rolling over our DCF model to 2011, our target price rises to HK$5.66, implying 11x 2011E P/E. As we still expect some catalysts, we maintain our OUTPERFORM rating.


02468



The price relative chart measures performance against the MSCI China Free index which closed at 66.77 on 24/01/11 On 24/01/11 the spot exchange rate was HK$7.77/US$1

Performance Over 1M 3M 12M Absolute (%) 0.5 0.9 76.2 Relative (%) -1.9 4.3 62.2


Year 12/09A 12/10E 12/11E 12/12ERevenue (Rmb mn) 6,901.0 11,827.5 14,625.1 16,229.3EBITDA (Rmb mn) 1,121.6 2,100.4 2,573.7 2,818.3EBIT (Rmb mn) 1,001.6 1,933.4 2,386.7 2,610.7Net income (Rmb mn) 800.0 1,540.8 1,851.1 1,891.0EPS (CS adj.) (Rmb) 0.19 0.36 0.43 0.44Change from previous EPS (%) n.a. 17.2 26.3 22.4Consensus EPS (Rmb) n.a. 0.32 0.36 0.41EPS growth (%) 20.1 92.6 20.1 2.2P/E (x) 20.1 10.4 8.7 8.5Dividend yield (%) 1.1 1.5 3.4 4.0EV/EBITDA (x) 15.5 8.7 7.0 6.2P/B (x) 4.2 3.2 2.5 2.1ROE 23.0 34.7 32.2 26.9Net debt/equity (%) 34.4 43.3 30.9 18.7





Rating OUTPERFORM* [V] Price (24 Jan 11, HK$) 4.45 Target price (HK$) (from 4.54) 5.66¹ Chg to TP (%) 27.1 Market cap. (HK$ mn) 19,046 (US$ 2,443) Enterprise value (Rmb mn) 18,280 Number of shares (mn) 4,280.10 Free float (%) 44.79 52-week price range 5.14 - 2.18

25 January 2011


Key charts and tables 43: Total revenue breakdown in 2011E 44: Net profit estimated to increase 20% in 2011E

Wheel Loader69%

Road roller5%

Forklift5%

Ex cav ator17%

Others4%

0200400600800

1,0001,2001,4001,6001,8002,000

2008 2009 2010E 2011E 2012E

0

2

4

6

8

10

12

14


(Rmb mn) (%)

Sources: Credit Suisse estimates Sources: Company data, Credit Suisse estimates

Figure 45: Key assumptions 2008 2009 2010E 2011E 2012E Loader Average sales price (Rmb mn/unit) 0.181 0.202 0.214 0.214 0.214 Unit cost (Rmb mn/unit) 0.145 0.156 0.156 0.156 0.156 Sales volumes 29,094 25,056 40,139 47,337 49,807 Excavator Average sales price (Rmb mn/unit) 0.391 0.383 0.383 0.383 0.383 Unit cost (Rmb mn/unit) 0.316 0.295 0.298 0.298 0.298 Sales volumes 675 2,026 4,045 6,472 8,414 Forklift Average sales price (Rmb mn/unit) 0.059 0.053 0.053 0.053 0.053 Unit cost (Rmb mn/unit) 0.054 0.048 0.046 0.043 0.043 Sales volumes 2,638 5,518 9,873 12,835 15,402


25 January 2011


Figure 46: P&L statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Turnover 6,145 6,901 11,828 14,625 16,229 Wheel Loader 5,262 5,070 8,610 10,154 10,683 Road roller 138 317 612 673 740 Forklift 155 292 522 679 815 Excavator 264 775 1,547 2,476 3,218 Others 447 536 643 643 772 COGS (4,970) (5,283) (8,894) (10,992) (12,232) Steel (1,193) (967) (2,146) (2,633) (2,908) Diesel engine (1,193) (993) (1,741) (2,135) (2,358) Tyre (615) (454) (758) (930) (1,027) Transmissions (528) (598) (997) (1,224) (1,351) Axles (725) (822) (1,371) (1,682) (1,858) Other parts (456) (704) (1,175) (1,442) (1,592) Wages (124) (141) (235) (259) (258) D&A (90) (120) (167) (187) (208) Others (47) (484) (302) (499) (670) Gross profit 1,175 1,618 2,934 3,633 3,998 Operating expense-promotion (429) (422) (724) (895) (994) Operating expense-administrative (188) (228) (319) (395) (438) Finance costs (108) (171) (117) (97) (84) Share of profit of associates 0 0 0 0 0 Others 289 109 43 44 45 Pre-tax profit 739 906 1,816 2,290 2,526 Taxation (73) (106) (272) (435) (632) Minorities 0 (0) (3) (4) (4) Net profit after minorities 666 800 1,541 1,851 1,891 EPS (Rmb) 0.16 0.19 0.36 0.43 0.44 DPS (Rmb) 0.06 0.04 0.06 0.13 0.15


Figure 47: Balance sheet Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Non-current assets Property, plant and equipment, net 2,060 2,758 3,020 3,233 3,425 Investment in associate 0 0 0 0 0 Intangible assets 224 221 221 221 221 Others 417 786 786 786 786 Current assets Cash & equivalents 1,142 1,241 296 318 567 Inventory 2,348 2,335 3,421 4,228 4,704 Trade accounts receivables 200 341 810 1,002 1,112 Other accounts receivables 1,103 1,608 2,756 3,408 3,782 Other current assets 348 476 815 1,008 1,118 Total assets 7,843 9,766 12,125 14,203 15,716 Current liabilities Short-term loans 361 687 540 480 462 Accounts payable 688 1,010 1,584 1,957 2,178 Other amounts payable 1,471 1,968 2,494 3,082 3,428 Long-term liabilities Long-term loans 637 482 1,260 1,120 938 Other long-term liabilities 1,527 1,829 1,153 1,153 1,053 Total liabilities 4,683 5,976 7,031 7,793 8,059 Share capital 111 222 410 410 410 Reserves 3,048 3,567 4,680 5,992 7,235 Minorities 1 1 4 8 12 Total liabilities & shareholders' funds 7,843 9,766 12,125 14,203 15,716 Source: Company data, Credit Suisse estimates

25 January 2011


Figure 48: Cash flow statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Net profit before minorities 666 800 1,544 1,855 1,895 Depreciation & amortisation 90 120 167 187 208 Change in working capital (614) 59 (1,940) (879) (504) Others 108 170 114 93 81 Operating cash flow 250 1,150 (115) 1,256 1,679 Capex (1,034) (846) (400) (400) (400) Investment in associate (2,140) 0 0 0 0 Others 1,694 (536) (117) (97) (84) Investment cash flow (1,480) (1,382) (517) (497) (484) Dividends paid (240) (170) (240) (539) (648) Share issues 0 0 0 0 0 Change in debts 998 171 631 (200) (200) Others (423) 331 (701) 4 (96) Financing cash flow 335 332 (310) (736) (944) Cash surplus/(deficit) (895) 100 (942) 24 250 Opening cash/(debt) 2,042 1,147 1,246 305 328 Closing cash/(debt) 1,147 1,246 305 328 579


Figure 49: Financial ratios Year to 31 Dec. (%) 2008 2009 2010E 2011E 2012E Growth Turnover 16 12 71 24 11 Gross profit (1) 38 81 24 10 Pre-tax profit 8 23 101 26 10 Net profit 6 20 93 20 2 EBITDA (16) 70 87 23 10 EBIT (21) 75 93 23 9 EPS 4 20 93 20 2 Profitability EBITDA margin 11 16 18 18 17 EBIT margin 9 15 16 16 16 Gross margin 19 23 25 25 25 Net profit margin 11 12 13 13 12 ROE 21 21 30 29 25 ROA 9 9 14 14 13 Leverage Total debt/total assets 60 61 58 55 51 Total debt/equity 148 158 138 122 105 Net debt/equity 42 34 43 31 19 Interest coverage (x) 4 5 16 24 29


25 January 2011



Guangxi Liugong Machinery (000528.SZ / 000528 CH)

Overseas acquisition positive in the long run ■ 2010 profit preview: In 2010, Liugong sold 38,968 loaders (+34% YoY),

missing our estimates by 3%. While its excavator sales were much better, its sales volumes rose 87% YoY to 5,595 units. Truck-mounted crane sales volumes grew 70% YoY to 2,210 units, above expectations as well. Thus, we raise our earnings forecasts for 2011-12E by 6.5% on higher sales assumptions for excavators and loaders.

■ Acquisition of overseas assets: Liugong targets to acquire 100% of the construction machinery business of Huta Stalowa Wola S.A (HSW) and 100% of its subsidiary, Dressta, in 2011. The target assets include bulldozers, wheel loaders and backhoe loaders. We think this acquisition should help Liugong improve its R&D capability on loaders and bulldozers. It should also help the company enter the Europe market quickly, as HSW is a leading loader manufacturer in Poland. The details of the transaction have not yet been finalised.

■ Catalysts: In our view, the upcoming acquisition should have some positive support, if the consideration is reasonable and the target company should raise Liugong�s profit after acquisition. Better-than-expected sales of Liugong�s major products should also trigger its stock price performance.

■ Valuation: By raising earnings forecasts and rolling over our DCF model to 2011, our target price rises to Rmb45.87, implying 15x 2011E P/E. As we still expect some catalysts, we maintain our OUTPERFORM rating.


010203040




Performance Over 1M 3M 12M Absolute (%) -14.0 -3.8 57.7 Relative (%) -16.0 -0.5 45.1


Year 12/09A 12/10E 12/11E 12/12ERevenue (Rmb mn) 10,183.0 14,388.4 17,543.8 19,801.0EBITDA (Rmb mn) 1,135.2 1,903.5 2,349.7 2,666.8EBIT (Rmb mn) 1,008.5 1,752.1 2,177.3 2,481.4Net income (Rmb mn) 865.7 1,544.1 1,932.9 2,217.6EPS (CS adj.) (Rmb) 1.36 2.37 2.97 3.41Change from previous EPS (%) n.a. -0.3 6.5 6.5Consensus EPS (Rmb) n.a. 2.33 2.68 3.17EPS growth (%) 126.8 74.6 25.2 14.7P/E (x) 24.0 13.7 11.0 9.6Dividend yield (%) � 1.2 2.9 3.6EV/EBITDA (x) 18.2 10.8 8.1 6.5P/B (x) 5.1 3.9 3.2 2.6ROE 25.7 32.6 32.0 29.9Net debt/equity (%) net cash net cash net cash net cash





Rating OUTPERFORM* [V] Price (24 Jan 11, Rmb) 32.61 Target price (Rmb) (from 42.75) 45.87¹ Chg to TP (%) 40.7 Market cap. (Rmb mn) 21,202 (US$ 3,222) Enterprise value (Rmb mn) 20,496 Number of shares (mn) 650.16 Free float (%) 55.63 52-week price range 40.34 - 17.94

25 January 2011


Figure 50: Revenue breakdown in 2011E Figure 51: Net profit estimated to rise 25% in 2011E

Loader62%

Ex cav ators19%

Forklifts3%

Road machines

8%

Others1%

Truck-mounted cranes

7%

0

500

1,000

1,500

2,000

2,500

2008 2009 2010E 2011E 2012E

0

2

4

6

8

10

12


(Rmb mn) (%)


Figure 52: Key assumptions 2008 2009 2010E 2011E 2012E Loaders Sales volumes (unit) 28,923 28,977 38,968 44,813 49,295 ASP (Rmb mn/unit) 0.23 0.22 0.24 0.24 0.24 Unit cost (Rmb mn/unit) 0.19 0.18 0.18 0.18 0.18 Excavators Sales volumes (unit) 2,579 2,992 5,595 8,393 10,071 ASP (Rmb mn/unit) 0.39 0.38 0.40 0.40 0.40 Unit cost (Rmb mn/unit) 0.30 0.28 0.29 0.29 0.29 Truck-mounted cranes Sales volumes (unit) 800 1,296 2,210 3,536 4,597 ASP (Rmb mn/unit) 0.31 0.31 0.31 0.31 0.31 Unit cost (Rmb mn/unit) 0.28 0.27 0.26 0.26 - Forklifts Sales volumes (unit) 3,000 4,500 6,300 8,190 ASP (Rmb mn/unit) 0.07 0.07 0.07 0.07 Unit cost (Rmb mn/unit) 0.06 0.06 0.06 0.06


25 January 2011


Figure 53: P&L statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Turnover 9,268 10,183 14,388 17,544 19,801 Loaders 6,650 6,329 9,193 10,571 11,629 Excavators 1,007 1,145 2,227 3,341 4,009 Truck-mounted cranes 252 408 695 1,113 1,446 Forklifts 168 210 315 441 573 Road machines 432 747 1,195 1,315 1,381 Others 138 59 89 89 89 COGS (7,808) (8,081) (11,183) (13,604) (15,335) Steel (3,052) (3,213) (4,446) (5,408) (6,096) components (3,176) (3,277) (4,535) (5,516) (6,218) Wages (779) (803) (1,111) (1,352) (1,524) D&A (92) (114) (139) (160) (173) Others (709) (674) (952) (1,168) (1,324) Gross profit 1,460 2,102 3,206 3,940 4,466 Operating expense-promotion (598) (615) (791) (965) (1,089) Operating expense-administrative (391) (435) (619) (754) (851) Finance costs (62) (36) 4 24 46 Share of profit of associates 37 (0) (0) (0) (0) Others (35) 17 41 60 73 Pre-tax profit 412 1,032 1,841 2,305 2,644 Taxation (70) (165) (294) (368) (422) Minorities (2) (2) (3) (4) (4) Net profit after minorities 340 866 1,544 1,933 2,218 EPS (Rmb) 0.60 1.36 2.37 2.97 3.41 DPS (Rmb) 0.08 0.00 0.40 0.95 1.19


Figure 54: Balance sheet Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Non-current assets Property, plant and equipment, net 952 1,293 1,550 1,641 1,618 Construction in progress 312 196 100 0 0 Investment in associate 112 124 123 123 123 Intangible assets 329 421 408 395 382 Others 91 650 1,000 1,000 1,000 Current assets Cash & equivalents 879 2,000 2,306 3,740 4,806 Inventory 2,437 2,228 2,777 3,073 3,177 Trade accounts receivables 788 1,012 1,971 2,307 2,495 Other accounts receivables 38 71 100 122 138 Other current assets 334 1,571 2,220 2,707 3,055 Total assets 6,272 9,565 12,556 15,108 16,795 Current liabilities Short-term loans 1,293 1,229 1,597 1,597 998 Accounts payable 542 1,567 2,200 2,713 3,058 Other amounts payable 1,112 2,255 3,151 3,871 4,364 Long-term liabilities Long-term loans 34 199 3 3 2 Other long-term liabilities 640 208 208 208 208 Total liabilities 3,621 5,457 7,158 8,391 8,629 Share capital 472 650 650 650 650 Reserves 2,168 3,447 4,733 6,049 7,493 Minorities 12 11 14 18 22 Total liabilities & shareholder funds 6,272 9,565 12,556 15,108 16,795 Source: Company data, Credit Suisse estimates

25 January 2011


Figure 55: Cash flow statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Net profit before minorities 342 867 1,547 1,937 2,222 Depreciation & amortisation 104 127 151 172 185 Change in working capital (816) 883 (657) 92 182 Others 19 21 (5) (28) (50) Operating cash flow (352) 1,898 1,036 2,174 2,539 Capex (515) (339) (300) (150) (150) Investment in associate (10) (12) 0 0 0 Others (239) (685) (345) 24 46 Investment cash flow (764) (1,035) (645) (126) (104) Dividends paid (47) 0 (260) (618) (773) Share issues 0 431 0 0 0 Change in debts 1,098 101 172 0 (600) Others 532 (274) 3 4 4 Financing cash flow 1,582 257 (84) (614) (1,369) Cash surplus/(deficit) 467 1,120 307 1,434 1,066 Opening cash/(debt) 412 879 2,000 2,306 3,740 Closing cash/(debt) 879 2,000 2,306 3,740 4,806


Figure 56: Financial ratios Year to 31 Dec. (%) 2008 2009 2010E 2011E 2012E Growth Turnover 21 10 41 22 13 Gross profit (0) 44 53 23 13 Pre-tax profit (39) 151 78 25 15 Net profit (41) 155 78 25 15 EBITDA (23) 101 69 24 14 EBIT (29) 117 75 25 14 EPS (41) 127 75 25 15 Profitability EBITDA margin 6 12 14 14 14 EBIT margin 5 10 13 13 13 Gross margin 16 21 22 22 23 Net profit margin 4 9 11 11 11 ROE 13 21 29 29 27 ROA 6 11 14 14 14 Leverage Total debt/total assets 58 57 57 56 51 Total debt/equity 137 133 133 125 106 Net debt/equity 40 (14) (13) (32) (47) Interest coverage (x) 6 29 62 73 103


25 January 2011



Shantui Construction Machinery (000680.SZ / 000680 CH)

New engine added ■ 2010 profit preview: Shantui saw its bulldozer market share expand further

in 2010 to 62% from 57% in 2009. The company sold 8,686 bulldozers, up 79% YoY, missing our estimates by 3%. But, its concrete machine business had revenue contribution of Rmb300 mn in 2010. We raise our earnings forecast for 2010-12 slightly by 1-2%.

■ Concrete machine should be a new engine: Shantui launched its concrete machine products in 2010, which achieved better-than expected revenue of Rmb300 mn. As there are two leaders in the concrete machine market, with a total of 90% market share, Shantui targets to be the no. 3. We expect the new product to contribute Rmb5 bn in revenue in future, or 36% of estimated sales in 2011.

■ Catalysts: Shantui raised its revenue growth guidance for bulldozers to 20-25% from 10-15%. Its revenue from concrete machines could beat estimates again this year.

■ Valuation: By raising our earnings forecast and rolling over our DCF model to 2011, our target price rises to Rmb21.9, implying 15x 2011E P/E. By launching concrete machines, Shantui�s product mix has become more balanced. We maintain our OUTPERFORM rating.


05

101520




Performance Over 1M 3M 12M Absolute (%) -6.2 -0.3 24.6 Relative (%) -8.4 3.0 14.7


Year 12/09A 12/10E 12/11E 12/12ERevenue (Rmb mn) 6,956.2 11,150.0 13,836.2 16,244.0EBITDA (Rmb mn) 488.0 928.0 1,267.4 1,462.9EBIT (Rmb mn) 394.7 796.8 1,102.4 1,286.8Net income (Rmb mn) 422.1 813.7 1,109.2 1,320.0EPS (CS adj.) (Rmb) 0.56 1.07 1.46 1.74Change from previous EPS (%) n.a. 1.1 2.2 2.2Consensus EPS (Rmb) n.a. 1.09 1.34 1.69EPS growth (%) -17.6 92.8 36.3 19.0P/E (x) 28.8 14.9 11.0 9.2Dividend yield (%) 0.6 0.6 1.2 1.6EV/EBITDA (x) 22.3 10.9 7.3 5.7P/B (x) 2.0 1.7 1.4 1.3ROE 7.7 12.2 14.1 14.6Net debt/equity (%) net cash net cash net cash net cash


*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.



Rating OUTPERFORM* Price (24 Jan 11, Rmb) 16.01 Target price (Rmb) (from 19.31) 21.90¹ Chg to TP (%) 36.8 Market cap. (Rmb mn) 12,154 (US$ 1,847) Enterprise value (Rmb mn) 10,118 Number of shares (mn) 759.16 Free float (%) 78.90 52-week price range 18.40 - 10.35

25 January 2011


Figure 57: Revenue breakdown in 2011E Figure 58: 36% income growth expected in 2011E

Bulldozers43%

Concrete machines

5%

Rollers3%

Ex cav ator agent sales

10%

Fittings32%

Others7%

0

200

400

600

800

1,000

1,200

1,400

2008 2009 2010E 2011E 2012E

(Rmb mn)

0

1

2

3

4

5

6

7

8

9


(%)


Figure 59: Key assumptions 2008 2009 2010E 2011E 2012E Bulldozers Sales volumes (units) 4,597 4,900 8,686 10,592 12,091 ASP (Rmb mn/unit) 0.580 0.461 0.516 0.547 0.569 gross margin (%) 24.7 18.3 18.3 19.0 18.2 Concrete machines Sales revenue (Rmb mn) 300 750 1,200 gross margin (%) 18.0 20.0 20.0 Fittings Sales revenue (Rmb mn) 2,142 2,471 3,707 4,374 5,030 gross margin (%) 18.1 19.4 17.0 17.0 17.0


25 January 2011


Figure 60: P&L statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Turnover 6,695 6,956 11,150 13,836 16,244 Bulldozers 2,668 2,259 4,484 5,796 6,881 Concrete machines 300 750 1,200 Rollers 171 332 432 454 476 Excavator agent sales 880 953 1,239 1,424 1,567 Fittings 2,142 2,471 3,707 4,374 5,030 Others 836 941 988 1,038 1,090 COGS (5,513) (5,954) (9,517) (11,699) (13,744) purchased components (2,068) (2,233) (3,569) (4,387) (5,051) Self produced components (2,438) (2,579) (4,123) (5,068) (5,954) Steel (538) (602) (1,027) (1,234) (1,398) Wages (128) (140) (154) (170) (170) D&A (69) (82) (120) (154) (165) Others (273) (317) (523) (686) (1,006) Gross profit 1,181 1,003 1,633 2,138 2,500 Operating expense-promotion (308) (253) (401) (498) (585) Operating expense-administrative (289) (344) (424) (526) (617) Finance costs (28) (25) (29) (23) (14) Share of profit of associates 167 150 242 302 372 Others (84) 9 22 30 37 Pre-tax profit 640 540 1,044 1,423 1,693 Taxation (95) (80) (157) (213) (254) Minorities (40) (38) (73) (100) (119) Net profit after minorities 504 422 814 1,109 1,320 EPS (Rmb) 0.68 0.56 1.07 1.46 1.74 DPS (Rmb) 0.10 0.10 0.10 0.19 0.26


Figure 61: Balance sheet Year to 31 Dec. (Rmb m) 2008 2009 2010E 2011E 2012E Non-current assets Property, plant and equipment, net 878 1,162 2,095 2,141 2,176 Construction in progress 394 369 0 0 0 Investment in associate 560 650 893 1,195 1,566 Intangible assets 104 110 99 88 77 Others 31 29 29 29 29 Current assets Cash & equivalents 1,039 1,319 943 1,119 1,549 Inventory 1,279 1,349 2,157 2,651 3,115 Trade accounts receivables 545 858 1,376 1,708 2,005 Other accounts receivables 77 69 110 137 160 Other current assets 260 422 677 840 986 Total assets 5,168 6,338 8,379 9,907 11,665 Current liabilities Short-term loans 616 802 800 500 300 Accounts payable 870 1,195 1,910 2,347 2,758 Other amounts payable 607 894 1,429 1,757 2,064 Long-term liabilities Long-term loans 0 19 0 0 0 Other long-term liabilities 8 16 16 16 16 Total liabilities 2,101 2,925 4,155 4,621 5,138 Share capital 759 759 759 759 759 Reserves 2,137 2,475 3,213 4,176 5,296 Minorities 171 179 252 352 471 Total liabilities & shareholder funds 5,168 6,338 8,379 9,907 11,665 Source: Company data, Credit Suisse estimates

25 January 2011


Figure 62: Cash flow statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Net profit before minorities 545 460 887 1,209 1,439 Depreciation & amortisation 77 93 131 165 176 Change in working capital (78) 75 (371) (250) (213) Others (184) (161) (287) (379) (477) Operating cash flow 360 467 360 745 925 Capex (509) (341) (650) (200) (200) Investment in associate (512) 60 0 0 0 Others 590 (42) (64) (23) (14) Investment cash flow (431) (323) (714) (223) (214) Dividends paid (76) (76) (76) (76) (146) Share issues 508 0 0 0 0 Change in debts 195 205 (20) (300) (200) Others 23 8 73 30 66 Financing cash flow 650 136 (23) (346) (280) Cash surplus/(deficit) 579 280 (376) 176 431 Opening cash/(debt) 461 1,039 1,319 943 1,119 Closing cash/(debt) 1,039 1,319 943 1,119 1,549


Figure 63: Financial ratios Year to 31 Dec. (%) 2008 2009 2010E 2011E 2012E Growth Turnover 39 4 60 24 17 Gross profit 36 (15) 63 31 17 Pre-tax profit 13 (16) 93 36 19 Net profit 13 (16) 93 36 19 EBITDA 15 (13) 83 34 17 EBIT 16 (17) 90 35 18 EPS 5 (18) 93 36 19 Profitability EBITDA margin 11 9 11 12 12 EBIT margin 10 8 10 10 11 Gross margin 18 14 15 15 15 Net profit margin 8 6 7 8 8 ROE 17 13 20 22 22 ROA 11 7 11 12 12 Leverage Total debt/total assets 41 46 50 47 44 Total debt/equity 73 90 105 94 85 Net debt/equity (15) (15) (4) (13) (21) Interest coverage (x) 16 22 37 63 120


25 January 2011



Anhui Heli (600761.SS / 600761 CH)

Valuation looks cheap but lacks catalysts ■ 2010 preview: Benefiting from the economic recovery, we expect Heli�s

forklift sales volumes to grow 75% YoY in 2010, versus 55% estimated earlier. However, margins could be weaker than expected, given increasing steel cost pressure and weak pricing power. Accordingly, we slightly raise our earnings forecast for 2010-12 by 5-7%.

■ Industry demand should be healthy: In the next few years, demand for forklifts is expected to be healthy, as: (1) the logistics industry should grow steadily on factory relocation; and (2) and more forklifts will be needed to replace manual labour due to rising labour costs.

■ Catalysts: In our view, the stock derated and factored in the potential risk of losing market shares to new entrants such as Liugong and Lonking. However, with an expected 30% growth in forklifts and margins shrinking, earnings growth in 2011E should be soft. We see low pricing momentum ahead.

■ Valuation: We set our new target price at Rmb18.42, implying 16x 2011E P/E Although the current stock price looks cheap, we see few price triggers, unless forklift demand beats estimates again. We maintain our NEUTRAL rating.


010203040




Performance Over 1M 3M 12M Absolute (%) -14.9 -27.0 3.1 Relative (%) -16.9 -24.5 -5.1


Year 12/09A 12/10E 12/11E 12/12ERevenue (Rmb mn) 3,111.1 5,087.4 6,538.3 7,795.8EBITDA (Rmb mn) 257.9 575.3 677.5 802.0EBIT (Rmb mn) 148.8 448.1 534.0 645.2Net income (Rmb mn) 111.6 339.8 407.3 467.6EPS (CS adj.) (Rmb) 0.31 0.95 1.14 1.31Change from previous EPS (%) n.a. 6.7 4.9 4.6Consensus EPS (Rmb) n.a. 0.96 1.19 1.46EPS growth (%) -40.8 204.5 19.9 14.8P/E (x) 47.3 15.5 13.0 11.3Dividend yield (%) 0.7 0.7 2.1 2.5EV/EBITDA (x) 18.8 8.9 7.6 6.3P/B (x) 2.5 2.2 1.9 1.7ROE 5.3 14.8 15.6 16.0Net debt/equity (%) net cash net cash net cash net cash





Rating NEUTRAL* [V] Price (24 Jan 11, Rmb) 14.78 Target price (Rmb) (from 18.39) 18.42¹ Chg to TP (%) 24.6 Market cap. (Rmb mn) 5,275.72 (US$ 801.64) Enterprise value (Rmb mn) 5,129 Number of shares (mn) 356.95 Free float (%) 65.70 52-week price range 22.05 - 11.27

25 January 2011


Figure 64: Revenue breakdown in 2011E Figure 65: Net profit and net margin

Forklifts87%

Others13%

050

100150

200250300

350400450500

2008 2009 2010E 2011E 2012E

(Rmb mn)

0

1

2

3

4

5

6

7

8


(%)


Figure 66: P&L statement Year to 31 Dec. (Rmb mn) 2008 2009 2010E 2011E 2012E Turnover 3,628 3,111 5,087 6,538 7,796 Forklifts 2,747 2,473 4,333 5,633 6,760 Loaders 33 60 91 91 91 Stackers 0 0 0 54 109 Others 815 533 613 705 775 COGS (2,981) (2,597) (4,112) (5,324) (6,342) Gross profit 647 514 976 1,214 1,454 Operating expense-promotion (160) (154) (224) (288) (343) Operating expense-administrative (269) (224) (331) (425) (507) Finance costs (3) (2) (4) (5) 0 Share of profit of associates 0 0 2 0 0 Others (5) 7 20 30 38 Pre-tax profit 210 142 439 527 642 Taxation (2) (14) (66) (79) (128) Minorities (20) (17) (34) (40) (46) Net profit after minorities 189 112 340 407 468 EPS (Rmb) 0.53 0.31 0.95 1.14 1.31 DPS (Rmb) 0.10 0.10 0.10 0.30 0.36


25 January 2011


Figure 67: Balance sheet Year to 31 Dec. (Rmb m) 2008 2009 2010E 2011E 2012E Non-current assets Property, plant and equipment, net 899 1,085 1,262 1,346 1,396 Construction in progress 112 115 20 0 0 Investment in associate 0 0 2 2 2 Intangible assets 135 165 158 151 143 Others 22 12 12 12 12 Current assets Cash & equivalents 431 615 467 271 320 Inventory 837 618 978 1,266 1,508 Trade accounts receivables 308 351 573 737 878 Other accounts receivables 34 25 41 53 63 Other current assets 238 207 341 439 523 Total assets 3,016 3,192 3,854 4,275 4,846 Current liabilities Short-term loans 150 150 240 80 40 Accounts payable 444 486 563 729 869 Other amounts payable 233 278 394 511 608 Long-term liabilities Long-term loans 19 19 60 20 10 Other long-term liabilities 12 22 22 22 22 Total liabilities 858 955 1,280 1,362 1,549 Share capital 357 357 357 357 357 Reserves 1,718 1,793 2,097 2,395 2,733 Minorities 83 87 120 161 207 Total liabilities & shareholder funds 3,016 3,192 3,854 4,275 4,846


Figure 68: Cash flow statement Year to 31 Dec. (Rmb m) 2008 2009 2010E 2011E 2012E Net profit before minorities 208 129 373 448 514 Depreciation & amortisation 94 109 127 144 157 Change in working capital (135) 304 (540) (279) (241) Others (18) (16) (32) (36) (47) Operating cash flow 149 526 (71) 277 383 Capex (209) (290) (200) (200) (200) Investment in associate 0 0 0 0 0 Others (64) (29) (6) (5) 0 Investment cash flow (273) (319) (206) (205) (200) Dividends paid (36) (36) (36) (109) (130) Share issues 0 0 0 0 0 Change in debts 70 (0) 131 (200) (50) Others (38) 14 34 40 46 Financing cash flow (4) (22) 129 (268) (134) Cash surplus/(deficit) (128) 185 (148) (196) 49 Opening cash/(debt) 559 431 615 467 271 Closing cash/(debt) 431 615 467 271 320


25 January 2011


Figure 69: Financial ratios Year to 31 Dec. (%) 2008 2009 2010E 2011E 2012E Growth Turnover 7 (14) 64 29 19 Gross profit (16) (21) 90 24 20 Pre-tax profit (52) (32) 208 20 22 Net profit (41) (41) 204 20 15 EBITDA (40) (18) 123 18 18 EBIT (50) (32) 201 19 21 EPS (41) (41) 204 20 15 Profitability EBITDA margin 9 8 11 10 10 EBIT margin 6 5 9 8 8 Gross margin 18 17 19 19 19 Net profit margin 5 4 7 6 6 ROE 9 5 14 15 15 ROA 6 4 10 10 10 Leverage Total debt/total assets 28 30 33 32 32 Total debt/equity 41 44 52 49 50 Net debt/equity (13) (21) (7) (6) (9) Interest coverage (x) 25 24 51 71 230


Companies Mentioned (Price as of 24 Jan 11) Anhui Heli (600761.SS, Rmb14.78, NEUTRAL [V], TP Rmb18.42) Atlas Copco (ATCOa.ST, SKr156.50, NEUTRAL, TP SKr155.00, MARKET WEIGHT) Caterpillar Inc. (CAT, $92.75, OUTPERFORM [V], TP $110.00) Deere & Co. (DE, $89.26, OUTPERFORM, TP $91.00) Guangxi Liugong Machinery (000528.SZ, Rmb32.61, OUTPERFORM [V], TP Rmb45.87) Lonking Holdings Ltd. (3339.HK, HK$4.45, OUTPERFORM [V], TP HK$5.66) Sandvik (SAND.ST, SKr125.90, UNDERPERFORM, TP SKr110.00, MARKET WEIGHT) Sany Heavy Industry (600031.SS, Rmb19.06, OUTPERFORM [V], TP Rmb25.59) Shantui Construction Machinery (000680.SZ, Rmb16.01, OUTPERFORM, TP Rmb21.90) Terex Corporation (TEX, $31.19, OUTPERFORM [V], TP $44.00) Volvo (VOLVb.ST, SKr111.60, UNDERPERFORM, TP SKr84.00, MARKET WEIGHT)

Disclosure Appendix Important Global Disclosures I, Victoria Li, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.

25 January 2011


3-Year Price, Target Price and Rating Change History Chart for 600761.SS 600761.SS Closing

Price Target

Price

Initiation/ Date (Rmb) (Rmb) Rating Assumption 17-Mar-08 22.38 43.461 29-Jul-08 13.99 21.106 27-Aug-08 10.48 19.703 29-Oct-08 6.15 9.705 3-Nov-08 6.16 9 15-Jan-09 8.57 9.396 N 31-Mar-09 10.62 9.912 29-Apr-09 9.9 7.076 U 26-Aug-09 11.72 7.18 18-Jan-10 15.9 11.235 24-Mar-10 14.1 13.933 N 24-Aug-10 15.15 16.454 27-Oct-10 21.01 16.45 28-Oct-10 20.51 18.392

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3-Year Price, Target Price and Rating Change History Chart for 000528.SZ 000528.SZ Closing

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Initiation/ Date (Rmb) (Rmb) Rating Assumption 22-Feb-08 33.67 42.659 7-Mar-08 27.44 45.211 29-Apr-08 23.72 39.532 29-Jul-08 16.47 20.862 29-Oct-08 8.44 12.357 3-Nov-08 7.06 12.014 15-Jan-09 9.57 14.035 20-Mar-09 12.96 14.031 1-May-09 15.67 18.249 15-Jul-09 19.26 22.303 18-Jan-10 22.87 25.259 29-Mar-10 22.12 35.614 27-Aug-10 23.8 37.969 27-Oct-10 32.47 42.75

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3-Year Price, Target Price and Rating Change History Chart for 3339.HK 3339.HK Closing

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Initiation/ Date (HK$) (HK$) Rating Assumption 6-Mar-08 2.575 3.521 27-Mar-08 1.523 3.052 29-Jul-08 1.698 2.38 10-Sep-08 1.625 2.404 3-Nov-08 .75 1.653 15-Jan-09 .835 2.047 10-Apr-09 1.455 1.931 23-Jul-09 2.575 2.93 18-Jan-10 2.925 3.09 N 1-Apr-10 3.01 4.13 O 12-Jul-10 2.765 4.23 27-Aug-10 3.105 4.541

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25 January 2011


3-Year Price, Target Price and Rating Change History Chart for 600031.SS 600031.SS Closing

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Initiation/ Date (Rmb) (Rmb) Rating Assumption 28-Apr-08 7.515 12.345 29-Jul-08 6.956 8.076 27-Aug-08 4.613 6.71 9-Sep-08 4.156 7.098 13-Oct-08 4.848 7.098 27-Oct-08 3.959 4.838 N 3-Nov-08 3.53 4.508 15-Jan-09 5.787 5.723 8-Apr-09 7.391 8.657 22-Apr-09 7.378 8.453 17-Aug-09 9.708 12.35 O 30-Oct-09 11.432 13.966 18-Jun-10 8.841 16.038 23-Aug-10 12.357 18.648 20-Oct-10 19.548 22.904

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3-Year Price, Target Price and Rating Change History Chart for 000680.SZ 000680.SZ Closing

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Initiation/ Date (Rmb) (Rmb) Rating Assumption 29-Feb-08 17.5 26.042 16-Apr-08 12.58 20.13 30-Apr-08 15.8 23.072 29-Jul-08 11.87 16.299 22-Oct-08 8.04 10.557 3-Nov-08 5.71 10.206 15-Jan-09 9.4 9.483 N 24-Mar-09 11.89 11.796 12-Aug-09 12.02 15.772 O 28-Oct-09 11.76 14.756 18-Jan-10 14.15 15.065 13-Apr-10 12.68 16.908 26-Apr-10 13.11 19.308 18-Oct-10 15.16 19.308

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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts� stock ratings are defined as follows: Outperform (O): The stock�s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock�s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock�s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock�s absolute total return potential to its current share price and (2) the relative attractiveness of a stock�s total return potential within an analyst�s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock�s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock�s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts� perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts� perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts� coverage universe weightings are distinct from analysts� stock ratings and are based on the expected performance of an analyst�s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.

25 January 2011


Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst�s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse�s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 45% (61% banking clients) Neutral/Hold* 41% (59% banking clients) Underperform/Sell* 11% (53% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse�s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (600761.SS) Method: We choose discounted cash flow (DCF) as our valuation method to derived Anhui Heli's RMB18.42 target price because 1) China's construction machinery sector is in a growth phase and it's not appropriate to compare it with global peers that are in mature phases; 2) Heli is an industry leader and not fit for comparison with local followers; 3) all of the local leaders focus on one or two different products and it's difficult to compare them with each other; 4) only the DCF model can factor in more than three years' earnings growth based on players' long-term plans to enrich their product mix. Based on our DCF model (a weighted average cost of capital (WACC) of 11% and a terminal growth rate of 1.5%), our target price is set at Rmb18.42, indicating 16x Price/Earnings (P/E) and 10x enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) on 2011E. Risks: Risks to our RMB18.42 target price for Anhui Heli include: 1) industry demand might be weaker than we expected and reduce Heli's earnings; 2) steel prices might rebound sharply and erode net profit. Our model indicates that for every 1% change in steel prices, Heli's income would change reversely by 1%; 3) renminbi appreciation above our assumption is negative to Heli as it has a big export proportion in total revenue. Based on our model, every 1% appreciation in the renminbi would reduce Heli's net profit by 1% in 2010E. Price Target: (12 months) for (000528.SZ) Method: In setting our RMD45.87 target price for Guangxi Liugong Machinery, we choose discounted cash flow (DCF) as the major valuation method, because 1) China's construction machinery sector is in a growth phase, and it's not appropriate to compare them with global peers, which are at mature phases; 2) Liugong is an industry leader and not fit for comparison with local followers; 3) all the local leaders are focusing on one or two different products and it's difficult to compare with each other; 4) only a DCF model could factor in more than three years' earnings growth based on players' long-term plans to enrich their product mix. Based on our DCF model (a weighted average cost of capital (WACC) of 10.5%, and a terminal growth rate of 2%), we set our target price for Guangxi Liugong Machinery at Rmb45.87, indicating 15x price to earnings ratio (P/E) and 13x enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) on 2011E. Risks: Risks on our RMB45.87 target price for Guangxi Liugong Machinery include: 1) global and domestic economy slow down might hurt the sector deeper than estimated and reduce Liugong's earnings; 2)Steel prices might rebound sharply and hurt margins, as steel accounts for 40% of COGS. Our model indicates that for every 1% change in steel prices, Liugong's income would change reversely by 2.9% and 2.6% respectively in 2008-09E; 3) RMB appreciation above our assumption would be negative to earnings. Based on our model, for every 1% RMB appreciation, Liugong's net profit wouldl be eroded by 0.6% in 2010E. Price Target: (12 months) for (3339.HK) Method: Our HK$5.66 target price for Lonking is based on discounted cash flow (DCF). We choose DCF as our valuation method because 1) China's construction machinery sector is in a growth phase and it's not appropriate to compare it with global peers, which are in a mature phase; 2) CIM is an industrial leader and not fit to compare with local followers; 3) all local leaders are focusing on one or two different products and it's difficult to compare with each other; 4) only a DCF model could factor in more than three years' earnings growth based on players' long-term plans on enriching their product mix. Our DCF model uses a weight average cost of capital of 10.8% and a terminal growth rate of 2%. Risks: Risks to our HK$5.66 target price for Lonking are 1) quality is becoming more important than prices for loader suppliers to improve their market positions, due to increasing industry centralisation. If the company fails to improve technology and narrow its quality gap with competitors, its long-term growth might be risky; 2) global and domestic economy slow down might hurt demand deeper than estimated; 3) steel prices might rebound sharply and erode net profit. Our model indicates that for every 1% change in steel prices, Lonking's net profit would change reversely by around 1.2% in 2009-10E; 4) faster-than-expected RMB appreciation would be negative to earnings. Based on our model, for every 1% RMB appreciation, net profit would be eroded by 0.7-1.0% in 2009-10E. Price Target: (12 months) for (600031.SS) Method: In deriving our Rmb25.59 target price for Sany Heavy Industry, we choose discounted cash flow (DCF) as the valuation method, because 1) China's construction machinery sector is in a growth phase, and we believe it is not appropriate to use relative valuation to compare it with global

25 January 2011


peers, which are in hte mature phase; 2) Sany is an industry leader and not a good fit for comparison with local followers; 3) all the leaders are focusing on one or two different products and it's difficult to compare with each other; 4) only the DCF model can factor in more than three years' earnings growth based on players' long-term plans to enrich their product mix. Based on our DCF model (weighted average cost of capital (WACC):11.5% terminal growth: 2%), target price is set at Rmb25.59, indicating a 16 x price/earnings (P/E) and a 10x enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) on 2011E. Risks: Risks on our Rmb25.59 target price for Sany Heavy Industry include: 1) demand for concrete machines is highly sensitive to changes in China's property investment which might not recover in this yar; 2) steel price might rebound sharply and erode net profit. Our model indicates that for every 1% change on steel prices, Sany's income would change reversely by 0.2%; 4) Above assumes RMB appreciation might be another negative factor to Sany in 2010, when hte export amount becomes large enough. For every 1% appreciation of the RMB, Sany's profit would decline by 0.1% in 2010. Price Target: (12 months) for (000680.SZ) Method: We choose discounted cash flow (DCF) to value Shantui Construction Machinery and derive a RMB21.9 target price, because 1) China's construction machinery sector is in a growth phase and it's not appropriate to compare it with global peers that are at mature phases; 2) Shantui is an industrial leader and not appropriate for comparing with local followers; 3) all the local leaders are focussing on one or two individual products and it's difficult to compare with each other; 4) only the DCF model can factor in more than three years' earnings growth based on player's long-term plan on enriching their product mix. Based on our DCF model (weighted average cost of capital (WACC):10.7%, terminal growth:2%), target price is set at Rmb21.9, indicating 15x price/earnings multiple and a 12x EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) on 2011E. Risks: Risks on to our RMB21.9 target price for Shantui Construction Machinery include: 1) bulldozers are a kind of earth-moving machine with much smaller market demand compared with loaders. In the next few years, if industry growth is softer than we expected, Shantui's growth would slowed down; 2) the market is highly controlled to four local players. Although Shantui has an absolulte advantage in its products and market positions, it might be difficult to catch more market share from other competitors and make Shantui's income be lower than we expected; 3) faster-than-expected RMB appreciation is negative to Shantui as its big export proportion to total revenue. Based on our model, every 1% appreciation on RMB would reduce Shantui's net profit by 1.1% in 2010E. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (600031.SS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (600031.SS) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (000528.SZ, 3339.HK, 600031.SS) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (600761.SS, 000528.SZ, 3339.HK, 600031.SS, 000680.SZ) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: ATCOa.ST, SAND.ST, VOLVb.ST. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. � Victoria Li, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited Shanghai Representative Office. Where this research report is about a non-Taiwanese company, written by a Taiwan-based analyst, it is not a recommendation to buy or sell securities For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

25 January 2011Asia Pacific / China

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China Construction Machinery Sector