Kaishan Compressor - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/STOCK/2013/10/30/1e32a776-6e09-4d8… · Zhejiang Kaishan Compressor is a leading domestic screw air compressor manufacturer

Please read carefully the important disclosures at the end of this report

Equity Research

October 30, 2013

Kaishan Compressor

From “Made in China” to “Created in China”

Initial Coverage Initiate with BUY

Investment positives

Zhejiang Kaishan Compressor is a leading domestic screw air compressor manufacturer. We believe it will leverage its growing R&D strength to extend its screw profile technology advantages across multiple sectors to become a world-class, integrated solutions provider specializing in energy conservation, environmental protection and compressor technology.

Screw expanders to see strong growth: Against the backdrop of the Chinese government’s drive to save energy and reduce emissions, and businesses’ need to cut costs and improve energy efficiency, screw expanders have bright prospects as they can effectively deal with the technological issue of low-grade waste energy (heat/pressure) recovery which has not been satisfactorily addressed by traditional methods (i.e., waste heat boilers + steam turbines).

Breakthroughs likely in gas compressor and refrigeration equipment: We believe Kaishan can also extend its competitive advantage in screw profile technology to the gas compressor and refrigeration fields.

More upside potential for Kaishan’s screw air compressor: While the air compressor industry is in a downturn in China, Kaishan still has growth potential in this traditional principal business thanks to its exposure to high-end models and overseas markets.

Financials

We expect EPS to grow 33.0% YoY to Rmb0.92 for 2013, 50.2% YoY to Rmb1.38 for 2014, and 30.2% YoY to Rmb1.79 for 2015.

Valuation and recommendation

The stock is trading at 38.3x 2013e P/E, 25.5x 2014e P/E, and 19.6x 2015e P/E. We believe it warrants a valuation premium as the company is likely to see wide application of its core technologies in more new fields and its products are environmentally friendly. The robust growth in orders for new products such as screw compressors and potential M&A in the medium/long-term are likely to be positive share price catalysts. Initiate with BUY.

Risks

Air compressor market volatility; slow marketing of new technology; capital constraints of EMC business model.

Ticker 300257.SZ

Last close Rmb35.10

52wk price range Rmb41.16~16.59

Market cap (bn) Rmb15

Daily value (mn) Rmb83.25

Shares outstanding (mn) 429

Free float (%) 33

Daily volume (mn sh) 2.23

Business sector Machinery

October 30, 2013

(Rmb mn) 2011A 2012A 2013E 2014E

Revenue 1,983 1,617 1,956 2,911

(+/-) 21.9% -18.4% 20.9% 48.8%

Net profit 294 296 393 591

(+/-) 44.2% 0.7% 33.0% 50.2%

EPS 0.68 0.69 0.92 1.38

BPS 6.62 6.98 7.57 8.65

DPS 0.33 0.33 0.30 0.59

CPS 0.26 0.51 0.87 1.14

P/E 51.3 50.9 38.3 25.5

P/B 5.3 5.0 4.6 4.1

EV/EBITDA 31.2 33.9 25.0 15.7

Dividend yield 0.9% 0.9% 0.8% 1.7%

ROAA 13.3% 8.8% 11.1% 14.7%

ROAE 18.1% 10.1% 12.6% 17.0%

Source: Bloomberg, company data, CICC Research

Jin ZHANG Huimin WU

[email protected]

[email protected]

SFC CE Ref: AUZ699

64

100

136

172

208

244

Oct 12 Jan 13 Apr 13 Jul 13 Oct 13

Re

lative

Va

lue

(%

) 300257.SZ CSI 300

CICC Research: October 30, 2013


2

Contents

Analysis on growth drivers for Kaishan .......................................................................................................... 4

Looking back, strength in management, manufacturing and marketing helped Kaishan become an air

compressor bellwether in China .............................................................................................................................. 4

Looking forward, Kaishan will likely grow into a world-class solution provider of energy conservation and

compressor technology helped by R&D strength .................................................................................................... 6

Screw expanders: Innovative energy recycling technology ......................................................................... 8

Screw expanders can effectively address issue of recycling low-grade, unstable heat resources ......................... 8

Kaishan is a pioneer in screw expander market thanks to its competitive advantage in profile design ................ 11

EMC model to help promote screw expanders ..................................................................................................... 14

Gas compressor and refrigeration technology two important growth drivers ......................................... 16

Gas compressor a potential beneficiary from natural gas exploration and investments in the coal chemical

sector ..................................................................................................................................................................... 16

Refrigeration Technology: Cold chain logistics industry has a bright prospect ..................................................... 18

Decent growth potential for air compressor business thanks to its exposure to high-end products and

overseas markets ............................................................................................................................................. 21

The largest beneficiary of stricter energy efficiency standards ............................................................................. 21

Huge potential of import substitution in high-end air compressor market ............................................................. 23

Bright prospects in overseas market exploration .................................................................................................. 24

Earnings forecasts and investment recommendation ................................................................................. 26

Earnings forecasts and key assumptions .............................................................................................................. 26

Valuation and recommendation ............................................................................................................................. 28

Risks .................................................................................................................................................................. 29

Domestic air compressor market volatility ............................................................................................................. 29

Slow recognition of innovative technology ............................................................................................................ 29

Capital constraints of EMC business model .......................................................................................................... 29

Figures

Figure 1: Kaishan is a leader in China’s air compressor market (especially screw air compressor) .................. 4 Figure 2: Screw air compressor cost breakdown................................................................................................. 4 Figure 3 Ability to manufacture core components is the key driver behind Kaishan’s competitive advantage in

air compressor business ...................................................................................................................................... 5 Figure 4: Healthy cash flow thanks to its excellent management of distribution channels. ................................ 5 Figure 5: Resume of General Manager Dr. Tang Yan .......................................................................................... 6 Figure 6: Other key technology experts ............................................................................................................... 6 Figure 7: New product development and future R&D directions ......................................................................... 7 Figure 8: Long-term growth directions of Kaishan and the corresponding international giants .......................... 7 Figure 9: Low-temperature waste heat recovery in the steel industry still underdeveloped ............................... 8 Figure 10: Picture of Kaishan screw expander .................................................................................................... 9 Figure 11: Performance of steam turbine vs. screw expander .......................................................................... 10 Figure 12: Screw expander market size estimates under conservative assumptions ...................................... 10 Figure 13: Cases of Jiangxi Huadian’s screw expander applications before 2011 ........................................... 12 Figure 14: Kaishan screw expander series ........................................................................................................ 12 Figure 15: Applications of Kaishan screw expanders ........................................................................................ 13 Figure 16: Sales revenue forecasts for Kaishan screw expanders ................................................................... 14 Figure 17: China’s steel and building materials sectors are under significant earnings pressure amid slower

FAI growth .......................................................................................................................................................... 14



3

Figure 18: Simulation analysis on investment returns of screw expander EMC ............................................... 15 Figure 19: Comparison of three types of natural gas compressors................................................................... 16 Figure 20: Applications of screw compressors in the chemical sector .............................................................. 17 Figure 21: Coal chemical sector investment breakdown ................................................................................... 17 Figure 22: Refrigeration compressor sales volumes over the past several years ............................................ 18 Figure 23: China lags far behind the advanced economies in the cold chain logistics industry ....................... 18 Figure 24: Cold chain logistics value chain and the related equipment ............................................................ 19 Figure 25: Domestic refrigeration compressor market share by manufacturer ................................................. 19 Figure 26: Product line of Shanghai Kailei Refrigeration System ...................................................................... 20 Figure 27: China’s manufacturing PMI and indusrial sector’s FAI ..................................................................... 21 Figure 28: Historical sales volumes of screw compressors in China ................................................................ 21 Figure 29: Industrial compressors are the key electricity users ........................................................................ 22 Figure 30: Kaishan sees most products be eligible for China’s subsidy program for energy efficient products

for 2013 .............................................................................................................................................................. 22 Figure 31: Revenue of Atlas in Asia Pacific Region and China ......................................................................... 23 Figure 32: Compressor product lines of Atlas, Ingersoll Rand, Sullair and Kaishan ......................................... 23 Figure 33: Technical characteristics of oil-free and oil-flooded screw air compressors .................................... 24 Figure 34: Proportion of Kaishan’s overseas revenue has been expanding steadily over the past several

years ................................................................................................................................................................... 24 Figure 35: Profiles of global major manufacturers of air compressors .............................................................. 25 Figure 36: Revenue and cost forecasts by segment ......................................................................................... 26 Figure 37: Key financial data.............................................................................................................................. 27 Figure 38: Valuations of A-share growth machinery stocks and the energy conservation & environmental

protection stocks ................................................................................................................................................ 28 Figure 39: Historical P/E and P/B bands............................................................................................................ 28



4

Analysis of growth drivers for Kaishan

Looking back, strength in management, manufacturing and marketing helped Kaishan become an air

compressor bellwether in China

Before going public in 2011, Kaishan had become a leading manufacturer in domestic air compressor market with the highest

sales revenue and the broadest product line. We believe the reasons why Kaishan can outshine its domestic rivals and even

global giants such as Atlas and Ingersoll Rand in the domestic air compressor market include:

Figure 1: Kaishan is a leader in China’s air compressor market (especially screw air compressor)

Source: Compressor Magazine, China General Machinery Industry Yearbook, CICC Research

Strong business strategy, management and execution: The management team with Cao Kejian as Chairman created a

successful business strategy (such as grabbing the opportunity to replace piston compressor by screw air compressor), and

strong management mechanism, corporate culture and execution.

Manufacturing strength: In addition to its excellent production management and cost control, Kaishan has a broader

product portfolio across the entire value chain than its domestic peers. Except for engine (or diesel engine), Kaishan can

independently manufacture all of other core parts of compressors, which enable it to better control product performance,

quality and cost. More importantly, Kaishan is able to manufacture main screw parts of screw air compressor. Industry

experience suggests that this is a right business strategy as the international giants such as Atlas, Ingersoll Rand, Sullair

and Fusheng all manufacture core screw parts independently.

Figure 2: Screw air compressor cost breakdown

Source: Industry data, CICC Research

0%

5%

10%

15%

20%

25%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2008 2009 2010 2011 2012

Kaishan sales of screw air

compressors

Market share

4,281

1,185 891 764 740 710 709 561 511 489

- 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

2011 Doemstic Leading Compressor Companies Revenue (Rmb mn)

Screw host,15%-

20%

Motor,15%-20%

Barrels of oil and gas,10%Sheet metal

parts,20%

Control panel,10%

Others,~ 25%



5

KaishanAtlas

Copco

Ingersoll

RandFusheng Sullair Hongwuhuan

Zhejiang

Zhigao

Shanghai

Screw

Compressor

Comp-AirXinlei Air

Compressor

Ningbo

GHH

Leading internat io nal co mpresso r co mpanies mo stly use self -made screw ho st

Major air compressors enterprises

Make in house Outsource

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2008 2009 2010 2011 2012 1H13

Kaishan's Complete industrial chain is one of the reasons for

higher profitability compared with peers

Kaishan GM

Hanbell Precise

Machinery GM

-

50

100

150

200

250

300

350

2008 2009 2010 2011 2012

RMB mn

Net profit Net operating cash flow

Figure 3 Ability to manufacture core components is the key driver behind Kaishan’s competitive advantage in air

compressor business

Source: Industry data, Bloomberg, CICC Research

Strong distribution channel: According to Kaishan IPO prospectus in 2011, the company had 800 dealers and 2,000

points of sales in China, the highest number among Chinese peers. In addition, Kaishan has established sound

management and incentive mechanisms for its dealers. Our grassroots survey suggests most dealers of Kaishan only sell

Kaishan products and they are loyal to Kaishan. The company has healthy cash flow thanks to its excellent management

of distribution channels.

Figure 4: Healthy cash flow thanks to its excellent management of distribution channels.

Source: Bloomberg, CICC Research



6

Looking forward, Kaishan will likely grow into a world-class solution provider of energy conservation

and compressor technology helped by R&D strength

On the back of its competitive advantage and leading position in air compressor market, Kaishan has increased R&D

spending and stepped up its efforts to recruit high-end talents over the past several years.

For example, Dr. Tang Yan, an international famous compressor expert, joined Kaishan in 2009. Dr. Tang worked as an expert

and senior executive in international giants such as Carrier and Quincy Compressor. After joining Kaishan, Dr. Tang

significantly increases R&D strength of Kaishan, having successfully developed Y profile and applied this product in SKY

screw compressor, which increases the company’s competitive strength notably thanks to the major technology advances in

power density and noise.

Figure 5: Resume of General Manager Dr. Tang Yan

Source: Company data, CICC Research

Figure 6: Other key technology experts


Kaishan achieves remarkable success in new product R&D and market exploration thanks to its increasing R&D strength. On

the one hand, Kaishan continually launches new high-end air compressors (especially energy-efficient products). On the other

hand, Kaishan has expanded into several niche markets through concentric diversification helped by its competitive strength

in screw compressor, including energy conservation, environmental protection, refrigeration, and coal chemicals.

Date Experience

Mar '91 to Nov '95

Visitor, Ph.D., research analyst in Department of Engineering, University of Strathclyde.

Engaged in gas and refrigeration screw compressor research funded by Howden

compressor

Dec '95 to Jun '97 Senior Engineer in IMW, Canada

Jul '97 to Jan '98 Manager of Engineering Department in Hilmar

Feb '98 to Jul '00 Chief Engineer in IMW, Canada

Aug '00 to Mar '02 Senior Chief Engineer in Carrier in 2001. Achieved Kaili Outstanding Award

Apr '02 to May '09 Vice President, Chief Engineer in Quincy

Since Jun '09Director General Manager in Kaishan, Director of North America R & D Center, General

Manager in Power-tech and Chairman in Kaishan Kerry

Core staff Current Position Previous positions

Xiaohua JiangDirector in Kaishan and Kaishan Kevin,

Executive Director in Power-tech

Air compressor engineer in Quzhou

General Coal Mine Machinery Factory;

Manager of Technology Department in Fu

Sheng (Shanghai)

Lixin Wang System General Manager in Power-tech Chief designer in Fu Sheng (Shanghai)

Jianxin Deng

General Manager in Power-tech

Refrigerant Compression Main Engine

Division

Engineer in Beijing Compressor;

Department Manager in Bitzer

Compressor (China)

Joost J.Brasz Contract Engineer

Associate Engineer, Project Manager,

Project Research Analyst and Chief

Centrifuge Engineer in Carrier (US)



7

Figure 7: New product development and future R&D directions


Going forward, Kaishan will likely focus on energy conservation, environmental protection, compressor and refrigeration

technologies, and some giants are likely to emerge in these niche markets given their huge growth potential. In the long run,

we think Kaishan is likely to grow into a world-class, integrated solution provider specializing in energy conservation,

environmental protection and compressor technology.

Figure 8: Long-term growth directions of Kaishan and the corresponding international giants


Main applications

ORC screw expander

Low pressure waste heat steam recycling, industrial waste water heat

recycling, geothermal power boilers, furnace exhaust gas heat recycling,

cooling water cylinder and diesel exhaust heat recycling, solar energy,

other suitable temperature thermal applications

Steam screw expander

Low pressure saturated steam heat and pressure recycling, achieving

maximum efficiency in power generation with the company's ORC screw

expander product series

Natural gas compressorNatural wellhead gas recycling / gathering, liquefaction, pipeline pressure,

gas storage, etc.

Process gas compressorPressurizing air and gas during various types of chemical reaction

processes

Refrigeration equipment and

compressorFrozen food processing, cold chain logistics, cold chain distribution, etc.

Air-conditioning equipment and

compressorCentral air conditioning, geothermal / water heat utilization, etc.

Providing aerodynamic in big (medium) industrial applications,

pressurizing gas pipelines, pressurizing chemical process gas, air

separating, etc.

Mainly used in textile, metallurgy, glass, food, chemical, pharmaceutical,

petroleum, electronics and air classification which need pure oil-free

compressed air. large import substitution space

Applications similar to those of conventional air compressors, but more

energy-efficient and more progressive considering rising energy costs

Screw vacuum pump

Mainly used in electronics, photovoltaics, chemicals, pharmaceuticals,

food, glass, or other areas which require a vacuum environment. Large

import substitution space

New energy-saving air compressor (frequency

conversion/low pressure/two degrees, etc.)

Important market expansion and product R&D

Screw expander

Gas compressor

Refrigeration

technology

Centrifugal compressor

Oil-free screw compressor

Growth direction International benchmarking Scale of international leaders

Kaishan Co.

Refrigeration technology

Energy saving and environment

Compressor technology

Carrier (UTC)

Veolia

Atlas

2010 Carrier's revenue: US$11,386mn(2010 UTC revenue: US$54,326mn

2012 UTC market cap: US$75,355mn)

2012 revenue: US$37,854mn 2012 market cap: US$6,136mn

2012 revenue: US$13,375mn 2012 market cap: US$32,503mn



8

Screw expanders: Innovative energy recycling technology

Screw expanders can effectively address issue of recycling low-grade, unstable heat resources

Recycling industrial waste energy (or waste heat/pressure recovery) is not a totally new technology. China’s cement and steel

industries have studied this technology as early as late-1980s~early-1990s, and later by chemical, power and glasses

industries. The key technologies include waste heat recovery for power generation (i.e., waste heat recovery boiler + steam

turbine, mainly used in metallurgical, building materials and chemical sectors), top-pressure recovery turbine (TRT, mainly

used in metallurgical and chemical sectors), and absorption heat pump for heating (mainly used in the power industry).

Since 2000, the industrial energy saving equipment market has been growing rapidly as China introduced several related

rules and regulations such as the Medium/long-term Energy Conservation Plan and the Energy Conservation and Emission

Reduction Measures. While China as a whole lags behind the US, Europe and Japan in the industrial waste energy recycling,

China has already had a relatively high waste energy recovery ratio in some fields, with penetration rate already topping 70%

for TRT in the steel industry and waste heat recovery boiler in the new dry process cement production.

However, the traditional technology roadmap combining waste heat recovery boilers and steam turbines has three

weaknesses:

Low recovery efficiency of low-grade waste heat resources: The technology roadmap of “waste heat recovery boiler +

steam turbine” is more suitable for recovering waste heat with temperature of >600°C, but it is financially not

satisfactory to recover waste heat with temperature of <600°C. Our industry survey indicates payback period of “waste

heat recovery boiler + steam turbine” system for temperature of ~300°C is 5~6 years, not attractive. This technology

issue results in a poor efficiency of low-temperature waste heat recovery in the steel and cement industries.

Figure 9: Low-temperature waste heat recovery in the steel industry still underdeveloped

Note: According to research institution estimates, the rate of residual heat recycling in China's steel enterprises is only 25.8%. A large number of

low-quality residual heat resources have not been effectively used. Based on the quality of waste heat resources, high-temperature residual heat is

recycled most, with recycling rate 44.4%. Next is medium-temperature residual heat, with recycling rate 30.2%. The recycling rate of low-temperature

residual heat is <1%. Based on the physical form in which residual heat is carried, product sensible heat is recycled most, with recycling rate 50.4%. The

second is sensible heat in smoke, with recycling rate 14.92%. The recycling rate of sensible heat in cooling water is just 1.90%. The recycling rate of all

kinds of slag sensible heat is even smaller, only 1.59%. Source: Industry data, CICC Research

Resource

availableRecycled

Resource

availableRecycled

Resource

availableRecycled

Resource

availableRecycled

Sinter / pellets Sensible Heat 32.0 9.6

Coke Sensible Heat 20.2 2.0

Molten Iron Sensible Heat 41.5 37.4

Billet Sensible Heat 20.6 8.2

Subtotal 82.3 47.6 32.0 9.6 114.3 57.2

Blast Furnace Slag Sensible Heat 20.1 0.4

Steel Slag Sensible Heat 5.1 0.0

Subtotal 25.2 0.4 25.2 0.4

Coke Oven Smoke Sensible Heat 6.5 0.0

Coke Oven Gas Sensible Heat 5.7 0.6

Sintering Flue Gas Sensible Heat 23.4 0.0

Blast Furnace Gas Sensible Heat 26.3 0.0

Stove Gas Sensible Heat 12.3 3.7

BOF Gas Sensible Heat 7.2 7.9

Heating Furnace Smoke Sensible Heat 24.5 8.6

Subtotal 7.2 2.9 42.5 12.9 56.2 0.0 105.9 15.8

32.4 0.0

10.0 0.8 10.0 0.8

Subtotal 42.4 0.8 42.4 0.8

114.7 50.9 74.5 22.5 98.6 0.8 287.8 74.2

Product

Sensible

Heat

Residual Heat Resources

High Temperature Medium Temperature Low Temperature Total

Slag

Sensible

Heat

Waste

Gas(Smoke)

Sensible

Heat

Cooling

Water

Blast Furnace Cooling Water Surplus Heat

Heating Furnace Cooling Water Surplus Heat

Total



9

Space constraints: Generally, steam turbine has higher efficiency if its size is bigger. Therefore, the traditional steam

turbine can hardly be applied in some narrow spaces.

Low efficiency if working conditions are unstable: While steam turbine has decent efficiency under designed working

conditions, its efficiency may decline dramatically when working conditions change significantly, leading to a poor

average power generation performance and long payback period.

These issues can be effectively addressed by screw expanders:

Screw expander is more suitable for low-temperature waste heat recovery: Screw expander may be driven either by

superheated steam, or by waste heat recovered from saturated steam or >90°C hot water. Screw expander is more

cost-effective in the low-grade waste heat recovery.

Screw expander is more suitable for working conditions with small space and low power output: Screw compressor

is smaller than steam turbine with similar power output. More importantly, screw expander needs much fewer heat

exchangers and pipelines than “waste heat recovery boiler + steam turbine” system. Take Kaishan products as example.

Screw compressor, generator, heat exchanger and pressure vessel can be used in industrial waste heat recovery site with

small space.

Figure 9: Picture of Kaishan screw expander

Source: Company website, CICC Research

Screw expander has higher efficiency than steam turbine under unstable working conditions: Although screw

expander might have slightly lower power output than steam turbine under design conditions, its power output changes

little when working conditions become unstable. As such, screw expander is more suitable for industrial waste heat

recovery site with changing working conditions, as well as power generation from geothermal, garbage and biomass. At

the same time, the operation of screw expander may be unattended given its stability, which may further improve

convenience and Economic benefit of screw expander.

Take a screw expander generation unit with design output of 100kW as example. Assuming selling price of screw expander is

Rmb10,000 per kW; installation and civil engineering expenses is smaller than 10% of screw expander prices; annual

operating hour is 8,000; electricity tariff is Rmb0.65/kWh (this figure varies in different region, but electricity price for

industrial users is higher than this level in most regions); and annual maintenance expenses are smaller than 5% of annual

power generation output value.

Based on the abovementioned assumptions, payback period of screw expender with power output of 100kW may be 2.23

years given an initial investment of Rmb1.1mn, and annual power generation of 800,000kWh (Rmb520,000). The annual

returns may reach Rmb494,000 if maintenance expenses are included. While these assumptions may vary among different

projects, we believe payback period may be shorter than three years in most cases, financially quite attractive.



10

Figure 10: Performance of steam turbine vs. screw expander


Actually, most projects have payback period of <3 years (with some having 3~5 years due to low capacity utilization or

different bases for the calculation of energy conservation). This result is basically consistent with our theoretical calculation.

We can hardly estimate the overall market size of screw expander given its wide applications. In this report, we will only

calculate the potential market sizes in metallurgical, petrochemical, building materials and power sectors.

In 2012, China’s metallurgical industry used 740 million tonnes of coal equivalent, with waste heat resources of 74 million

tonnes. At present, about 20~30% of these waste heats are being recovered through TRT, waste heat recovery boiler and

steam turbine. Under conservative assumptions, we believe screw expander can recover 10% of total waste heat resources,

i.e., 7.4mt coal equivalent, which can translate into power generation of 60bn kWh a year. The investments in the related

equipment (screw expanders) top Rmb80bn.

Under the similar assumptions, we estimate the potential market size of screw expanders at >Rmb200bn in the domestic

metallurgical, petrochemical, building materials and power sectors.

Figure 11: Screw expander market size estimates under conservative assumptions

Source: CEIC, CICC Research

While screw expanders now see most applications in metallurgical, building materials and power industries, it should be

noted that petroleum refining and coal chemical sectors may also be major demand growth drivers.

Both steam turbine and screw expander may be used in the waste heat recovery in metallurgical and building materials

sectors. Of course, as we have mentioned, screw expander may be more energy efficient in case of low-temperature

working conditions.

While petroleum refining and coal chemical sectors have significantly higher waste heat resources than the metallurgical

sector, these resources can hardly be recovered by steam turbine.

Take a refinery with capacity of 10 million tonnes as example. Waste heat recovery and cooling may need energy of

50,000kW, which may be translated into screw expander demand of Rmb500mn. As China’s total refining capacity is

close to 700 million tonnes, we believe the petroleum refining industry’s demand for screw expanders may be close to

Rmb35bn.

Performance

indexTurbine Technology (Generally) Screw expander Technology

Heat conditionsOnly for superheated steam heat

generation

For superheated steam, saturated

steam, hot water hydrothermal or

other heat sources

Efficiency

Under designed conditions, internal

efficiency 70~90%;

Under changing conditions, internal

efficiency dropping significantly or

shutting down

Under designed conditions, internal

efficiency 70~85%;

Under changing conditions, internal

efficiency changing slightly, running

well

Security Potential security accidents No potential accidents

Maintenance

Services

High maintenance cost.

Needs professional technical team,

high maintenance workload

Should last 10 years without need

for major repairs. Maintenance

convenient, can be left unattended

ApplicationsFor large power plants, high-quality

residual heat generation

Low-quality risidual heat and

renewable energy sources, etc.

2012 Energy

consumptionResidual heat

Screw expander

Recyclable

Screw

expander

Average economic

effect

Screw expander

market

kt standard coal kt standard coal kt standard coal bn kwh Rmb bn Rmb bn

Metallurgical industry 743,455 74,345 7,435 60.4 39.3 80.5

Traditional chemical industry 538,410 53,841 5,384 43.8 28.5 58.3

Building materials industry 312,156 31,216 3,122 25.4 16.5 33.8

Electric power industry 253,470 25,347 2,535 20.6 13.4 27.5

Total 1,847,490 184,749 18,475 150.2 97.6 200.1



11

The coal chemical sector may be the bigger demand growth driver. We believe China’s total investments in the coal

chemical industry may reach Rmb800bn over the next five years, and may top Rmb2 trillion in a longer run. Therefore,

we believe the coal chemical sector’s demand for screw expanders may even be bigger than that of the petroleum

refining industry.

In addition, power generation from solar thermal, geothermal and biomass, exhaust gas of diesel engine and other resource

recycling may also be equally important demand drivers for screw expanders.

China focuses attention on wind power and photovoltaic power, and attaches inadequate importance to solar thermal,

geothermal and biomass power generation.

This situation has showed sign of changing in the 12th FYP period. The Chinese government has released several

guidance documents to highlight the importance of the development of solar thermal and geothermal resources.

Solar thermal, geothermal and biomass are characterized by their low-grade, unstable heat sources, which allow screw

expanders to come in.

Power generation from exhaust gas of diesel engine is also a significant demand growth driver. At present, the

transportation sector represents 10~15% of China’s total energy consumption, mainly by diesel engines of ships, heavy

trucks and construction machinery. Generally, thermal efficiency of diesel engines is just 30%~40%, which means a

considerable waste heat recovery market. Currently, Kaishan has already started to cooperate with Zhejiang Yinlun

Machinery and Yuchai Machinery to develop related products and has made a steady progress. We are also optimistic

about demand growth potential in this niche market.

Kaishan is a pioneer in screw expander market thanks to its competitive advantage in profile design

The key technologies of screw expander are both correlated with and different from those of screw compressor:

Screw is core component of both screw expander and screw compressor, while working process of expanders is just in

the opposite direction of compressor. Efficiency of both screw expander and screw compressor relies heavily on design

of screw profile. Therefore, screw compressor manufacturers enjoy clear advantage when they enter screw expander

market.

However, screw expander has stricter technology requirements than screw compressor in several indicators. Take rotor as

example. Screw rotor is an active component in compressor, but a passive one in expander, which has more complex

control technology, suggesting screw expander has stricter requirements for profile design and processing technology

than screw compressor. We believe screw expander market has significantly higher barriers to entry than screw

compressor market.

Jiangxi Huadian is an early domestic mover in R&D of screw expander. According to the publicly available data, its screw

expanders have been applied in metallurgical, petrochemical, power, papermaking and geothermal sectors. Thanks to

growing demand, this company’s revenue from screw expander has been expanding over the past several years. Due to lack

of data, we can hardly estimate financial performance of its screw expanders. That said, we believe Jiangxi Huadian plays a

positive role in the applications of screw expanders.

Kaishan started developing screw expander before 2011 and delivered its first screw expander to Quzhou Yuanli Steel Mill in

September 2012. Up to now, the company has already developed ORC (organic ranking cycle) screw expander and steam

screw expander, with power output ranging from 1.5kW to 1,200kW. We expect the company's screw expander segment to

receive new order of Rmb500~600mn, and to post revenue of Rmb200~300mn in 2013. Kaishan has become the domestic

and global leader in screw expander production technology.



12

Figure 12: Cases of Jiangxi Huadian’s screw expander applications before 2011


Figure 13: Kaishan screw expander series


No. User Type / Power Heat Source Usage

1 Xinyu Iron & Steel 1 × 250kWBleeding

saturated steam

Power generation

and network

2 Shao Steel 1 × 300kW Surplus steam

Drive heating

network class I

pump

3 Jiujiang Power Plant 1 × 300kW Boiler drain waterPower and low

pressure networking

4 Lianyungang Soda Ash 1 × 150kW Boiler drain water Drive Dust Pump

5 Sinopec (Maoming) 2 × 500kWResidual heat

steam

Power generation

and networking

6 Sinopec (Yanshan) 1 × 400kWResidual heat

steam

Power generation

and networking

7 Jinlong Copper 2 × 250kW Surplus steamDrive two FF8

circulating pump

8Panzhihua New Steel &

Vanadium1 × 150kW Boiler drain water

Power and low

pressure networking

9 Jiangtongguixi Smeltery2 × SEPG 400-

600Steam pressure

Power and low

pressure networking

10 Shougang Group1 × 300kW

1 × 500kW

BOF saturated

steam

Power and low

pressure networking

11 Laigang Iron & Steel 1 × 500kW Surplus steamPower and low

pressure networking

12 Ningxia Shahu Paper 1 × 300kW Surplus steam Drive feed pump

13Xizang Yangbajing Thermal

Power2 × 1000kW Terrestrial heat

Power and low

pressure networking

14Brazil residual heat power

project 1 × 500kW Surplus steam

Power and low

pressure networking

Products Type

Saturated steam

temperature

(°C)

Steam

consumption

(t/h)

Rated net

generation

(kW)

KE90-95V-1-50 100 1.3 69

KE185-95V-1-50 100 2.6 138

KE450-95V-1-50 100 6.5 350

KE900-95V-1-50 100 13 700

KE132-110V-1-50 115 1.8 109

KE280-110V-1-50 115 3.6 218

KE600-110V-1-50 115 8.3 508

KE1200-110V-1-50 115 16.5 1,016

KE90-95V-2-50 100 1.3 62

KE185-95V-2-50 100 2.6 124

KE450-95V-2-50 100 6.5 316

KE900-95V-2-50 100 13 633

KE132-110V-2-50 115 1.8 100

KE280-110V-2-50 115 3.6 200

KE600-110V-2-50 115 8.3 466

KE1200-110V-2-50 115 16.5 933

Steam screw

expansion

generators

ORC

screw expansion

generator

Four product types, range for stand-alone steam flow 1 ~ 20t/h, adapted

pressure range 0.2 ~ 2.5MPa



13

Figure 14: Applications of Kaishan screw expanders


Kaishan has become a global leader in screw expander driven by several factors:

Profile technology: Kaishan’s screw expander has higher efficiency and economic benefits than its peers as Kaishan can

leverage its advantage in screw compressors. At present, isentropic heat efficiency of Kaishan ORC screw expander

exceeds 85%, and that of steam screw expander may top 70%.

Manufacturing strength: One of the key reasons behind low applications of screw expanders in the US and Europe is

their high manufacturing costs and low cost effectiveness. However, Kaishan screw expanders have much lower

manufacturing costs and better cost effectiveness than foreign products.

Smart timing for product launch: While Chinese industrial sector paid little attention to investments in and upgrading

of energy conservation equipment in the 2000s during which this sector expanded capacity aggressively driven by robust

downstream demand, this has changed since 2011. As downstream demand slowed, industrial companies have been

under pressure to reduce cost and improve efficiency through energy conservation in order to expand corporate earnings.

Without doubt, this is the best opportunity for Kaishan to launch screw expander.

Date Partners Industry Details

Sep 2012 Quzhou Yuanli Steel SteelFirst screw expander (100kw) delivered to Quzhou Yuanli in September 2012, running

smoothly so far

Dec 2012 GE Multi-industry Kaishan exported the first ORC screw expander power station (110kw) to GE (India)

Jan 2013ChenaPower (Alaska,

US)

Geothermal/biomass power

generation

Framework agreement under which ChenaPower agrees to sell ORC screw expander

power stations with total capacity of >40,000kW over two years. The first machine

passed testing in February.

Mar 2013Sinoma Energy

ConservationBuilding materials

Kaishan delivered the first ORC screw expander power station (185kw) to Sinoma

Energy Conservation

Apr 2013 GE Multi-industryGE (India) CTO visited Kaishan and discussed long-term cooperation on a screw

expander project

May~June

2013

Indonesian

governmentBiomass power generation

In May, Chairman Cao Kejian discussed biomass power generation using ORC

screw expander technology with Dahlan Iskan, Indonesia's Minister for State-Owned

Enterprises. In June, General Manager Tang Yan visited Indonesia and reached a

preliminary technology roadmap.

Jun 2013 Tianjin Tianfeng Steel Steel

Tianjin Tianfeng Steel completed its Phase I project, with two ORC screw expander

generators (185kW and 450kW) on line and now generating power. The company

plans to buy nine screw expanders from Tongrong under an EMC model.

Jul 2013 Juhua ChemicalsExperts from Kaishan and Juhua discussed cooperation on energy conservation

technology, including screw expanding agent technology

Jul 2013 --Solar thermal power

generation

Kaishan Yinlun, a JV between Kaishan and Yinlun Machinery, successfully developed

a 15kW ORC screw expander generation unit, and has started selling prototypes

Aug 2013 GE Multi-industryDesignated Kaishan as a qualified supplier of products for ORC screw expander

power stations

Sep 2013Malaysian/Philippine

enterprisesBiomass power generation

Corporate executives of Malaysia and the Philippines visited Kaishan and discussed

screw expander power station technology. Kaishan agreed to offer screw expander

power generation units to a palm oil plant on Palawan Island in the Philippines

Sep 2013

Lightning Dock

Geothermal

(Delaware, US)

Geothermal power

generation

Tongrong agreed to sell four 100kW screw expander power generation units and

related services for US$3.75mn to explore geothermal resources in New Mexico

Various

Market exploration in several sectors including oil & gas fields, sea water desalination,

petrochemicals, coal chemicals, waste power plants and power generation from

diesel engine exhaust, with prospective partners including well-known domestic

enterprises



14

Figure 15: Sales revenue forecasts for Kaishan screw expanders

Source: CICC Research

EMC model to help promote screw expanders

Energy management contract (EMC) is an important form of industrial energy saving service. Energy service company

provides energy saving solution to clients, and the latter uses benefits from energy savings (such as returns from waste heat

recovery power generation) to pay for this service.

EMC is of critical significance under the current economic environment: 1) industrial enterprises (especially traditional

sectors such as steel, building materials and chemicals) are under significant earnings pressure, and there is absolutely a

need for cost reduction and energy conservation in order to improve operating performance; and 2) the weak profitability of

industrial enterprises prevents them from using their own capitals to buy energy conservation equipment. We believe EMC

model can help them effectively address this issue.

Figure 16: China’s steel and building materials sectors are under significant earnings pressure amid slower FAI

growth


In order to speed up promotion of screw expander and other energy saving products of Kaishan, Kaishan Holdings Group, the

largest shareholder of Kaishan, established a 95.3%-owned subsidiary Zhejiang Tongrong Energy Conservation Technology

Service Co., Ltd in August 2012. This subsidiary operates EMC services after purchasing screw expanders and other energy

saving products from Kaishan.

We have constructed one model to stimulate two scenarios of earnings and cash flows from screw expander EMC services.

Take screw expander with power output of 100kW as example and assuming returns from power generation is shared

between EMC service company and client under 50:50 proportion. All initial investments comes from own capitals of EMC

service company under scenario 1, and 50% of initial investment comes from bank loans under scenario 2. Under both

scenarios, EMC service provider is able to collect all initial investment within six years. Of course, it needs smaller initial

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2013E 2014E 2015E 2016E 2017E 2018E

Kaishan Screw Expander Revenue Forcast (Rmb bn)

0

20

40

60

80

100

120

140

160

180

Steel industry prosperity index

Building materials industry prosperity index

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Growth rate of FAI in the steel industry

Growth rate of FAI in the building materials industry



15

cash flow under scenario 2. Therefore, a rational leverage can help EMC service company expand business quickly. Overall,

we think Tongrong is able to maintain an annual growth rate of more than 30% without increasing share capitals.

Figure 17: Simulation analysis on investment returns of screw expander EMC

Source: CICC Research

Of course, EMC model also faces the following risks: 1) high initial investments; 2) risks from subsequent collections

(especially when clients’ operations can’t be sustained). As Kaishan operates this business through its parentco’s Tongrong,

this might to a large extent help minority shareholders avoid these risks.

Scenario 1: All initial investment made by Kaishan

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Initial investment (Rmb k) -1,100.00

Generating capacity（k kwh） 400.00 800.00 800.00 800.00 800.00 800.00 800.00 810.00

Generating revenue（Rmb k） 260.00 520.00 520.00 520.00 520.00 520.00 520.00 520.00

Attrubute to EMC (Rmb k) 130.00 260.00 260.00 260.00 260.00 260.00 260.00 260.00

Operating and maintainance costs (Rmb k) -13.00 -26.00 -26.00 -26.00 -26.00 -26.00 -26.00 -26.00

Depreciation (Rmb k) -55.00 -55.00 -55.00 -55.00 -55.00 -55.00 -55.00 -55.00

Net profit(Rmb k) 62.00 179.00 179.00 179.00 179.00 179.00 179.00 179.00

Net cash flow (Rmb k) -983.00 234.00 234.00 234.00 234.00 234.00 234.00 234.00

Accumulated net cash flow (Rmb k) -983.00 -749.00 -515.00 -281.00 -47.00 187.00 421.00 655.00

Recover all the investment in 6 years

Scenario 2: 50% of the initial investment are loans, five years to pay off with 5% interest rate

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Initial investment (Rmb k) -550.00

Initial bank loans (Rmb k) 550.00

Generating capacity（k kwh） 400.00 800.00 800.00 800.00 800.00 800.00 800.00 810.00

Generating revenue（Rmb k） 260.00 520.00 520.00 520.00 520.00 520.00 520.00 520.00

Attrubute to EMC (Rmb k) 130.00 260.00 260.00 260.00 260.00 260.00 260.00 260.00

Operating and maintainance costs (Rmb k) -13.00 -26.00 -26.00 -26.00 -26.00 -26.00 -26.00 -26.00

Depreciation (Rmb k) -55.00 -55.00 -55.00 -55.00 -55.00 -55.00 -55.00 -55.00

Finance cost -27.50 -22.00 -16.50 -11.00 -5.50 - - -

Repayment of bank loans -110.00 -110.00 -110.00 -110.00 -110.00 - - -

Remaining bank loans 440.00 330.00 220.00 110.00 - - - -

Net profit(Rmb k) 34.50 157.00 162.50 168.00 173.50 179.00 179.00 179.00

Net cash flow (Rmb k) -570.50 102.00 107.50 113.00 118.50 234.00 234.00 234.00

Accumulated net cash flow (Rmb k) -570.50 -468.50 -361.00 -248.00 -129.50 104.50 338.50 572.50

Recover all the investment in 6 years

Mature project's annual cash flow is

21% of initial investment

Mature project's annual cash flow is

43% of initial investment



16

Gas compressor and refrigeration technology two important growth drivers

Gas compressor a potential beneficiary from natural gas exploration and investments in the coal

chemical sector

Screw gas compressors include natural gas compressor, and air compressor and process gas compressor for chemical reaction

process. Kaishan’s gas compressor business is likely to benefit from the pickup in China’s natural gas exploration (especially

unconventional natural gas) as well as investments and technology upgrading of the domestic chemical sector (especially coal

chemical industry).

Natural gas exploration (especially unconventional natural gas)

Piston compressors, screw compressors and centrifugal compressors all see successful applications in the natural gas industry.

However, screw compressor have not been widely used in China’s natural gas development as this product is more suitable

for the development of natural gas with low/medium pressure and volume.

Figure 18: Comparison of three types of natural gas compressors


That said, applications of screw compressors in the natural gas exploration have been increasing over the past several years,

mainly because:

It seems that development of sour natural gas and associated petroleum gas (which were mostly flared previously) picked

up over the past several years due to the stricter environmental standards and earnings pressure of oil & gas developers.

Gas fields of this type often have low unit output, unstable volume and low pressure, which is more suitable for screw

compressor.

Over the 12th

and 13th

FYP periods, a large part of coal-bed gas and shale gas should be liquefied locally due to lack of

transmission pipelines, which needs small/medium-sized liquefaction equipment, allowing screw compressor to come in.

At present, among multiple applications of natural gas compressors, the domestic market of CNG compressors for refueling

stations is mainly dominated by Chinese manufacturers, including Sichuan Jinxing Compressor and CIMC Enric (Bengbu),

but compressors for on-site operation of oilfield, pipeline booster and large gas storehouses are mainly imported, or its core

parts are imported by Chinese manufacturers such as PetroChina Compression Plant and Jereh. Chinese manufacturers of

core parts for natural gas compressors have huge room for import substitution going forward.

Advantages Disadvantages Applicable conditions

Reciprocating gas

compressors

Stable discharge of pressure, wide

pressure adaptation range, high thermal

efficiency. The pressure ratio is relatively

high (single-stage compression ratio can

be up to 4-5). High adaptability.

Large, bulky, smaller

displacement, airflow has pulse

and very noisy

Small displacement, high or super

high pressure, light hydrocarbon

recycling and gas pipeline

supercharging devices

Centrifugal gas

compressors

Compact structure, small and light,

exhaust steadily and continuously, high

speed, large displacement; work

smoothly, small vibration, long life, less

wearing parts, can communicate directly

with the driver transport, easy to achieve

automatic control

Pressure ratio is relatively low;

lower thermal efficiency, surge

when flow is too small

High flow, low pressure, light

hydrocarbon recycling and gas

pipeline supercharging devices

Screw natural gas

compressors

Simple structure, small, less wearing

parts, low vibration, high volumetric

efficiency, long life, maintenance is

simple, natural gas close to isothermal

compression, high compression ratio can

also use a single-stage compression,

good balance

Complex lube oil system, large,

more fuel consumption, noisy,

and require high rotor machining

precision, relatively high power

consumption

Entry gas with liquid, low pressure

and small displacement, often used

in refrigeration, generally not used

for light hydrocarbon recycling, gas

pipeline or oil field superchargers



17

Process compressor for chemical reaction

Like natural gas compressor market, process compressors were previously also mainly composed of piston compressors

(suitable for high pressure and small/medium volume) and centrifugal compressors (low/medium pressure and large flow).

Domestic brands include Shenyang Blower Works and Shaangu Power, and international brands include MAN Turbo (Sulzer),

GE (Nuovo Pignone) and Siemens.

However, screw compressors have seen increasing applications in the chemical reaction process over the past several years: 1)

Screw compressors are replacing piston compressors if pressure is not very high (<30bar) thanks to its smaller size, higher

energy efficiency and easier maintenance; 2) “medium-pressure screw compressor + high-pressure medium-displacement

piston compressor” can replace one high-pressure large-displacement piston compressor under some cases of high volume in

order to reduce initial investment, occupied space and energy consumption.

Figure 19: Applications of screw compressors in the chemical sector

Source: www.chinaqking.com, CICC Research

While chemical process compressors were mainly used in petroleum and refining industries in the past, they may also be

widely used in the coal chemical industry going forward. Generally, about half of the coal chemical industry’s investments

are used to procure equipment, with more than 5% going to process gas compressors (excluding air separation compressors).

Given this, we believe demand for process gas compressors to top Rmb20bn over the next five years assuming China’s total

investments in the coal chemical industry is Rmb800bn during this period.

Figure 20: Coal chemical sector investment breakdown


Since 2010~2011, Kaishan has started developing and manufacturing several series of gas compressors. In 1H12, Kaishan

established the Gas Compressor Division, and began to build gas compressor plant in Kaishan No.3 Industrial Park. After this

project reaches design capacity, Kaishan is able to manufacture 50 units of KSG large screw gas compressors p.a.

In September 2012, the company delivered the first gas compressor (Kaishan controls core technology and has independent

intellectual property rights) to a client in Shanxi’s Jincheng, which was used in a coal-bed gas development project with

annual capacity of 156,000 cm3. According to a notice jointly issued by the National Development and Reform Commission

and the Ministry of Industry and Information Technology, the Chinese government will extend subsidies to its gas

compressors, indicating the company’s gas compressor technology is being highly recognized by the authoritative body.

Machine type Adapted gas

Oil-free screw compressorMethane, ethylene, ethane, propylene, propane, acetylene, butadiene, flare gas,

exhaust, cracking furnace gas, recycle gas, coke oven gas, lime kiln gas, steam

Injected screw compressor

Ammonia, CO2, natural gas, methane, ethylene, ethane, propylene, propane, butane,

hydrogen, helium, chlorine, hydrogen chloride, chlorine, methane, landfill gas and

biogas

Equipment procurement

45%

Installation20%

Construction15%

Others20%

Coal Chemical Projects Investment Structure

Pressure vessels

41%

Heat exchangers

20%

Air/gas equipments

11%

Valves and pumps

16%

Others12%

Coal chemical industry (ie. coal gasification) system equipments value



18

Refrigeration Technology: Cold chain logistics industry has a bright prospect

Screw compressor is one of the core parts of refrigeration equipment. Refrigeration compressor and refrigerant hold the keys

for the performance of compression refrigeration system. Similar to air compressor market, screw compressors are replacing

piston compressors in the refrigeration compressors industry, and this replacement faces significant upside potential going

forward. At present, most refrigerated vehicles use piston compressors in China, while screw compressors have already been

widely used in the US, Europe and Japan.

Figure 21: Refrigeration compressor sales volumes over the past several years

Source: Industry associations, CICC Research

Refrigeration system (especially screw compression refrigeration system) is mainly used in central air-conditioning system

and freezing & refrigerated storage equipment. We favor the market for its applications in freezing and refrigerated storage

field (especially in cold chain logistics).

Cold chain logistics play a vital role in food safety. International experience shows that demand for cold chain logistics picks

up when per-capita GDP exceeds US$3,000. This demand has been accelerating in China since 2007, but this market remains

underdeveloped compared to those in the advanced economies, mainly due to the lack of related equipment.

Figure 22: China lags far behind the advanced economies in the cold chain logistics industry


We expect the domestic freezing & refrigerated storage equipment market to grow at an annual pace of ~20% (a faster growth

rate is likely in some years if policy supports and government subsidies exceed expectations), and the total market size is

likely to top Rmb40bn in the long run. While medium/large refrigerated warehouses are now the major growth drivers of

demand for refrigeration equipment, we believe refrigerated vehicles are likely to become next bright spot going forward.

157,270

40,083

2,353

169,750

49,640

3,418

137,539

46,832

4,009

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Piston machine Screw machine Centrifuge machine

Amounts in 2010 Amounts in 2011 Amounts in 2012

25%

12%

15%

5%

0%

5%

10%

15%

20%

25%

30%

Fruit & vegetableproducts

Meat Aquatic Developed countriesaverage spoilage

rates

Chinese agricultural products corrosion rate

5%15%

23%

100%95%

0%

20%

40%

60%

80%

100%

120%

Fruit & vegetableproducts

Meat Aquatic Developedcountries meat

averagecorrosion rates

Developedcountries

fruit&vegetablecold chainturnover

Comparison between Chinese and foreign cold chains



19

Figure 23: Cold chain logistics value chain and related equipment


At present, the domestic complete refrigeration equipment market (medium/large refrigerated warehouses and refrigerated

food processing equipment) is being dominated by three state-owned companies, i.e., Dalian Refrigeration, Yantai Moon and

Wuhan New World Refrigeration (a subsidiary of Dalian Refrigeration), while refrigeration compressor manufacturers

include Bitzer, Hanbell, Carrier and Trane. We believe Kaishan is likely to become a major player in the domestic

refrigeration equipment market.

The core members of Kaishan’s technology team such as Dr. Tang Yan, Dr. Yuan Zengzhi and Joost J. Brasz in the past

worked as core R&D or management personnel in Carrier and Bitzer;

Kaishan may extend its competitive advantage in screw profile design and energy efficiency to refrigeration equipment.

Figure 24: Domestic refrigeration compressor market share by manufacturer


Kaishan started developing refrigerant compressor before going public, and completed tests of refrigerant screw compressors

and sold a small number of them as early as 2010. This product has an industry-leading energy efficiency and is recognized

by the market. In addition, the company also developed refrigerant centrifugal compressor under the leadership of Dr. Joost J.

Brasz who was in the past the centrifuge compressor R&D head of Carrier. Among IPO proceeds-funded projects are

Batch cultivation

Production base

Production base

Local primary processing

Local wholesale

Local logistics center

Corporate and institutional cafeterias

Hotels

Farmers' markets

Retail stores

Supermarkets

Consumers

Logistical nodes

Production processes

Production Short

transportation Delivery

Save

packaging

processing

Delivery

Refrigerate

sort

package

process

Storage, consumption

Cold chain

ColdRefrigerated processing

plants

Refrigerated trucks

Refrigerated containers

Small refrigerator

freezers

RefrigeratorRefrigerated

trucksPre-cooling equipment

Refrigerated trucks

Refrigerated delivery devices

Dalian Bingshan

18%

Moon Group17%

Hanbell16%

Wuhan New World13%

Bitzer10%

Trane8%

York6%

Maikeweier4%

Carrier3%

Others5%

Screw refrigeration compressor market distribution

Bitzer19%

Dalian Bingshan

17%

Carrier (Yileng)

15%

Moon Group12%

Sanyo10%

Hanbell4%

Others23%

Refrigeration piston compressor market distribution



20

5,000-unit refrigerant screw compressor and 500-unit refrigerant centrifugal compressor production facilities.

After going public, Kaishan established a wholly-owned subsidiary Shanghai Kailei Refrigeration System to develop and

distribute refrigeration products. Dr. Tang Yan is the general manager of this subsidiary and Dr. Fan Zengzhi is the chief

technology officer. Kailei Refrigeration System has expanded from refrigerant compressor market to refrigeration system

market.

In early-2013, Shanghai Kailei Refrigeration System signed an agreement with Hebei Houpu Cold Chain Logistics Park,

under which the former agreed to provide refrigeration equipment to the latter’s 30,000sqm-large refrigerated warehouse,

indicating the advanced energy-efficient refrigeration technology has successful application in large cold chain logistics

project.

Figure 25: Product line of Shanghai Kailei Refrigeration System

Source: Company website, CICC Research

Refrigeration product Characteristics

CT refrigerant compressor Internationally leading new-generation Y-2 profile suitable for severe working conditions,

high efficiency, stable performance; displacement range of 307~1270m3/h

SKY refrigerant compressor

Y-profile semi-hermetic screw refrigerant compressor for air conditioning systems; high

efficiency and stable performance under different working conditions; displacement

range of 142~915m3/h

CT open screw refrigeration unitSuitable for medium/large refrigeration & air conditioning systems, freezing, cold storage

and process cooling

CT open screw parallel refrigeration systemCentralized management with safe and stable control valve and advanced automatic

control system

Semi-hermetic low-temperature screw parallel

refrigeration unit (oil-free and oil-flooded)

Suitable for low-temperature cold storage or quick freezing systems with

evaporating temperature of -25～-40°C; refrigerants including R22, R404a and R507a

Oil-flooded two-stage parallel refrigeration

system for quick freezing

Suitable for low-temperature quick freezing systems with evaporating temperature of -

35～-45°C

Medium-temperature screw parallel

refrigeration unit

Suitable for medium-temperature refrigeration systems with evaporating temperature of

10～-25°C

Low-temperature two-stage piston parallel

refrigeration unit

Suitable for small/medium-sized low-temperature cold storage or quick freezing systems

with evaporating temperature of -25～-40°C; this unit has much longer service life than

single-stage unit

Medium-temperature piston parallel

refrigeration unit

Suitable for medium-temperature refrigeration systems with evaporating temperature of

10～-25°C

Others Oil-flooded barrel pumping systemLiquid feeding to low/medium-temperature refrigeration systems to improve refrigeration

efficiency by more than 30%

Refrigerant

compressor

Unit/system



21

Decent growth potential for air compressor business thanks to its exposure to high-end products and overseas markets

Air compressors may be used in almost all industrial sectors, especially infrastructure, mines and equipment manufacturing.

Therefore, demand for air compressors is closely correlated with FAI in the industrial sector. This is the major reason why the

domestic screw air compressor market has been slowing or even declined since 2H11.

Figure 26: China’s manufacturing PMI and indusrial sector ’s FAI

Source: CEIC, CICC Research

Figure 27: Historical sales volumes of screw compressors in China

Source: Compressor Magazine, CICC Research

While we are aware that China’s air compressor industry will gradually turn from a growth sector into a cyclical one along

with China’s economic transformation, this does not mean air compressor business of Kaishan hasn’t upside potential. In our

view, this business may continue to benefit from stricter energy efficiency standards, import substitution in high-end air

compressor market, and overseas market explorations.

The largest beneficiary of stricter energy efficiency standards

Compressors have always been the key energy consumers in China. Wind turbines, pumps and compressors together

represent 42% of China’s total electricity consumption, with industrial compressors alone accounting for 15%. Generally, air

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

China Industrial FAI MoM

30

35

40

45

50

55

60

65

70

China Manufacturing PMI

-

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010 2011 2012

Historical Domestic Sales of Screw Air Compressors (thousands)



22

compressors account for 10~20% of total electricity consumption of manufacturers. In the entire life cycle of air compressor,

electricity costs account for 70~80% of its total cost of acquisition and operating costs. Therefore, an improvement in energy

efficiency of air compressors is of critical significance in order to expand profitability and help the government achieve

energy conservation and emission reduction targets.

Figure 28: Industrial compressors are the key electricity users

Source: Company announcement, CICC Research

Kaishan’s screw air compressors are energy efficient thanks to its advantage in screw profile technology. Energy efficiency of

all Kaishan’s screw air compressor series is at least 5% higher than China’s Level-2 Energy Efficiency. Energy efficiency of

Kaishan air compressors is well above those of its domestic rivals, and as good as, if not better than, those of international

giants such as Atlas and Ingersoll Rand. In addition, the company has developed low-pressure, two-stage

constant-pressure/high-pressure air compressors with higher energy efficiency, which can help reduce energy use by 20~30%

or more compared to the ordinary equipment.

In November 2012, the Ministry of Finance, the National Development and Reform Commission and the Ministry of Industry

and Information Technology jointly announced that the country will extend subsidy of Rmb100/kW to screw air compressors

with Level-2 Energy Efficiency and Rmb200/kW to those with Level-1 Energy Efficiency (We estimate this is equivalent to

10~15% of air compressor price). Kaishan is the biggest beneficiary given that its products account for 32.4% of total

qualified products. While this subsidy may merely be effective between November 2012 and October 2013, we believe

Kaishan can further expand its market share as the Chinese government is set to further tighten standards for energy

consumption and more support policies will likely be introduced going forward.

Figure 29: Kaishan sees most products be eligible for China’s subsidy program for energy efficient products for

2013

Source: NDRC, CICC Research

Other electric motors, 28% Industrial compressors

electricity consumption,

15%

Fan, Pump,

Compressor,42%

Other electric

motors, 28%

Industrial

compressors

electricity

consumption, 15%

Blower, Pump,

Compressor,42%

8547

74

13 9 1 1041

139

396

45

23 7 16 14 11

35

0

50

100

150

200

250 The first batch The second batch



23

Huge potential of import substitution in high-end air compressor market

For historical reasons, international air compressor manufacturers such as Atlas and Ingersoll Rand still have high market

share in China, and they also have some production facilities in the country. We estimate Atlas may post annual sales revenue

of Rmb5bn from China’s compressor business, and this figure is about Rmb2~3bn for Ingersoll Rand.

Having compared product portfolio of Kaishan to Atlas and Ingersoll Rand products in China, we find Kaishan already has a

largely similar product line with these two international giants (except for some niche markets, such as compressors for

medical systems). Their key differences are: 1) Kaishan has not developed medium/large centrifugal air compressor; and 2)

Kaishan still lags behind Atlas in some high-end air compressor markets (mainly oil-free screw air compressor, as well as

high-power products).

At present, the domestic medium/large centrifugal air compressor market is being dominated by Shenyang Blower Works,

Shaangu Power, MAN Turbine and GE (Actually, we believe Atlas and Ingersoll Rand’s revenue from this market is not

large). That said, the possibility of entering this market should not be ruled out for Kaishan considering the company has

successfully developed small centrifugal air compressor and has centrifugal compressor experts.

On the other hand, oil-free compressor is one of key R&D directions going forward. We have good reason to believe the

company is able to make breakthrough in the coming 2~3 years, and to use its high-end products to replace imported ones.

Figure 30: Revenue of Atlas in Asia Pacific Region and China


Figure 31: Compressor product lines of Atlas, Ingersoll Rand, Sullair and Kaishan

Source: Company websites, CICC Research

620 686 759

1,173

1,350 1,190 1,198

1,563 1,586

-

500

1,000

1,500

2,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Atlas•Copco's Compressor Department Historical Revenue in Asia-

Pacif ic (US$ mn)

2,484

2,161

2,649

3,569 3,634

977 894 1,089

1,469 1,507

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011 2012

US$ mn

Atlas revenue in Asia-Pacific Atlas revenue in China

Company CompressorsScrew Compressor

Power Range

Atlas•Copco

(China)

Oil-free compressors (screw / rotary tooth / vortex; air / gas), oil-lubricated compressors (screw /

piston; air / gas), centrifugal compressors (air / gas), high-pressure compressor (air / gas), nitrogen

and oxygen systems, medical air systems, booster, Contract Air services, PET compressors, control

systems, blowers, vacuum pumps

5kW~935kW

Ingersoll Rand

(China)

Oil-free screw compressor, micro oil-free screw compressor, screw compressor inverter, level 2

injectied screw compressor, centrifugal compressor (air / gas), piston compressor, PET compressor /

booster, system control and monitoring, post-processing equipment (drying equipment / filtering

equipment, etc.), various refrigeration equipments (including refrigeration compressor / equipment /

accessories, mainly in Trane or Thermo King)

4kW~300kW

Sullair (Asia)Fixed screw air compressor, portable screw air compressor, screw air compressor water spray, oil-free

screw compressors, vacuum pumps, filters, desiccant3.7kW~440kW

Kaishan

Screw air compressor, variable frequency screw air compressor, low pressure screw air compressor,

two pressure / high pressure screw air compressor, explosion-proof screw air compressor, screw air

compressors, cooling / refrigeration screw compressors, screw vacuum pumps, small centrifugal air

compressor, piston compressor

15kW~400kW



24

Figure 32: Technical characteristics of oil-free and oil-flooded screw air compressors

Source: Compressor Magazine, CICC Research

Bright prospects in overseas market exploration

According to Kaishan’s IPO prospectus, the global air compressor market size reached US$26bn in 2010. Based on the

proportion in domestic market (In 2010, the domestic air compressor market size was Rmb20bn, and Rmb15bn for screw

compressor), the global screw air compressor market size may be US$19.5bn (or Rmb120bn). In the long run, if Kaishan can

successfully expand its global market share to 10% (Atlas and Ingersoll Rand together have approximately 20%), Kaishan

can see a sevenfold increase in its revenue from 2012’s level.

Screw air compressors of Kaishan have similar higher energy efficiency than those of Atlas and Ingersoll Rand, but much

lower prices. Going forward, we believe Kaishan needs to step up its efforts to build overseas distribution channels.

Kaishan has increased its efforts to expand overseas market over the past several years, and this momentum picked up steam

further after Dr. Tang Tan joined Kaishanand set up a North America R&D Center in Seattle in 2009. In November 2012,

Kaishan acquired Southern Cross Compressors (Australia). At present, Kaishan has become a major player in Southeast Asia

and the Pacific region, with chain stores in the US, Germany, Japan, Korea and Russia. The revenue from the overseas

markets has been rising steadily over the past several years. We are upbeat on its overseas market exploration outlook.

Figure 33: Proportion of Kaishan’s overseas revenue has been expanding steadily over the past several years


Injected screw compressors Oil-free screw compressors

Air compression Compressed air with a small amount of oil. Oil-free compressed air.

Compression ratio High single-stage compression ratio, up to 13Low single-stage compression ratio, generally less than

3, requiring level 2 compression

Structure Complex structure, oil and gas separation device needed Simple structure, no oil-gas separation device

Manufacturing costsLow manufacturing precision, low cost (no synchronized gears, no oil

seal, no gas seal, no interlayer)

High manufacturing precision, high cost (synchronous

gears, oil seal, gas seal, interlayer, etc.)

Operating costsHigh running costs, regular replacement of oil and gas separation

core, compressor oil needed.Low running costs

Exhaust pressure 0.8MPa ~ 4.5MPa Less than 2.5MPa

Applicable conditionsRequire high exhaust pressure and power. Mining, machinery

manufacturing, construction, textile, petrochemical, etc.

Require pure oil-free air such as textile, metallurgy,

glass, food, chemical, pharmaceutical, oil and air

seperation, etc.

0.00%

2.50%

3.04%3.48%

6.61%

0%

1%

2%

3%

4%

5%

6%

7%

-

10

20

30

40

50

60

70

2009 2010 2011 2012 1H13

Overseas Rev.(RMB mn) Portion



25

Figure 34: Profiles of global major manufacturers of air compressors


Headquarters Major Market Competitive Air Compressors Other Products Rev./Profit

Atlas Copco Sweden Global

Large mining air compressor,

oil-free compressor, centrifugal

compressor

Construction and mining

equipments, industrial tools

2012 Rev.

USD13,374.96mn, Net

profit USD2,053.67mn

Ingersoll

RandIreland Global

Factory air compressor, oil-free

compressor, centrifugal

compressor

Pneumatic tools and a wide

range of other industrial

equipments, refrigeration

equipment, security

equipment, etc.

2012 Rev.

USD14,034.90mn, Net

porfit USD1,018.60mn

Sullair US Global Oil-free screw compressor

Screw vacuum pumps, air

dryers, precision, pneumatic

tools, etc.

--

Gardoner

DenverUS Global Screw compressor

Engineering products and

services

2012 Rev.

USD2,355.53mn, Net

profit USD263.27mn

MAN turbo Germany Global Large turbine compressor --2009 Rev.

USD1,953.34mn

Fusheng TaiwanTaiwan, Mainland

ChinaScrew compressor Golf club head, wire frame

2006 Rev.

USD257.06mn, Net

profit USD60.9mn



26

Earnings forecasts and investment recommendation

Earnings forecasts and key assumptions

We expect Kaishan’s operating revenue to grow 20.9% YoY to Rmb1.956bn for 2013, 48.8% YoY to Rmb2.911bn for 2014,

and 25.5% YoY to Rmb3.654bn for 2015; and net profit attributable to shareholders to rise 33.0% YoY to Rmb393mn for

2013, 50.2% YoY to Rmb591mn for 2014, and 30.2% YoY to Rmb769mn for 2015. Based on the total 429mn outstanding

shares, its EPS may be Rmb0.92 in 2013, Rmb1.38 in 2014, and Rmb1.79 in 2015.

Key assumptions:

We assume Kaishan to receive Rmb600mn new orders for screw compressors in 2013, Rmb1.4bn in 2014, and Rmb2bn

in 2015 (tax inclusive). Based on an average 6 month order-to-delivery lead time, we expect new orders to contribute

revenue of Rmb260mn for 2013, Rmb1.03bn for 2014 and Rmb1.44bn for 2015.

We expect the domestic screw air compressor market to grow 5% in 2013, 10% in 2014 and 15% in 2015, with Kaishan

likely to post slightly faster growth than the industry-average pace thanks to its expanding market share and overseas

market exploration.

Gas compressor and refrigeration equipment businesses are likely to see rising sales volume starting from 2013.

Figure 35: Revenue and cost forecasts by segment


RMB mn 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Revenue

Screw compressors 626.28 1,066.65 1,407.52 1,163.06 1,221.21 1,367.76 1,641.31

Piston compressors 106.21 356.86 363.02 193.74 199.55 205.54 215.82

Screw expanders 260.00 1,025.64 1,435.90

Pressure vessels and castings 169.11 119.95 91.18 91.23 89.41 87.62 92.00

Others 46.23 71.57 106.08 141.44 185.58 224.14 268.97

Total 947.83 1,615.03 1,967.80 1,589.47 1,955.75 2,910.70 3,653.99

COGS

Screw compressors 437.36 771.93 978.66 802.85 836.53 950.59 1,132.50

Piston compressors 92.73 313.85 341.93 178.80 183.59 189.26 198.72

Screw expanders 143.00 574.36 804.10

Pressure vessels and castings 158.67 109.50 79.56 80.53 80.53 80.53 81.53

Others 34.92 43.96 77.21 91.82 124.34 152.42 181.56

Total 723.68 1,239.24 1,477.36 1,154.00 1,367.99 1,947.16 2,398.42

GP

Screw compressors 30.2% 27.6% 30.5% 31.0% 31.5% 30.5% 31.0%

Piston compressors 12.7% 12.1% 5.8% 7.7% 8.0% 7.9% 7.9%

Screw expanders 45.0% 44.0% 44.0%

Pressure vessels and castings 6.2% 8.7% 12.7% 11.7% 12.0% 11.9% 11.9%

Others 24.5% 38.6% 27.2% 35.1% 33.0% 32.0% 32.5%

Total 23.6% 23.3% 24.9% 27.4% 30.1% 33.1% 34.4%

% of Total

Screw compressors 66.1% 66.0% 71.5% 73.2% 62.4% 47.0% 44.9%

Piston compressors 11.2% 22.1% 18.4% 12.2% 10.2% 7.1% 5.9%

Screw expanders 13.3% 35.2% 39.3%

Pressure vessels and castings 17.8% 7.4% 4.6% 5.7% 4.6% 3.0% 2.5%

Others 4.9% 4.4% 5.4% 8.9% 9.5% 7.7% 7.4%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%



27

Figure 36: Key financial data


P&L(Rmb-mn) 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Revenue 953.15 1,625.84 1,982.52 1,617.09 1,955.75 2,910.70 3,653.99

(+/-%) 31.5% 70.6% 21.9% -18.4% 20.9% 48.8% 25.5%

Gross profit 224.90 379.66 497.28 448.56 587.76 963.54 1,255.58

(+/-%) 76.9% 68.8% 31.0% -9.8% 31.0% 63.9% 30.3%

Selling and distribution costs 21.71 40.34 48.89 40.39 48.85 72.71 91.28

Administrative expenses 31.60 54.14 83.46 89.21 97.79 154.27 190.01

EBIT 168.67 282.44 358.92 311.41 431.99 722.98 957.24

EBITDA 198.10 321.63 423.07 393.14 529.87 834.85 1,084.23

Finance costs 2.80 3.81 -10.88 -55.41 -50.00 -45.00 -40.00

Op. profit 163.29 277.62 364.85 367.38 482.61 768.32 997.61

Profit before tax 165.24 277.50 367.25 373.60 489.41 775.30 1,005.29

Income tax expense 31.74 54.87 57.14 72.02 88.09 155.06 192.01

Profit for minor shareholders 19.64 19.06 16.46 5.81 7.82 29.11 43.85

Profit attributable to Owners 113.86 203.58 293.65 295.77 393.49 591.13 769.43

Dividend - - 143.00 143.00 127.29 254.97 317.59

B&S(Rmb-mn) 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Cash and bank balances 113.90 94.91 1,902.25 1,743.73 1,846.38 2,046.68 2,346.44

Trade receivables 153.26 149.93 244.18 275.05 317.62 472.97 593.35

Inventories 152.64 251.01 404.47 411.93 487.23 693.51 854.23

Current assets 439.55 532.04 2,609.69 2,462.42 2,688.91 3,257.18 3,842.98

Property, plant and equipment 306.48 468.95 623.20 790.14 850.25 921.05 1,004.27

Total assets 790.61 1,079.57 3,324.05 3,382.42 3,696.68 4,366.49 5,068.44

Trade and bills payables 316.40 374.55 395.83 304.20 344.98 491.12 605.07

Current liabilities 427.78 652.99 456.91 362.06 416.51 593.38 737.01

Total liabilities 427.78 652.99 456.91 362.06 416.51 593.38 737.01

Minority interests 31.85 30.41 25.68 26.13 33.95 63.06 106.91

Interests attribute to shareholders 362.84 426.58 2,867.14 3,020.36 3,280.17 3,773.12 4,331.43

Cash flow (Rmb mn) 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Operating cash flow 200.06 241.34 110.22 218.61 375.35 489.35 750.78

Investing cash flow -98.32 -234.50 -232.89 -228.79 -181.14 -206.76 -236.06

Financing cash flow -19.20 -23.13 1,931.91 -148.36 -91.50 -82.29 -214.97

Net increase in cash 82.92 -16.83 1,807.64 -158.56 102.70 200.30 299.76

Financial ratio 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Gross margin 23.6% 23.4% 25.1% 27.7% 30.1% 33.1% 34.4%

EBIT margin 17.7% 17.4% 18.1% 19.3% 22.1% 24.8% 26.2%

Net margin 11.9% 12.5% 14.8% 18.3% 20.1% 20.3% 21.1%

ROE 34.4% 51.4% 10.3% 9.9% 12.1% 15.9% 18.2%

ROA 14.4% 18.9% 8.8% 8.7% 10.6% 13.5% 15.2%

Gearing ratio 54.1% 60.5% 13.7% 10.7% 11.3% 13.6% 14.5%

Net debt/equity -8.1% 7.9% -57.2% -51.6% -49.9% -46.9% -46.3%

Interest coverage ratio 70.8 84.4 -38.9 -7.1 -10.6 -18.6 -27.1

Current ratio 1.0 0.8 5.7 6.8 6.5 5.5 5.2

Quick ratio 0.6 0.4 4.7 5.6 5.2 4.3 4.0

AR turnover days 56.6 27.6 38.0 51.9 50.0 50.0 50.0

Inventory turnover days 76.5 73.5 99.4 128.7 130.0 130.0 130.0



28

Valuation and recommendation

The stock is trading at 38.3x 2013e P/E, 25.5x 2014e P/E, and 19.6x 2015e P/E.

Based on valuations of A-share growth machinery stocks and the energy conservation & environmental protection stocks, we

think the current valuation of Kaishan is relatively fair. That said, we believe it warrants a valuation premium as the company

is likely to see wide application of its core technologies in more new fields and its products are environmentally friendly.

Actually, we believe Kaishan is one of a few A-share machinery stocks which can grow into a large-cap company.

Initiate with BUY.

Figure 37: Valuations of A-share growth machinery stocks and the energy conservation & environmental protection

stocks

Source: Wind, CICC Research

Figure 38: Historical P/E and P/B bands


Company Ticker Price Mkt Cap

13-10-28 Rmb mn 2012A 2013E 2014E 2012A 2013E 2014E 2012A 2013E 2014E

Machinery industry growth stocks

Jereh 002353.CH 73.03 43,603 67.8 43.4 30.0 13.9 10.5 7.8 22.5% 25.4% 27.6%

Zhangjiagang Furui 300228.CH 64.11 8,591 75.5 37.7 24.6 11.6 9.0 6.7 16.6% 24.9% 28.6%

Siasun RobotAutomation 300024.CH 40.52 12,061 58.0 42.5 31.4 8.6 7.2 5.9 16.1% 17.5% 19.7%

CNP 300145.CH 30.00 4,353 36.0 27.8 21.3 3.9 3.5 3.0 11.6% 12.8% 14.5%

Xinjiang Machinery 300159.CH 16.46 2,969 37.1 26.4 20.3 3.1 2.8 2.6 8.7% 10.9% 12.8%

Average 54.9 35.6 25.5 8.2 6.6 5.2 15.1% 18.3% 20.7%

Median 58.0 37.7 24.6 8.6 7.2 5.9 16.1% 17.5% 19.7%

Energy conservation & environmental protection

Longhua Heat 300263.CH 23.38 3,818 66.8 36.2 25.4 4.1 3.6 3.2 6.4% 9.6% 12.5%

DAS 002421.CH 17.71 3,698 47.5 32.9 24.2 5.3 4.7 4.1 11.9% 14.4% 17.0%

Top Resource Conservation 300332.CH 12.48 3,994 44.1 31.9 23.3 3.4 3.1 2.8 11.1% 10.0% 12.6%

Beijing Originwater 300070.CH 43.89 38,876 69.1 46.0 33.6 10.0 8.3 6.8 15.7% 18.2% 20.5%

Tianjin Motimo 300334.CH 31.77 5,528 93.2 61.2 42.3 7.8 6.6 6.0 12.9% 11.3% 14.2%

CPI Yuanda 600292.SH 28.47 14,573 86.6 60.7 43.6 5.3 4.8 4.3 6.3% 8.2% 9.7%

Sound Environmental Resources 000826.CH 36.70 23,722 55.2 38.5 28.9 6.2 4.8 4.2 15.9% 12.9% 14.5%

Average 66.1 43.9 31.6 6.0 5.1 4.5 11.5% 12.1% 14.4%

Median 66.8 38.5 28.9 5.3 4.8 4.2 11.9% 11.3% 14.2%

P/E P/B ROE

300257 P/E band

10

15

20

25

30

35

40

45

2011-08 2012-02 2012-08 2013-02 2013-08

Rmb Price 20 x 25 x 30 x 35 x

10

15

20

25

30

35

40

45

2011-08 2012-02 2012-08 2013-02 2013-08

Rmb Price 2.2 x 3.0 x 4.0 x 5.0 x

300257 P/B band



29

Risks

Domestic air compressor market volatility

Air compressor market is closely correlated with industrial activities. While we believe Kaishan can expand market share

steadily thanks to its competitive strength, the company may still be adversely impacted if domestic air compressor market

becomes volatile.

Slow recognition of innovative technology

Kaishan has several innovative products including screw compressor, two-stage compressor, low-pressure compressor and

screw gas compressor. While we are optimistic about their long-term prospects, their market recognition may face some

uncertainties in the near term. Of course, the strong distribution, services and marketing strength can help Kaishan ease

negative impact from this uncertainty.

Capital constraints of EMC business model

At present, Kaishan sells some screw expanders through Tongrong. The EMC business model needs a huge cash flow to

support initial investments and possible arrearages. Although Tongrong is a subsidiary of Kaishan’s parentco, the possible

cash flow volatility of Tongrong may still have negative impact on the promotion of Kaishan screw expanders.


30

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Fax: (86-532) 6887-7018

Wuhan Jiefang Road Branch Chongqing Honghu Road (West) Branch Changsha Chezhan Road (North) Branch

4th Floor, New World Centre Tower

634 Jiefang Road, Qiaokou District

Wuhan 430032, P.R. China

Tel: (86-27) 8334-3099

Fax: (86-27) 8359-0535

1st & 10th Floors, Ourui Lanjue Center

Block 9, Honghu Road (W), New North District

Chongqing 401120, P.R. China

Tel: (86-23) 6307-7088

Fax: (86-23) 6739-6636

3rd Floor, Annex Building, Securities Tower

459 Chezhan Road (North), Furong District

Changsha 410001, P.R. China

Tel: (86-731) 8878-7088

Fax: (86-731) 8446-2455

Foshan Jihua 5th

Road Branch Tianjin Nanjing Road Branch Dalian Jinma Road Branch

12th Floor, Trend International Business Building

2 Jihua 5th Road, Chancheng District

Foshan 528000, P.R. China

Tel: (86-757) 8290-3588

Fax: (86-757) 8303-6299

10th Floor, Tianjin Global Trading Center

219 Nanjing Road, Heping District

Tianjin 300051, P.R. China

Tel: (86-22) 2317-6188

Fax: (86-22) 2321-5079

128B Jinma Road

Economic-Technological Development Area

Dalian 116000, P.R. China

Tel: (86-411) 8755-5088

Fax: (86-411) 8801-7568

Ningbo Yangfan Road Branch

11th Floor, Building Five, 999 Yangfan Road

Hi-tech Industrial Development Zone

Ningbo 315103, P.R. China

Tel: (86-574) 8907-7288

Fax: (86-574) 8907-7328

Documents

Kaishan Compressor - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/STOCK/2013/10/30/1e32a776-6e09-4d8… · Zhejiang Kaishan Compressor is a leading domestic screw air compressor manufacturer