7 March 2017 Asia Pacific/China Equity Research Construction & Farm Machinery China Construction Machinery Sector Research Analysts SECTOR REVIEW Amy Ji 852 2101 7735 [email protected] Strength in excavator/crane continues with Edmond Huang, CFA 852 2101 6701 concrete machinery catching up [email protected] Figure 1: Excavator sales tripled in Feb; concrete machinery catching up

50,000 350.0% 2000 25%

45,000 300.0% 1800 20% 40,000 250.0% 1600 15% 35,000 1400 200.0% 10% 30,000 1200 150.0% 5% 25,000 1000 100.0% 0% 20,000 800 50.0% -5% 15,000 600 0.0% 10,000 400 -10%

5,000 -50.0% 200 -15%

0 -100.0% 0 -20% Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Excavator sales volume YoY (RHS) Operating hours (trailing 12 months) YoY(RHS)

Source: Company data, Credit Suisse estimates

■ Strong February excavator sales with sufficient new orders. Official excavator sales volumes tripled in February, led by small/large-sized excavators (+317%/+345% YoY), beating market expectations. January- February volumes grew 189% YoY. Sany’s market share further expanded to 25% from 22% last month. We estimate that major machinery makers have already secured sufficient orders to fulfil their production in March- April. For truck cranes, the production pipeline has already reached May. ■ Concrete machinery is catching up. We turn more positive on concrete machinery, and expect their sales to register 15-20% growth in 2017 on a low base, vs our previous estimate of high single-digit growth. We expect Sany's concrete machinery sales to rise 180% YoY in January-February. The resilient infrastructure spending and rising replacement cycle are sufficient to offset a softening property market, in our view. Moreover, environment regulation has become a key growth driver. About 50% of mixing plants are sold for relocation demand due to environment issues. National V emission standards (from 17 July) could also help machinery companies improve margins by ~1%, based on their new product launch. ■ Disciplined supply with healthy financing terms. Utilisation of production capacity of key machinery makers is approaching 100% compared to less than 50% during the downturn. We expect profitability for Zoomlion and Sany to improve, thanks to their high operating leverage. We observe no price competition, and all financing terms remain healthy or even tighter. We expect accounts receivables (AR) quality to improve with better operating cash flow (OpCF). ■ Maintain OVERWEIGHT on construction machinery. We raise our construction machinery sector forecasts by 10-20% in 2017E, factoring in better-than-expected sales growth and lower costs. Our top pick is Zoomlion (H), as we expect it to register a stronger-than-industry average rebound with better margins and a healthier balance sheet. We like Sany for its exposure to excavator sales and high sensitivity to a concrete machinery rebound.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US 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.

7 March 2017

Focus charts and table Figure 2: Excavator sales tripled in February Figure 3: Growth of truck cranes is catching up

50,000 350.0% 8,000 200%

45,000 300.0% 7,000 150% 40,000 250.0% 6,000 35,000 200.0% 100% 5,000 30,000 150.0% 25,000 4,000 50% 100.0% 20,000 3,000 50.0% 0% 15,000 2,000 10,000 0.0% -50% 1,000 5,000 -50.0%

0 -100.0% 0 -100% Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16

Excavator sales volume YoY (RHS) Truck crane sales YoY(RHS)

Source: CCMA Source: CCMA

Figure 5: Truck crane operating hours have reached Figure 4: Expect Jan-Feb loader sales to double a historical peak

45,000 250% 2000 25%

40,000 1800 20% 200% 35,000 1600 15% 150% 1400 30,000 10% 1200 25,000 100% 5% 1000 20,000 0% 50% 800 15,000 -5% 0% 600 10,000 400 -10% -50% 5,000 200 -15%

0 -100% 0 -20% Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Loader sales YoY(RHS) Operating hours (trailing 12 months) YoY(RHS)

Source: CCMA Source: Company data, Credit Suisse estimates

Figure 6: Valuation comparison—as of 6 March Market EPS Ticker Rating Target priceClose price Cap P/E (x) P/B(x) ROE (%) EV/EBITA Dividend Yield CAGR (local) (US$ bn) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E 2017-18 Zoomlion -H 1157.HK O 5.10 4.06 5.1 34.4x 17.5x 0.7x 0.7x 2.0% 3.9% 21.2x 15.6x 0.4% 0.9% n/a Lonking 3339.HK O 2.60 2.17 1.2 17.1x 13.2x 1.2x 1.1x 7.0% 8.8% 12.1x 10.0x 3.1% 4.6% 41% Sany 600031.SS O 9.00 7.29 8.1 38.0x 21.0x 2.3x 2.2x 6.2% 10.6% 15.1x 11.4x 0.8% 1.4% 197% Zoomlion -A 000157.SZ N 4.65 4.82 5.1 45.9x 23.4x 0.9x 0.9x 2.0% 3.9% 21.2x 15.6x 0.3% 0.6% n/a Source: Company data, Credit Suisse estimates, The BLOOMBERG PROFESSIONAL™ service

China Construction Machinery Sector 2 7 March 2017

Strong February excavator sales China Construction Machinery Associate (CCMA) announced official excavator sales volume data: up 298% YoY in February. Monthly sales volume reached 14,540 units in February, back to the same level as in 2012. January-February sales volume grew 189% YoY. By product type, small-sized excavators (0-13 tonne) and large-sized excavators (>30 tonne) continued to show strong growth momentum, +317% and +345% YoY in February, respectively. Mid-sized excavators also caught up with +252% YoY. The trend was similar to 2H16's and we believe the growth reflects (1) resilient infrastructure demand, especially driven by municipal PPP projects (mainly using small-sizes excavators), and (2) continuous active mining activities. Rural development has also become a key driver for small-sized excavator sales. As expected, Sany continued to exceed industry average and registered 369% YoY growth, with its market share expanding from 22% in January to 25% in February. We believe Sany will continue to gradually gain market share on the back of its high quality products and strong sales and service teams.

Figure 7: Excavator sales tripled in February Figure 8: Sany further expanded market share

50,000 350.0% 30.0%

45,000 300.0% 25.0% 40,000 250.0% 35,000 200.0% 20.0% 30,000 150.0% 25,000 15.0% 100.0% 20,000 50.0% 10.0% 15,000

10,000 0.0% 5.0% 5,000 -50.0%

0 -100.0% 0.0% Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Aug-13 Jul-14 Jun-15 May-16 2012-12 2013-06 2013-12 2014-06 2014-12 2015-06 2015-12 2016-06 2016-12

Excavator sales volume YoY (RHS) Sany CAT XCMG Komatsu Liugong

Source: CCMA Source: CCMA, Credit Suisse estimates Strong sales led to low inventory levels with sufficient new orders Machinery makers now have relatively low inventory levels due to stronger-than-expected machinery demand, especially for new machinery. Based on feedback from dealers, several types of machinery are even in shortage. One of the major machinery makers currently holds only a half month's shipments compared to its normal level of two months. On the other hand, new orders remain strong. Currently, major machinery makers have already secured sufficient orders to fulfil their production in March-April. For truck cranes, the production pipeline has already reached May. Concrete machinery is catching up Based on our recent channel checks, we turn more positive on concrete machinery and expect concrete machinery to register 15-20% growth in 2017 on a low base, vs our previous estimate of high single-digit growth. We observe that concrete machinery sales are largely muted due to a weakening property market, and we attribute the growth to (1) infrastructure demand, (2) replacement demand, and (3) environment regulations. We

China Construction Machinery Sector 3 7 March 2017

estimate Sany’s concrete machinery sales to register ~180% YoY growth in January- February. We expect the trend to continue, as there are sufficient orders that are able to cover production until April/May. Infrastructure investment and replacement to offset the weak property market We reiterate our view that infrastructure investment and replacement demand should be able to offset the weakening property market. We estimate that the impact from the property market on concrete machinery is declining while infrastructure investment now accounts for ~50% of the demand. Pump truck sales almost tripled in February and we attribute the growth to infrastructure demand and replacement cycle. Small-sized towers still face downward pressure, reflecting a weakening property market as 90% of small tower cranes are used in the property market. Environmental issues have become a key driver Based on our channel checks, the impact from environment is not limited to mobile machinery but also to concrete mixing plants—a new catalyst to boosting sales further. Our channel checks suggest that 50% sales of mixing plants are sold for relocation needs. As environmental regulations are being tightened further (especially in tier 1-2 cities), the existing plants are required to relocate to places outside the cities. While the designed usage life span for mixing plant is ~15 years, users normally choose to buy a new set of mixing plants due to the high relocation cost of the existing plants. We believe environmental issues will continue to be a key driver in accelerating the replacement cycle and machinery upgrades. National V standards will be implemented starting from 1 July 2017. Being different from the upgrade from National III to IV standards, the cost for this upgrade is much lower for both machinery makers and users. Machinery makers are well-prepared for this upgrade and will start producing National V standards machinery from May. Therefore, we don’t expect much rush orders as last year, and believe the transition will be smooth. Meanwhile, we think it is highly likely for machinery makers to set their prices slightly higher for complying with the National V standards despite there being not much change on the cost side. We expect the new products on National V standards to have slightly higher margins (~1%). Disciplined supply with better financing terms Reaching full capacity utilisation and improving profitability, thanks to high operating leverage Utilisation of production capacity of key machinery makers has improved significantly. Given one batch of work a day, the production capacity is approaching 100% compared to less than 50% during the downturn. Considering the current low inventory level and strong order intake, we expect machinery makers to hire more workers and extend working hours to stock up for 2Q17. This kind of capacity enhancement is very much flexible and the margin cost is limited as those machinery makers do not need to invest in fixed assets such as land/factory/machinery. Their profitability is more sensitive to the strong recovery, given their high operating leverage. Meanwhile, we have witnessed key suppliers also showing low inventory. One of the key suppliers of excavators stated that it can only fulfil 60-70% of total orders in time. Under such a circumstance, the supplier will first provide the product to large players and then it will choose small clients with better pricing terms. Therefore, we think key players such as Sany and Zoomlion are likely to benefit from competition and enjoy relatively stable cost given their dominant position and strong relationship with suppliers.

China Construction Machinery Sector 4 7 March 2017

Unchanged sales terms; expect better OpCF Despite the sales rebound, we see no loosening of the down-payment requirement, which is still at least 20%. Dealers indicate that sales terms remain healthy. Furthermore, given the strong demand, dealers have become more selective on their customers regarding financial capability. For those with machinery shortage, the down-payment has been raised up to >25% with tightening terms. Therefore, we expect the quality of new accounts receivable (AR) to improve. In addition to the newly added AR, dealers and machinery makers also have positive feedback on cash collections for their existing AR. We expect machinery makers to have better operating cash flow in 2017. Valuations

Figure 9: Sany forward P/B Figure 10: Zoomlion forward P/B

8.00 3.50

7.00 3.00

6.00 2.50 5.00 2.00 4.00 1.50 3.00 1.00 2.00

1.00 0.50

- - Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

[email protected] PB [email protected] +1 [email protected] -1 [email protected] [email protected] PB [email protected] +1 [email protected] -1 [email protected]

Source: Company data, Credit Suisse estimates, The BLOOMBERG PROFESSIONAL™ Source: Company data, Credit Suisse estimates, The BLOOMBERG PROFESSIONAL™ service service

Figure 11: Lonking forward P/B Figure 12: Performance YTD

4.50 140%

4.00 135%

3.50 130% 3.00 125% 2.50 120% 2.00 115% 1.50 110% 1.00 105% 0.50

- 100% Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 1-Jan 8-Jan 15-Jan 22-Jan 29-Jan 5-Feb 12-Feb 19-Feb 26-Feb 5-Mar

[email protected] PB [email protected] +1 [email protected] -1 [email protected] Zoomlion Lonking Sany

Source: Company data, CS estimates, The BLOOMBERG PROFESSIONAL™ service Source: The BLOOMBERG PROFESSIONAL™ service

China Construction Machinery Sector 5 7 March 2017

Asia Pacific/China Construction & Farm Machinery

Zoomlion Heavy Industry (1157.HK / 1157 HK) Rating OUTPERFORM [V] Price (06-Mar-17, HK$) 4.06 Target price (HK$) (from 4.75) 5.10 Upside/downside (%) 25.6

Mkt cap (HK$/US$ mn) 39,702 / 5,114 Ahead of the industry recovery Enterprise value (Rmb mn) 59,379 Number of shares (mn) 7,664 ■ Better-than-expected concrete machinery. We estimate that pump truck Free float (%) 83.7 sales volumes more than doubled in 2M17. We attribute the high growth to 52-wk price range (HK$) 4.35-2.25 (1) the low base of last year; (2) replacement demand; and (3) infrastructure ADTO-6M (US$ mn) 5.3 investment. Concrete mixing plant has become a new leading driver with Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) ~50% YoY growth, thanks to their relocation due to environmental

regulations. The recovery of concrete machinery alleviates market concerns Research Analysts about concrete machinery due to a softening property market. We think

Amy Ji Zoomlion’s rebound will continue to be stronger than the industry average on 852 2101 7735 its market share recovery. Zoomlion lost market share in 1H16 due to change [email protected] of strategy and regulatory issues. Edmond Huang, CFA 852 2101 6701 ■ Truck crane sales to lead growth. Zoomlion’s truck crane sales volume [email protected] tripled in January (on a low base) compared to the market average of 51%. Its market share recovered to 19.5%. We expect its March sales to be even stronger: +300% YoY. We are confident of its sales in 1H17, given the existing order book is already able to cover its production by May. We see steady growth for large-sized tower cranes, thanks to (1) infrastructure demand, and (2) increasing demand from prefabrication, which should be able to offset the contraction of small tower crane sales. Small tower crane sales remain a laggard, mainly due to its 90% exposure to the property market and high existing fleet size. ■ Room for margin improvement. We think Zoomlion’s gross margin has room to improve, given: (1) the strong new machinery sales, and (2) potentially higher margins for its new products, including National V standard- complied products starting from July. We expect limited margin impact due to recent raw material price rise. It normally purchases parts and components from suppliers, instead of procuring raw materials directly. Zoomlion has witnessed stable pricing from its suppliers. ■ Lift forecasts and TP; maintain OUTPERFORM. We raise our EPS for 2017/18E by 15%/13%, and therefore raise our DCF-based target price to HK$5.10 from HK$4.75, implying 0.9x/0.87x 2017/18E P/B. The current share price is trading at 0.7x 2017E P/B, 20% below the historical average and at a ~40% discount to its peer Lonking. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 20,753.0 19,609.5 23,080.3 27,030.6 EBITDA (Rmb mn) 1,343.0 1,170.0 2,804.6 3,800.3 EBIT (Rmb mn) 514.0 278.3 1,889.3 2,861.4 Net profit (Rmb mn) 89.0 (753.3) 804.0 1,578.3 EPS (CS adj.) (Rmb) 0.01 (0.10) 0.10 0.21 Change from previous EPS (%) n.a. - 15.1 13.0 Consensus EPS (Rmb) n.a. (0.07) 0.07 0.13 EPS growth (%) (84.9) n.m. n.m. 96.3 The price relative chart measures performance against the P/E (x) 310.5 (36.7) 34.4 17.5 MSCI CHINA F IDX which closed at 6,613.42 on 06/03/17. Dividend yield (%) 4.2 0.0 0.4 0.9 On 06/03/17 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 43.9 50.7 21.2 15.8

Performance 1M 3M 12M P/B (x) 0.69 0.71 0.69 0.67 Absolute (%) 4.4 14.4 50.9 ROE (%) 0.2 (1.9) 2.0 3.9 Relative (%) 0.6 7.2 30.9 Net debt/equity (%) 58.3 60.5 60.0 58.8

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Construction Machinery Sector 6 7 March 2017

Zoomlion Heavy Industry (H) (1157.HK / 1157 HK) Price (06 Mar 2017): HK$4.06; Rating: OUTPERFORM [V]; Target Price: (from HK$4.75) HK$5.10; Analyst: Amy Ji Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Crane sales volume growth - - - - Shares (wtd avg.) (mn) 7,664 7,664 7,664 7,664 - - - - EPS (Credit Suisse) 0.01 (0.10) 0.10 0.21 - - - - (Rmb)DPS (Rmb) 0.15 0.00 0.02 0.03 - - - - BVPS (Rmb) 5.21 5.11 5.20 5.37 - - - - Operating CFPS (Rmb) (0.52) 0.16 0.23 0.23 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 20,753 19,609 23,080 27,031 P/E 310.5 (36.7) 34.4 17.5 Cost of goods sold 15,146 14,623 16,687 19,178 P/B 0.69 0.71 0.69 0.67 SG & A 4,773 4,414 4,204 4,639 Dividend yield (%) 4.2 0.0 0.4 0.9 Other operating exp./(inc.) (509) (598) (615) (588) P/CF (6.9) 23.1 15.6 15.6 EBITDA 1,343 1,170 2,805 3,800 EV/sales 2.8 3.0 2.6 2.2 Depreciation & amortisation 829 892 915 939 EV/EBITDA 43.9 50.7 21.2 15.8 EBIT 514 278 1,889 2,861 EV/EBIT 114.6 213.2 31.5 20.9 Net interest expense/(inc.) 736 1,120 1,077 1,082 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 260 (60) 140 140 Growth (%) Associates/JV 1 5 5 5 Sales revenue (19.7) (5.5) 17.7 17.1 Recurring PBT 39 (897) 957 1,925 EBIT (62.8) (45.9) 578.8 51.5 Exceptionals/extraordinaries 0 0 0 0 Net profit (85.0) (946.4) 206.7 96.3 Taxes (58) (117) 124 289 EPS (84.9) (946.4) 206.7 96.3 Profit after tax 97 (780) 833 1,636 Margins (%) Other after tax income 0 0 0 0 EBITDA 6.5 6.0 12.2 14.1 Minority interests 8 (27) 29 58 EBIT 2.5 1.4 8.2 10.6 Preferred dividends 0 0 0 0 Pre-tax profit 0.2 (4.6) 4.1 7.1 Reported net profit 89 (753) 804 1,578 Net profit 0.4 (3.8) 3.5 5.8 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 89 (753) 804 1,578 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 0.2 (1.9) 2.0 3.9 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 2.1 0.4 2.6 3.7 Cash & cash equivalents 11,487 10,455 10,265 9,913 Asset turnover (x) 0.2 0.2 0.3 0.3 Current receivables 43,137 43,755 43,712 45,352 Interest burden (x) 0.1 (3.2) 0.5 0.7 Inventories 14,083 13,622 13,715 14,187 Tax burden (x) 2.5 0.9 0.9 0.8 Other current assets 2,309 2,207 2,518 2,872 Financial leverage (x) 2.3 2.3 2.3 2.2 Current assets 71,016 70,038 70,210 72,323 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 8,520 8,117 7,696 7,257 Investments 389 394 399 404 Net debt/equity (%) 58.3 60.5 60.0 58.8 Intangibles 4,351 4,242 4,128 4,008 Net debt/EBITDA (x) 17.62 20.59 8.66 6.48 Interest cover (x) 0.70 0.25 1.75 2.65 Other non-current assets 9,407 8,901 9,531 10,164 Total assets 93,683 91,692 91,964 94,156 Accounts payable 16,813 16,215 15,761 16,537 12MF P/E multiple Short-term debt 13,273 15,545 15,545 15,545 Current provisions 0 0 0 0 Other current liabilities 87 82 97 113 Current liabilities 30,173 31,843 31,403 32,196 Long-term debt 21,881 19,000 19,000 19,000 Non-current provisions 439 439 439 439 Other non-current liabilities 621 621 621 621 Total liabilities 53,114 51,903 51,463 52,256 Shareholders' equity 39,896 39,143 39,826 41,168 Minority interests 673 646 675 733 Total liabilities & equity 93,683 91,692 91,964 94,156 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 514 278 1,889 2,861 Net interest (1,182) (1,320) (1,077) (1,082) Tax paid 0 0 0 0 12MF P/B multiple Working capital (5,354) (247) (1,074) (1,899) Other cash & non-cash items 2,010 2,485 2,027 1,895 Operating cash flow (4,012) 1,196 1,766 1,775 Capex (386) (300) (300) (300) Free cash flow to the firm (4,398) 896 1,466 1,475 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 37 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 3,419 518 19 (36) Investing cash flow 3,070 218 (281) (336) Equity raised 0 0 0 0 Dividends paid (378) 0 (121) (237) Net borrowings 0 0 0 0 Other financing cash flow (1,664) (2,446) (1,555) (1,555) Financing cash flow (2,042) (2,446) (1,675) (1,791) Source: Credit Suisse, Thomson Reuters Total cash flow (2,984) (1,032) (190) (352) Adjustments 0 0 0 0 Net change in cash (2,984) (1,032) (190) (352)

Source: Company data, Credit Suisse estimates

China Construction Machinery Sector 7 7 March 2017

Asia Pacific/China Construction & Farm Machinery

Sany Heavy Industry Co (600031.SS / 600031 CH) Rating OUTPERFORM Price (06-Mar-17, Rmb) 7.29 Target price (Rmb) (from 7.80) 9.00 Upside/downside (%) 23.5

Mkt cap (Rmb/US$ mn) 55,826 / 8,098 In the sweet spot for recovery in excavator and Enterprise value (Rmb mn) 72,263 Number of shares (mn) 7,658 concrete machinery sales Free float (%) 43.4 52-wk price range (Rmb) 7.49-4.88 ■ Excavator sales to further beat market expectations. Total excavator ADTO-6M (US$ mn) 40.1 sales nearly tripled in February and volumes surpassed 10,000 units for the Target price is for 12 months. first time since 2012. Sany continued to expand its market share, reaching

Research Analysts 25% in February from 20%/22% in 2016/Jan 2017. Given its strong order

Amy Ji book, we are confident that excavator sales will continue to register double- 852 2101 7735 digit growth throughout 1H17; and we lift our excavator sales growth forecast [email protected] for Sany to 35% from 30% YoY with market share expansion. Edmond Huang, CFA 852 2101 6701 ■ Highly sensitive to concrete machinery sales recovery. We estimate that [email protected] Sany’s concrete machinery segment registered ~180% YoY sales growth in January-February. We think the growth is sustainable, driven by infrastructure investment and replacement demand. Sany’s strong relationship with key constructors should further support its concrete machinery recovery. ■ Well-positioned in the supply chain. We observe a shortage of inventory from machinery makers and key suppliers. Under this situation, we believe Sany has more advantages than small players given (1) its good relationship with suppliers (suppliers normally fulfill orders from key clients first); and (2) Sany's stronger bargaining power, thanks to its economies of scale. Therefore, supply strain is not a concern for Sany and we expect it to enjoy stable cost. We expect Sany to hire more production workers to enhance its production capability without investing in fixed assets. The capacity enhancement is much flexible and cost efficient, leading to better profitability due to its high operating leverage. ■ Lift forecasts and maintain OUPTERFORM. We lift our EPS for 2017/18E by 18%/12%, factoring in better sales growth, margin improvement and lower provision costs. We raise our DCF-target price to Rmb9.00 (from Rmb7.80), implying 2.8x/2.6x 2017/18E P/B. Our new target price is justified by Sany's improving profitability and clean balance sheet. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 23,245.7 21,212.2 26,347.8 31,828.6 EBITDA (Rmb mn) 3,566.9 3,607.5 4,796.3 6,314.2 EBIT (Rmb mn) 1,726.9 1,774.6 2,885.8 4,326.2 Net profit (Rmb mn) 19.4 298.9 1,458.5 2,643.4 EPS (CS adj.) (Rmb) 0.00 0.04 0.19 0.35 Change from previous EPS (%) n.a. (21.1) 17.5 11.7 Consensus EPS (Rmb) n.a. 0.04 0.14 0.29 EPS growth (%) (94.6) 1439.7 387.9 81.2 The price relative chart measures performance against the P/E (x) 2857.7 185.6 38.0 21.0 Shanghai Shenzhen CSI300 index which closed at Dividend yield (%) 0.1 0.2 0.8 1.4 3,428.05 on 06/03/17. On 06/03/17 the spot exchange rate EV/EBITDA (x) 21.3 20.0 15.1 11.7 was Rmb6.89/US$1 P/B (x) 2.45 2.42 2.32 2.15

Performance 1M 3M 12M ROE (%) 0.1 1.3 6.2 10.6 Absolute (%) 6.0 16.5 31.8 Net debt/equity (%) 85.2 68.6 67.5 66.7

Relative (%) 4.1 17.3 21.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

China Construction Machinery Sector 8 7 March 2017

Sany Heavy Industry Co (600031.SS / 600031 CH) Price (06 Mar 2017): Rmb7.29; Rating: OUTPERFORM; Target Price: (from Rmb7.80) Rmb9.00; Analyst: Amy Ji Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Excavator sales growth -0.08 0.20 0.35 0.30 Shares (wtd avg.) (mn) 7,617 7,611 7,611 7,611 - - - - EPS (Credit Suisse) 0.00 0.04 0.19 0.35 - - - - (Rmb)DPS (Rmb) 0.01 0.01 0.06 0.10 - - - - BVPS (Rmb) 2.98 3.01 3.14 3.38 - - - - Operating CFPS (Rmb) 0.28 0.59 0.27 0.23 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 23,246 21,212 26,348 31,829 P/E 2857.7 185.6 38.0 21.0 Cost of goods sold 17,577 15,686 19,288 22,925 P/B 2.45 2.42 2.32 2.15 SG & A 3,942 3,752 4,174 4,578 Dividend yield (%) 0.1 0.2 0.8 1.4 Other operating exp./(inc.) (1,840) (1,833) (1,910) (1,988) P/CF 26.0 12.3 27.3 31.7 EBITDA 3,567 3,608 4,796 6,314 EV/sales 3.3 3.4 2.8 2.3 Depreciation & amortisation 1,840 1,833 1,910 1,988 EV/EBITDA 21.3 20.0 15.1 11.7 EBIT 1,727 1,775 2,886 4,326 EV/EBIT 44.0 40.7 25.2 17.0 Net interest expense/(inc.) 852 885 806 800 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) (327) (164) 5 5 Growth (%) Associates/JV 62 62 62 62 Sales revenue (23.0) (8.7) 24.2 20.8 Recurring PBT 610 788 2,147 3,593 EBIT (22.8) 2.8 62.6 49.9 Exceptionals/extraordinaries (491) (437) (437) (493) Net profit (94.6) 1438.6 387.9 81.2 Taxes (18) 53 257 465 EPS (94.6) 1439.7 387.9 81.2 Profit after tax 138 298 1,454 2,635 Margins (%) Other after tax income 0 0 0 0 EBITDA 15.3 17.0 18.2 19.8 Minority interests (0) (1) (5) (8) EBIT 7.4 8.4 11.0 13.6 Preferred dividends 0 0 0 0 Pre-tax profit 2.6 3.7 8.1 11.3 Reported net profit 139 299 1,459 2,643 Net profit 0.1 1.4 5.5 8.3 Analyst adjustments (119) 0 0 0 Net profit (Credit Suisse) 19 299 1,459 2,643 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 0.1 1.3 6.2 10.6 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 4.1 3.9 6.2 8.7 Cash & cash equivalents 6,841 7,137 5,728 4,683 Asset turnover (x) 0.4 0.4 0.5 0.5 Current receivables 23,768 21,402 22,903 26,397 Interest burden (x) 0.4 0.4 0.7 0.8 Inventories 5,521 5,157 5,813 6,909 Tax burden (x) 1.2 0.9 0.8 0.9 Other current assets 1,199 822 873 925 Financial leverage (x) 2.6 2.4 2.3 2.3 Current assets 37,329 34,517 35,316 38,913 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 15,226 14,618 13,941 13,194 Investments 1,026 1,088 1,150 1,213 Net debt/equity (%) 85.2 68.6 67.5 66.7 Intangibles 4,436 4,411 4,378 4,337 Net debt/EBITDA (x) 5.65 4.54 3.50 2.82 Interest cover (x) 2.03 2.01 3.58 5.41 Other non-current assets 3,211 3,414 3,414 3,414 Total assets 61,228 58,048 58,200 61,071 Accounts payable 6,229 6,403 6,341 7,160 12MF P/E multiple Short-term debt 17,785 11,000 11,000 11,000 Current provisions 0 0 0 0 Other current liabilities 3,790 3,712 3,909 4,120 Current liabilities 27,804 21,115 21,251 22,280 Long-term debt 9,199 12,500 11,500 11,500 Non-current provisions 431 431 431 431 Other non-current liabilities 163 163 163 163 Total liabilities 37,597 34,209 33,344 34,374 Shareholders' equity 22,671 22,880 23,901 25,751 Minority interests 960 959 954 946 Total liabilities & equity 61,228 58,048 58,200 61,071 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 1,727 1,775 2,886 4,326 Net interest (1,321) (1,385) (806) (800) Tax paid 18 (53) (257) (465) 12MF P/B multiple Working capital (2,794) 2,053 (1,854) (3,010) Other cash & non-cash items 4,506 2,116 2,065 1,696 Operating cash flow 2,136 4,506 2,034 1,748 Capex (1,570) (1,200) (1,200) (1,200) Free cash flow to the firm 1,774 4,306 1,834 1,548 Disposals of fixed assets 385 1,402 0 0 Acquisitions 0 0 0 0 Divestments 0 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 900 546 0 0 Investing cash flow (285) 748 (1,200) (1,200) Equity raised 0 0 0 0 Dividends paid (76) (90) (438) (793) Net borrowings 1,042 (3,484) (1,000) 0 Other financing cash flow (1,170) (1,385) (806) (800) Financing cash flow (204) (4,959) (2,243) (1,593) Source: Credit Suisse, Thomson Reuters Total cash flow 1,647 296 (1,409) (1,045) Adjustments 0 0 0 0 Net change in cash 1,647 296 (1,409) (1,045)

Source: Company data, Credit Suisse estimates

China Construction Machinery Sector 9 7 March 2017

Asia Pacific/China Construction & Farm Machinery

Lonking Holdings Limited (3339.HK / 3339 HK) Rating OUTPERFORM [V] Price (06-Mar-17, HK$) 2.17 Target price (HK$) (from 2.35) 2.60 Upside/downside (%) 19.8

Mkt cap (HK$/US$ mn) 9,288 / 1,196 Promising outlook with better OpCF Enterprise value (Rmb mn) 10,703 Number of shares (mn) 4,280 ■ Loader sales doubled in February; substitution not a concern for Free float (%) 44.2 Lonking. Lonking’s loader sales also delivered >100% YoY growth in 52-wk price range (HK$) 2.22-1.10 ADTO-6M (US$ mn) 2.5 January-February with a promising outlook in March and April. Lonking’s Target price is for 12 months. loader business continues to exceed the market average. While we agree [V] = Stock Considered Volatile (see Disclosure Appendix) that excavators can substitute loaders to some extent, given their wider

Research Analysts application, we think substitution is manageable and it may lead to

Amy Ji consolidation within the industry, which will benefit the industry leader, such 852 2101 7735 as Lonking. Furthermore, substitution occurs mainly with small-/medium-sized [email protected] loaders. The demand for large-sized loader remains strong, especially for Edmond Huang, CFA mining activities. Lonking will benefit from change of product mix as large- 852 2101 6701 [email protected] sized loaders account for >80% of its loader sales with better margins. ■ Strong forklift sales. Lonking’s forklift sales also doubled in January- February. We estimate its higher growth rate was mainly due to (1) overall growth acceleration in the forklift industry; and (2) market share expansion. We expect forklifts to deliver solid growth in 2017 on the back of a rise in the domestic logistics industry as well as a shift in demographics and occupational preference. We are positive on the forklift business, given that (1) it does not have overcapacity issues as other types of construction machinery have; and (2) it sees muted impact from the property market. ■ High quality AR leads to lower provision cost and better OpCF. Lonking’s provision ratio was ~24.5% in 1H16, the highest provision ratio among peers. Given the recent better cash collection and improving quality of newly added account receivables, we think Lonking will lower its provision cost with better OpCF in 2017-18. ■ Raise forecasts and maintain OUTPERFORM. We lift our EPS forecasts by 11%/5% for 2017/18E by factoring in higher loader and forklift sales and lower provision costs. We revise up our DCF-based target price from HK$2.35 to HK$2.60, implying 1.5x 2017E P/B. Maintain OUTPERFORM. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 4,829.3 5,041.1 5,920.0 6,889.9 EBITDA (Rmb mn) 585.0 700.4 886.9 1,065.8 EBIT (Rmb mn) 188.5 322.1 503.5 675.7 Net profit (Rmb mn) 116.6 313.5 482.2 627.2 EPS (CS adj.) (Rmb) 0.03 0.07 0.11 0.15 Change from previous EPS (%) n.a. 10.7 10.7 5.0 Consensus EPS (Rmb) n.a. 0.07 0.10 0.15 EPS growth (%) (72.0) 169.0 53.8 30.1 The price relative chart measures performance against the P/E (x) 70.8 26.3 17.1 13.2 MSCI CHINA F IDX which closed at 6,613.42 on 06/03/17. Dividend yield (%) 0.7 2.0 3.1 4.6 On 06/03/17 the spot exchange rate was HK$7.76/US$1 EV/EBITDA (x) 19.6 15.3 11.9 9.3

Performance 1M 3M 12M P/B (x) 1.25 1.22 1.18 1.14 Absolute (%) 3.8 17.3 90.4 ROE (%) 1.7 4.7 7.0 8.8 Relative (%) 0.1 10.1 70.3 Net debt/equity (%) 48.7 36.7 33.1 22.6

Source: Company data, Thomson Reuters, Credit Suisse estimates

China Construction Machinery Sector 10 7 March 2017

Lonking Holdings Limited (3339.HK / 3339 HK) Price (06 Mar 2017): HK$2.17; Rating: OUTPERFORM [V]; Target Price: (from HK$2.35) HK$2.60; Analyst: Amy Ji Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Loader sales volume growth -0.44 0.03 0.20 0.20 Shares (wtd avg.) (mn) 4,280 4,280 4,280 4,280 - - - - EPS (Credit Suisse) 0.03 0.07 0.11 0.15 - - - - (Rmb)DPS (Rmb) 0.01 0.04 0.06 0.09 - - - - BVPS (Rmb) 1.55 1.58 1.63 1.69 - - - - Operating CFPS (Rmb) 0.40 0.39 0.28 0.32 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 4,829 5,041 5,920 6,890 P/E 70.8 26.3 17.1 13.2 Cost of goods sold 3,730 3,904 4,580 5,307 P/B 1.25 1.22 1.18 1.14 SG & A 589 564 584 652 Dividend yield (%) 0.7 2.0 3.1 4.6 Other operating exp./(inc.) (75) (127) (131) (134) P/CF 4.8 4.9 7.0 6.1 EBITDA 585 700 887 1,066 EV/sales 2.4 2.1 1.8 1.4 Depreciation & amortisation 396 378 383 390 EV/EBITDA 19.6 15.3 11.9 9.3 EBIT 189 322 503 676 EV/EBIT 60.8 33.3 21.0 14.6 Net interest expense/(inc.) (24) (60) (85) (89) Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 0 0 0 0 Growth (%) Associates/JV 0 0 0 0 Sales revenue (35.0) 4.4 17.4 16.4 Recurring PBT 212 382 588 765 EBIT (71.6) 70.9 56.3 34.2 Exceptionals/extraordinaries 0 0 0 0 Net profit (72.0) 169.0 53.8 30.1 Taxes 96 69 106 138 EPS (72.0) 169.0 53.8 30.1 Profit after tax 117 314 482 627 Margins (%) Other after tax income 0 0 0 0 EBITDA 12.1 13.9 15.0 15.5 Minority interests 0 0 0 0 EBIT 3.9 6.4 8.5 9.8 Preferred dividends 0 0 0 0 Pre-tax profit 4.4 7.6 9.9 11.1 Reported net profit 117 313 482 627 Net profit 2.4 6.2 8.1 9.1 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 117 313 482 627 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 1.7 4.7 7.0 8.8 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 1.0 2.8 4.4 6.1 Cash & cash equivalents 1,146 1,521 2,185 2,865 Asset turnover (x) 0.4 0.4 0.4 0.5 Current receivables 2,002 1,796 1,773 1,890 Interest burden (x) 1.1 1.2 1.2 1.1 Inventories 1,281 1,176 1,255 1,454 Tax burden (x) 0.5 0.8 0.8 0.8 Other current assets 2,222 2,950 3,477 3,395 Financial leverage (x) 1.9 1.9 2.0 2.0 Current assets 6,651 7,444 8,689 9,604 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 2,829 2,516 2,216 1,929 Investments 3 3 3 3 Net debt/equity (%) 48.7 36.7 33.1 22.6 Intangibles 0 1 2 3 Net debt/EBITDA (x) 5.51 3.55 2.62 1.54 Interest cover (x) n.a. n.a. n.a. n.a. Other non-current assets 3,032 2,838 2,905 2,976 Total assets 12,516 12,802 13,816 14,515 Accounts payable 684 1,176 1,380 1,745 12MF P/E multiple Short-term debt 292 2,000 2,000 2,000 Current provisions 62 46 28 6 Other current liabilities 659 685 787 897 Current liabilities 1,697 3,908 4,195 4,648 Long-term debt 4,078 2,005 2,505 2,505 Non-current provisions 5 4 2 1 Other non-current liabilities 111 111 111 111 Total liabilities 5,891 6,028 6,814 7,264 Shareholders' equity 6,621 6,770 6,997 7,244 Minority interests 3 3 3 3 Total liabilities & equity 12,516 12,801 13,814 14,512 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 189 322 503 676 Net interest 24 60 85 89 Tax paid 0 0 0 0 12MF P/B multiple Working capital 946 883 204 217 Other cash & non-cash items 564 422 392 373 Operating cash flow 1,722 1,687 1,184 1,355 Capex (70) (60) (80) (100) Free cash flow to the firm 1,652 1,627 1,104 1,255 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 112 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) (1,199) (610) (571) (73) Investing cash flow (1,157) (670) (651) (173) Equity raised 0 0 0 0 Dividends paid (220) (165) (255) (380) Net borrowings (211) (365) 500 0 Other financing cash flow (76) (112) (114) (121) Financing cash flow (508) (642) 131 (501) Source: Credit Suisse, Thomson Reuters Total cash flow 57 375 663 681 Adjustments 1 0 0 0 Net change in cash 58 375 663 681

Source: Company data, Credit Suisse estimates

China Construction Machinery Sector 11 7 March 2017

Asia Pacific/China Construction & Farm Machinery

Zoomlion Heavy Industry (000157.SZ) Rating NEUTRAL Price (06-Mar-17, Rmb) 4.82 Target price (Rmb) (from 4.45) 4.65 Upside/downside (%) -3.5

Mkt cap (Rmb/US$ mn) 35,255 / 5,114 Ahead of the industry recovery Enterprise value (Rmb mn) 59,379 Number of shares (mn) 7,664 ■ Better-than-expected concrete machinery sales. Pump truck sales Free float (%) 83.7 volumes more than doubled in 2M17. We believe the high growth could be 52-wk price range (Rmb) 4.95-4.01 ADTO-6M (US$ mn) 5.3 attributed to (1) the low base of last year; (2) replacement demand; and (3) Target price is for 12 months. infrastructure investments. Concrete mixing plant has become a new rising Research Analysts star with ~50% YoY growth, thanks to relocation due to environmental Amy Ji regulations. The recovery of concrete machinery sales alleviates market 852 2101 7735 [email protected] concerns about concrete machinery due to a softening property market. We Edmond Huang, CFA think Zoomlion’s rebound will continue to be stronger than the industry 852 2101 6701 average, thanks to a market share recovery. Zoomlion lost market share in [email protected] 1H16 due to change of strategy and regulatory issues.

■ Truck crane sales to lead the growth. Zoomlion’s truck crane volumes tripled in January (on a low base) vs the market average of 51%. Its market share recovered to 19.5%. We expect its March sales to be even stronger: +300% YoY. We are confident of its sales in 1H17, given that the existing order book is already able to cover its production by May. We see steady growth for large-sized tower cranes, thanks to (1) infrastructure demand; and (2) increasing prefabrication usage, which are able to offset the contraction of small tower crane sales. Small tower crane remains a laggard, mainly due to its 90% exposure to the property market and high existing fleet size. ■ Room for margin improvement. We think Zoomlion’s gross margin has room to improve, thanks to (1) strong new machinery sales; and (2) potentially higher margins for new products, including products complying with the National V standards starting from July. We expect limited margin impact due to the recent rise in raw material prices. It normally purchases parts and components from suppliers, instead of procuring raw materials directly. Zoomlion has witnessed stable pricing from its suppliers. ■ Lift forecasts and TP; maintain NEUTRAL. We lift our EPS for 2017/18E by 15%/13%, and therefore raise our DCF-based target price to Rmb4.65 (from Rmb4.45). Maintain NEUTRAL. Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (Rmb mn) 20,753.0 19,609.5 23,080.3 27,030.6 EBITDA (Rmb mn) 1,343.0 1,170.0 2,804.6 3,800.3 EBIT (Rmb mn) 514.0 278.3 1,889.3 2,861.4 Net profit (Rmb mn) 89.0 (753.3) 804.0 1,578.3 EPS (CS adj.) (Rmb) 0.01 (0.10) 0.10 0.21 Change from previous EPS (%) n.a. - 15.1 13.0 Consensus EPS (Rmb) n.a. (0.03) 0.09 0.18 EPS growth (%) (84.9) n.m. n.m. 96.3 P/E (x) 415.1 (49.0) 45.9 23.4 The price relative chart measures performance against the Dividend yield (%) 3.1 0.0 0.3 0.6 Shanghai Shenzhen CSI300 index which closed at 3,428.05 on EV/EBITDA (x) 43.9 50.7 21.2 15.8 06/03/17. On 06/03/17 the spot exchange rate was P/B (x) 0.93 0.94 0.93 0.90 Rmb6.89/US$1 ROE (%) 0.2 (1.9) 2.0 3.9 Performance 1M 3M 12M Net debt/equity (%) 58.3 60.5 60.0 58.8 Absolute (%) 6.9 5.7 7.6 Source: Company data, Thomson Reuters, Credit Suisse estimates

Relative (%) 5.0 6.6 -3.2

China Construction Machinery Sector 12 7 March 2017

Zoomlion Heavy Industry (A) (000157.SZ) Price (06 Mar 2017): Rmb4.82; Rating: NEUTRAL; Target Price: (from Rmb4.45) Rmb4.65; Analyst: Amy Ji Earnings Drivers 12/15A 12/16E 12/17E 12/18E Per share 12/15A 12/16E 12/17E 12/18E Crane sales volume growth - - - - Shares (wtd avg.) (mn) 7,664 7,664 7,664 7,664 - - - - EPS (Credit Suisse) 0.01 (0.10) 0.10 0.21 - - - - DPS(Rmb) (Rmb) 0.15 0.00 0.02 0.03 - - - - BVPS (Rmb) 5.21 5.11 5.20 5.37 - - - - Operating CFPS (Rmb) (0.52) 0.16 0.23 0.23 Income Statement (Rmb mn) 12/15A 12/16E 12/17E 12/18E Valuation (x) 12/15A 12/16E 12/17E 12/18E Sales revenue 20,753 19,609 23,080 27,031 P/E 415.1 (49.0) 45.9 23.4 Cost of goods sold 15,146 14,623 16,687 19,178 P/B 0.93 0.94 0.93 0.90 SG & A 4,773 4,414 4,204 4,639 Dividend yield (%) 3.1 0.0 0.3 0.6 Other operating exp./(inc.) (509) (598) (615) (588) P/CF (9.2) 30.9 20.9 20.8 EBITDA 1,343 1,170 2,805 3,800 EV/sales 2.8 3.0 2.6 2.2 Depreciation & amortisation 829 892 915 939 EV/EBITDA 43.9 50.7 21.2 15.8 EBIT 514 278 1,889 2,861 EV/EBIT 114.6 213.2 31.5 20.9 Net interest expense/(inc.) 736 1,120 1,077 1,082 Earnings 12/15A 12/16E 12/17E 12/18E Non-operating inc./(exp.) 260 (60) 140 140 Growth (%) Associates/JV 1 5 5 5 Sales revenue (19.7) (5.5) 17.7 17.1 Recurring PBT 39 (897) 957 1,925 EBIT (62.8) (45.9) 578.8 51.5 Exceptionals/extraordinaries 0 0 0 0 Net profit (85.0) (946.4) 206.7 96.3 Taxes (58) (117) 124 289 EPS (84.9) (946.4) 206.7 96.3 Profit after tax 97 (780) 833 1,636 Margins (%) Other after tax income 0 0 0 0 EBITDA 6.5 6.0 12.2 14.1 Minority interests 8 (27) 29 58 EBIT 2.5 1.4 8.2 10.6 Preferred dividends 0 0 0 0 Pre-tax profit 0.2 (4.6) 4.1 7.1 Reported net profit 89 (753) 804 1,578 Net profit 0.4 (3.8) 3.5 5.8 Analyst adjustments 0 0 0 0 Net profit (Credit Suisse) 89 (753) 804 1,578 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 0.2 (1.9) 2.0 3.9 Balance Sheet (Rmb mn) 12/15A 12/16E 12/17E 12/18E ROIC 2.1 0.4 2.6 3.7 Cash & cash equivalents 11,487 10,455 10,265 9,913 Asset turnover (x) 0.2 0.2 0.3 0.3 Current receivables 43,137 43,755 43,712 45,352 Interest burden (x) 0.1 (3.2) 0.5 0.7 Inventories 14,083 13,622 13,715 14,187 Tax burden (x) 2.5 0.9 0.9 0.8 Other current assets 2,309 2,207 2,518 2,872 Financial leverage (x) 2.3 2.3 2.3 2.2 Current assets 71,016 70,038 70,210 72,323 Credit ratios 12/15A 12/16E 12/17E 12/18E Property, plant & equip. 8,520 8,117 7,696 7,257 Investments 389 394 399 404 Net debt/equity (%) 58.3 60.5 60.0 58.8 Intangibles 4,351 4,242 4,128 4,008 Net debt/EBITDA (x) 17.62 20.59 8.66 6.48 Interest cover (x) 0.70 0.25 1.75 2.65 Other non-current assets 9,407 8,901 9,531 10,164 Total assets 93,683 91,692 91,964 94,156 Accounts payable 16,813 16,215 15,761 16,537 12MF P/E multiple Short-term debt 13,273 15,545 15,545 15,545 Current provisions 0 0 0 0 Other current liabilities 87 82 97 113 Current liabilities 30,173 31,843 31,403 32,196 Long-term debt 21,881 19,000 19,000 19,000 Non-current provisions 439 439 439 439 Other non-current liabilities 621 621 621 621 Total liabilities 53,114 51,903 51,463 52,256 Shareholders' equity 39,896 39,143 39,826 41,168 Minority interests 673 646 675 733 Total liabilities & equity 93,683 91,692 91,964 94,156 Cash Flow (Rmb mn) 12/15A 12/16E 12/17E 12/18E EBIT 514 278 1,889 2,861 Net interest (1,182) (1,320) (1,077) (1,082) Tax paid 0 0 0 0 12MF P/B multiple Working capital (5,354) (247) (1,074) (1,899) Other cash & non-cash items 2,010 2,485 2,027 1,895 Operating cash flow (4,012) 1,196 1,766 1,775 Capex (386) (300) (300) (300) Free cash flow to the firm (4,398) 896 1,466 1,475 Disposals of fixed assets 0 0 0 0 Acquisitions 0 0 0 0 Divestments 37 0 0 0 Associate investments 0 0 0 0 Other investment/(outflows) 3,419 518 19 (36) Investing cash flow 3,070 218 (281) (336) Equity raised 0 0 0 0 Dividends paid (378) 0 (121) (237) Net borrowings 0 0 0 0 Other financing cash flow (1,664) (2,446) (1,555) (1,555) Financing cash flow (2,042) (2,446) (1,675) (1,791) Source: Credit Suisse, Thomson Reuters Total cash flow (2,984) (1,032) (190) (352) Adjustments 0 0 0 0 Net change in cash (2,984) (1,032) (190) (352)

Source: Company data, Credit Suisse estimates

China Construction Machinery Sector 13 7 March 2017

Companies Mentioned (Price as of 06-Mar-2017) Lonking Holdings Limited (3339.HK, HK$2.17, OUTPERFORM[V], TP HK$2.6) Sany Heavy Industry Co (600031.SS, Rmb7.29, OUTPERFORM, TP Rmb9.0) Zoomlion Heavy Industry (1157.HK, HK$4.06, OUTPERFORM[V], TP HK$5.1) Zoomlion Heavy Industry (000157.SZ, Rmb4.82, NEUTRAL, TP Rmb4.65)

Disclosure Appendix Analyst Certification Edmond Huang, CFA, and Amy Ji each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Lonking Holdings Limited (3339.HK)

3339.HK Closing Price Target Price Date (HK$) (HK$) Rating 14-Dec-16 1.73 2.35 O * * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

3-Year Price and Rating History for Sany Heavy Industry Co (600031.SS)

600031.SS Closing Price Target Price Date (Rmb) (Rmb) Rating 14-Dec-16 6.47 7.80 O * * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Zoomlion Heavy Industry (1157.HK)

1157.HK Closing Price Target Price Date (HK$) (HK$) Rating 14-Dec-16 3.99 4.75 O * * Asterisk signifies initiation or assumption of coverage.

China Construction Machinery Sector 14 7 March 2017

3-Year Price and Rating History for Zoomlion Heavy Industry (000157.SZ)

000157.SZ Closing Price Target Price Date (Rmb) (Rmb) Rating 14-Dec-16 4.52 4.45 N * * Asterisk signifies initiation or assumption of coverage.

NEUTRAL

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 As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican 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; prior to 2nd October 2012 U.S. and Canadian ratings were 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. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 Ju ly 2011. 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. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. 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’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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China Construction Machinery Sector 15 7 March 2017 the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . 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: https://www.credit- suisse.com/sites/disclaimers-ib/en/managing-conflicts.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.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Lonking Holdings Limited (3339.HK) Method: Our DCF (discounted cash flow)-backed price target of HK$2.6 for Lonking Holdings Limited is based on 1.5% terminal growth and 8.3% WACC (weighted average cost of capital). We assume 9.5% cost of equity and 4.5% after-tax cost of debt. Our price target implies 1.35x 2016E P/B (price-to-book). We give Lonking an OUTPERFORM rating for its solid outlook given resilient infrastructure investment and replacement cycle. Risk: Risks that could impede achievement of our HK$2.6 target price and OUTPERFORM rating for Lonking Holdings Limited include: (1) Weaker than expected forklift growth: While the forklift industry has experienced robust in recent years, the slowdown in China's economy might put downward pressure on forklift growth. (2) Slower than expected receivables collection: Lonking's balance sheet has always been relatively solid compared to peers. However, a slowdown in receivables collection will nevertheless hurt the company's financial condition. (3) Weak commodity prices: A decline in commodity prices will lead to reduced mining activity. Given wheel loader's relation to mining activity, a fall in commodity prices will in turn lead to less demand for wheel loaders, putting more pressure on wheel loader sales. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sany Heavy Industry Co (600031.SS) Method: Our target price of Rmb9.0 for Sany Heavy Industry Co is based on a DCF (discounted cash flow) model which we believe can better capture the mid-term growth. We assume 9% cost of equity, 50% target leverage, 1.5% terminal growth and 10% terminal EBIT margin. Our target price implies 2.4x P2017 P/B. We have an OUTPERFORM rating on Sany thanks to its strong position in excavator with further market share gain. Risk: Risks to our Rmb9.0 target price and OUTPERFORM rating for Sany Heavy Industry Co include: 1) Worse than expected decline in property investment: Due to the relationship between Sany's concrete and crane segment and property investment, a worse than expected fall in property investment will lead to slowdown in property and in turn, slowdown in concrete and crane demand. 2) Intensifying competition: The rebound in investment might cause producers to over producer and thus creating an oversupplied market which suppress machinery ASP and company margin. 3) Overseas expansion: As Sany's tries to establish its footprint overseas, political uncertainty and sluggish economic activity can hinder Sany's overseas expansion progress. Target Price and Rating Valuation Methodology and Risks: (12 months) for Zoomlion Heavy Industry (1157.HK) Method: Our HK$5.10 target price for Zoomlion Heavy Industry (H) is based on DCF (discounted cash flow) model which we think can better capture the mid-term growth. We assume 11% cost of equity, 50% target leverage, 1.5% terminal growth and 10% terminal EBIT margin. The target price implies 0.85 2016E P/B. We have an OUTPERFORM rating on Zoomlion H share, given its recovery with reducing credit risk and better OpCF. We think the recovery of construction machinery is sustainable thanks to resilient infra demand and accelerating replacement cycle. Risk: Risks to our HK$5.10 target price and OUTPERFORM rating for Zoomlion Heavy Industry (H) include 1) Worse-than-expected decline in property investment: Due to the relationship between Zoomlion's concrete and crane segment and property investment, a worse than expected fall in property investment will lead to slowdown in property and in turn, slowdown in concrete and crane demand. 2) Intensifying competition: The rebound in investment might cause producers to over producer and thus creating an oversupplied market which suppress machinery ASP and company margin. 3) Credit risk: While we believe receivables collection will improve going forward, worse than expected receivables collection could weight down on company's balance sheet. In addition, portion of new business's contribution to account receivable could be lower than expected. 4) FX risk: As Zoomlion has operations across the world, many being in developing countries, a change in currency could hurt Zoomlion's sales. Target Price and Rating Valuation Methodology and Risks: (12 months) for Zoomlion Heavy Industry (000157.SZ) Method: Our Rmb4.65 target price for Zoomlion Heavy Industry (A) is based on a DCF (discounted cash flow) model which we think can better capture the mid-term growth. We assume 11% cost of equity, 50% target leverage, 1.5% terminal growth and 10% terminal EBIT margin. The target price implies 0.85 2016E P/B (price-to-book). We have a NEUTRAL rating on Zoomlion A share given its recovery with reducing credit risk and better OpCF. we think the recovery of construction machinery is sustainable thanks to resilient infra demand and accelerating replacement cycle

China Construction Machinery Sector 16 7 March 2017

Risk: Risks to our Rmb4.65 target price and NEUTRAL rating for Zoomlion Heavy Industry (A) include 1)Worse-than-expected decline in property investment: Due to the relationship between Zoomlion's concrete and crane segment and property investment, a worse than expected fall in property investment will lead to slowdown in property and in turn, slowdown in concrete and crane demand. 2 )Intensifying competition: The rebound in investment might cause producers to over producer and thus creating an oversupplied market which suppress machinery ASP and company margin. 3) Credit risk: While we believe receivables collection will improve going forward, worse than expected receivables collection could weight down on company's balance sheet. In addition, portion of new business's contribution to account receivable could be lower than expected. 4) FX risk: As Zoomlion has operations across the world, many being in developing countries, a change in currency could hurt Zoomlion's sales

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures 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 (3339.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1157.HK, 3339.HK, 000157.SZ) within the next 3 months. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=288413&v=3ilkbv5o31m4r4c7850ww8nyz . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. 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 https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has sent extracts of this research report to the subject company (600031.SS, 1157.HK, 3339.HK, 000157.SZ) prior to publication for the purpose of verifying factual accuracy. Based on information provided by the subject company, factual changes have been made as a result. 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 any time after that. This research report is authored by: Credit Suisse (Hong Kong) Limited ...... Edmond Huang, CFA ; Amy Ji 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 FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse (Hong Kong) Limited ...... Edmond Huang, CFA ; Amy Ji For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

China Construction Machinery Sector 17 7 March 2017

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China Construction Machinery Sector 18