Sector Research | Construction & Building Materials

THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON September 7, 2012

September 7, 2012 Construction & Building Materials

Another railway construction boom could emerge in China

Event: Analysts Qiu Bo This week, China approved 30 urban railway transit projects by a number of local +86 755 82133390 [email protected] governments, intercity railway plans by and Inner Mongolia, feasibility study S0980510120021 reports on 13 subway lines in several cities, including Chengdu, Tianjin, Changchun, etc, Liu Ping +86 755 82130678 the No.1 subway line franchise project in Hangzhou and the second Gantang-Southern [email protected] Weiwu railway line project. S0980512030001

Comment: Sales Contact

Another massive railway transit construction boom may occur as the number of Dan Weil Global Head of Institutional Sales and Trading projects approved this time hit a three-year high. Managing Director +852 2248 3588 [email protected]  The construction of a subway project usually lasts four years. Therefore, the Chris Berney construction of projects in seven cities approved in 2009 is drawing to an end, and it Managing Director is necessary to launch a new batch of projects to improve urban construction. On the +852 2248 3568 [email protected] other hand, we believe the NDRC’s latest move is also an important measure the government takes to stabilise economic growth. Roger Chiman Managing Director +852 2248 3598 [email protected]  The investment in the 30 railway transit projects totals RMB427.8 billion and most of these projects are scheduled to be completed over 2012-15. In terms of investment Andrew Collier Director amount, Guangzhou tops all other cities, as the NDRC approved the Guangzhou +852 2248 3528 [email protected] government to construct seven subway lines with anticipated investment amount of RMB124.1 billion. Three subway lines will be constructed in Shenyang, with Joe Chan Director anticipated investment amount of over RMB60 billion. +852 2248 3578 [email protected]

 Developers must provide 40% of initial capital (non-debt capital) for these projects, Cancy Kong versus 25% for the projects approved before, and most of the initial capital will be Vice President +852 2248 3538 financed by local government revenue. [email protected]

Gary Wong Associate  The NDRC has approved multiple ways to finance the projects besides fiscal support +852 2248 3548 [email protected] from local governments. We believe as local governments are suffering from a capital crunch, more projects will be financed through other channels in the future. Ma Ning Associate +852 2248 3536 [email protected] Approval of railway transit construction projects underscores the government’s

intention to promote infrastructure investment amid the continuing economic slowdown.

 Since 2H 2011, China’s infrastructure investment kept slowing down, with investment in railway, highway and urban constructions suffering y-o-y decline in 1H 2012. Given the worrisome economic condition, we believe the government’s move to accelerate

For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1 Bespoke translation by Guosen Securities (HK) strictly for use by its clients only. Construction & Building Materials September 7, 2012 | China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON September 7, 2012

approvals for railway transit projects signals it will promote infrastructure investment. As such, we believe infrastructure investment will pick up in 2H 2012.

We suggest paying attention to central government-owned construction companies with attractive valuations.

 Two types of companies will benefit from the construction boom of urban railway projects. First, infrastructure-listed companies, including Group (601390.CH), China Railway Construction (601186.CH), China Railway Erju (600528.CH), China State Construction Engineering (601668.CH), Shanghai Tunnel Engineering (600820.CH), Guangdong No.2 Hydropower Engineering (002060.CH) and Hongrun Construction Group (002062.CH) will be major beneficiaries. Second, listed decoration companies, including Yasha Decoration (002375.CH) and SZ Grandland Decoration (002482.CH) are also set to benefit.

 ased on the optimistic outlook for infrastructure investment, we suggest investors to pay special attention to China State Construction Engineering (6016 CH and Sinoh dro roup 01 .CH), given their strong fundamentals and significant valuation advantages. Meanwhile, China Railway Group (601390.CH), China Railway Construction (601186.CH), and China Railway Erju(600528.CH) could also bring attractive trading opportunities.

Guosen Securities (HK) 2 Bespoke translation by Guosen Securities (HK) strictly for use by its clients only

Construction & Building Materials September 7, 2012 | China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON September 7, 2012

Exhibit 1: Projects and schemes approved by the NDRC

Length No. of Total investment Construction amount (RMB1 Note (Kilometre) stations billion) time period Changzhou No.1 Subway Line, first phase 34.02 28 21.33 2011～2016 Initial capital (non-debt capital) amounts to RMB13.46 billion, making up 40% of total investment amount. No.2 Subway Line, first phase 19.86 13 12.32 2014～2018 The Changzhou municipal government will finance the initial capital with government revenue. The remaining investment will be financed via other channels, e.g. bank loans. Xiamen No.1 Subway Line, first phase 31.5 23 20.39 2011～2016 Initial capital makes up 40% of total investment. The Xiamen municipal government will finance the initial No.2 Subway Line, first phase 25.2 19 17.62 2013～2018 capital with government revenue. The remaining ～ investment will be financed via other channels, e.g. No.3 Subway Line, first phase 18.6 16 12.36 2015 2020 bank loans. Shenyang No.4 Subway Line, first phase 32 23 16.63 2012～2016 Initial capital amounts to RMB18.311 billion, making up 30% of total investment. The Shenyang municipal No.10 Subway Line, first phase 50 33 25.21 2012～2017 government will finance the initial capital with ～ government revenue. The remaining investment will No.9Subway Line, first phase 36 29 19.20 2013 2018 be financed via other channels, e.g. bank loans. Harbin No.1 Subway Line, third phase 8 4.90 2012～2016 Initial capital amounts to RMB22.93 billion, making up 40.8% of total investment. The Harbin municipal No.2 Subway Line, first phase 26.5 16.49 2013～2018 government will finance the initial capital with ～ government revenue. The remaining investment will No.3 Subway Line 37.6 24.44 2012 2018 be financed via other channels, e.g. bank loans. Guangzhou No.8 Subway Line 15 12 11.08 2012-2015 Initial capital amounts to RMB55.845 billion, making up 45% of the total investment of RMB124.1 billion. No.13 Subway Line, first phase 28.3 11 18.24 2012-2016 The Guangzhou municipal government will finance the initial capital with government revenue. The No.14 Subway Line, first phase 51.2 13 18.91 2013-2017 remaining investment will be financed via other No.21 Subway Line, first phase 58.7 14 29.13 2013-2017 channels, e.g. bank loans. No.4 Subway Line, southern 11.7 5 5.33 2013-2017 section extension project No. 11 Subway Line 42.4 32 33.61 2014-2018 No. 14 Subway Line 21.6 5 7.80 TBD Shanghai No. 11 Subway Line, Disney 9.15 4.37 2012～2015 The adjusted length of subway lines in Shanghai Section reaches 250.55 kilometres, and total investment amount is expected to amount to RMB158.69 billion. No.8 Subway Line, third phase 6.6 2.24 2012～2015 Total investment in the newly added projects is ～ expected to reach RMB16.791 billion, RMB7.1 billion No.10 Subway Line, second 10 5.94 2012 2015 out of which will be initial capital. Shanghai municipal phase and district governments will finance the initial capital No.2 Subway Line, western 2 1.35 2012～2015 with government revenue. The remaining investment section extension project will be financed via other channels, e.g. bank loans. No.3 and No.4 Subway Lines, 2.6 2.89 2012～2015 revamp of branch lines Lanzhou No.1 Subway Line, first phase 26.6 20 17.16 2011～2016 Initial capital amounts to RMB6.3 billion, making up 27.48% of the total investment of RMB22.922 billion. No.2 Subway Line, first phase 9.4 8 5.76 2015～2020 Lanzhou municipal and district governments will finance the initial capital with government revenue. The remaining investment will be financed via other channels, e.g. bank loans. Taiyuan No.1 Subway Line, first phase 24.1 21 15.79 2014～2018 Initial capital amounts to RMB10.826 billion, making up 35% of the total investment of RMB30.929 billion. No.2 Subway Line, first phase 25.1 22 15.14 2012～2016 The Taiyuan municipal government will finance the initial capital with government revenue. Shijiazhuang No.1 Subway Line, first phase 23.9 21 16.70 2012～2016 No.2 Subway Line, first phase 16.2 17 11.52 2015～2020 No.3 Subway Line, first phase 19.5 15 13.97 2013～2018

Guosen Securities (HK) 3 Bespoke translation by Guosen Securities (HK) strictly for use by its clients only

Construction & Building Materials September 7, 2012 | China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON September 7, 2012

Inter-city railway network in coastal areas of Jiangsu Province -Gaochun Line, Nanjing 35 0.00 2012-2015 These projects will mainly be financed by local South Station-Lukou Airport governments. Governments will take measures to section attract various investors to participate in the construction of operation of the projects. Nanjing-Hexian Line, Nanjing 46 0.00 South Station-Huangli section Nanjing-Tianchang Line, 49 0.00 Linchang Station-Jinniu Lake section Wuxi-Jiangyin-Jingjiang Line, 31 0.00 Wuxi-Jiang section Inter-city railway network between Hohhot, Baotou and Ordos Baotou-Ordos Inter-city Railway 162 0.00 From 2012 to 2015, the section between Dongsheng and Ordos Airport of the Baotou - Ordos Railway, which extends about 52 kilometers, will be constructed first, and the construction of inter-city railway between Hohhot and Baotou and that between Hohhot and Ordos will be rolled out in later years. Approved feasibility studies Engineering feasibility study of 19.96 15 11.48 The initial capital is RMB2.871 billion, representing Chengdu Subway 25% of the total investment, which will be financed by Phase 1 Chengdu Municipal Government. Engineering feasibility studies of 20.5 17 12.83 The initial capital is RMB3.21 billion, representing Changchun Subway 25% of the total investment, which will be financed by Phase 1 Changchun Municipal Government. Xi’an Subway Line 3 Phase 1 38.4 24 18.03 The initial capital is RMB4.51 billion, representing 25% of the total investment. Tianjin Subway 33.6 28 25.82 The initial capital is RMB12.911 billion, representing 50% of the total investment, which will be financed by Tianjin Municipal Government. Tianjin Subway and Line 56.1 47 39.82 The initial capital is RMB19.908 billion, representing 6 extension project 50% of the total investment. Rail Transit 23.45 8 7.02 The initial capital is RMB1.756 billion, representing Phase 2 25% of the total investment, which will be financed by Ningbo Municipal Government. Guangzhou Rail Transit 18.6 9 9.47 The initial capital is RMB3.757 billion, representing Phase 1 25% of the total investment, which will be financed by Ningbo Municipal Government. Rail Transit Line 2 13.8 13 9.91 The initial capital is RMB3.467 billion, representing extension project 35% of the total investment, which will be financed by Suzhou Municipal Government. Shenzhen Rail Transit 51.7 17 33.32 The initial capital is RMB16.661 billion, representing 50% of the total investment, which will be financed mainly by income from selling on-the-ground properties and land across the railway. The shortfall (if any) will be funded by government revenue. Shenzhen Rail Transit Line 7 30.256 28 25.49 Qingdao Subway Line 2 29.7 27 17.55 The initial capital is RMB6.143 billion, representing Phase 1 35% of the total investment, which will be financed by Qingdao Municipal Government. Chengdu Subway Line 1 South 5.42 4.01 The initial capital is RMB1.002 billion, representing extension project and Marine 25% of the total investment, which will be financed by Park Station Chengdu Municipal Government. 53.1 38 35.75 The initial capital is RMB12.512 billion, representing 35% of the total investment, which will be financed by Suzhou Municipal Government. Others Franchise of Hangzhou Subway 8.29 The initial capital is RMB4.54 billion, 51% of which will Line 1 be financed by Line 1 Investment Co Ltd, and the rest financed by MTR Corp. Proposal for the 3.77 The initial capital accounts for 50% of the total Gantang-Southern Wuwei investment. Gansu, Inner Mongolia and Ningxia will Railway Line 2 extension project be responsible for the land requisition and demolition work and related expenses in their respective jurisdictions. The expenses can be included in the initial capital as approved by all investors. The rest capital will be provided by the Ministry of Railways. Source: the NDRC，Guosen Securities Economic Research Institute

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Construction & Building Materials September 7, 2012 | China THIS IS THE TRANSLATION OF A REPORT ORIGINALLY PUBLISHED IN CHINESE BY GUOSEN SECURITIES CO., LTD ON September 7, 2012

Information Disclosures

Stock ratings, sector ratings and related definitions Stock Ratings: Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 20% or more over the next six months. Cautious Buy: Indicates that the analyst expects the stock to outperform the Benchmark by 10% or more but less than 20% over the next six months. Neutral: Indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 10% over the next six months. Reduce: Indicates that the analyst expects the stock to underperform the Benchmark by 10% or more over the next six months.

Sector Ratings: Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 10% or more over the next six months. Cautious Buy: Indicates that the analyst expects the sector to outperform the Benchmark by 5% or more but less than 10% over the next six months. Neutral: Indicates that the analyst expects the sector to either outperform or underperform the Benchmark by less than 5% over the next six months. Reduce: Indicates that the analyst expects the sector to underperform the Benchmark by 5% or more over the next six months

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Guosen Securities (HK) 5 Bespoke translation by Guosen Securities (HK) strictly for use by its clients only