CFA Institute Research Challenge Hosted by:

The Hong Kong University of Science and Technology (HKUST) HKUST Student Research October 31, 2012

Initiation Asia Pacific Industrials BUY Last closing price: HK$10.44 Zoomlion Heavy Industry (1157.HK) 12-month price target: HK$14.22 Right product, right strategy, and right timing

Sources of opportunity Stock price chart

We initiate coverage on Zoomlion with a “BUY” rating and a target HK$ price of HK$ 14.22, represent an upside of 36.2%. Our positive view is 12 based on: (1) We believe the market overlooked China’s robust demand growth for heavy construction machinery and Zoomlion is 11 best positioned to benefit from such rising demand; (2) China’s construction machinery industry is going through consolidation; 10

Zoomlion is the only producer remains in net cash position and we 9 believe it will thrive through the consolidation process. (3) Zoomlion

supplies into China’s machinery upgrading demand, which is driven 8 by China’s industrialization deepening process, while construction activities might remain weak in 2013, robust upgrading demand 7 Nov-11 Jan-12 May-12 Aug-12 Nov-12 would bolster Zoomlion’s earnings growth to exceed industry average; (4) Zoomlion’s product mix is best geared for a recovery in Zoomlion HSI (rebased) Source: Bloomberg, as of October 31, 2012 construction activities, concrete and crane machinery; (5) Zoomlion is trading at 36.5% discount to its H-share comparable universe. Catalysts Stock price performance (%) 3 months 6 months 12 months . We expect a recovery in China’s FAI and real estate construction Absolute (2.8) 7.8 0.0 activities in 2013, after the new government takes office. Zoomlion Relative to Hang Seng Index (8.1) (1.1) (11.8) Source: Bloomberg, HKUST team analysis, as of October 31, 2012 is the cheapest construction activity recovery play in HK market.

When the new government announces plans to resume FAI Market data projects, the stock’s multiples would expand. H Shares Outstanding (mm) 1,430 . We believe the market under-estimates Zoomlion’s earnings H Shares Free Float 100% growth potential,, under-values China’s demand for heavy Total Shares Outstanding 7,706 machinery. 1Q2013 results in April 2014 would be a medium term H Share % of Total Share 18.56% H Share Market Cap (HK$mm) 14,930 positive catalyst. If Zoomlion can prove it is increasing its revenue Total Market Cap (HK$mm) 80,450 exposure of heavy equipment, we believe the market would re- Share Price (HK$) 10.44 evaluate the stock’s multiples. 52 Week Low (HK$) 7.60 52 Week High (HK$) 12.48 % of 52 Week High 83.7% Fundamentals 30 Day Average Daily Volume (HK$mm) 19.22 . Strongest balance sheet in the sector – Zoomlion is the only 3 Month Average Daily Volume (HK$mm) 19.43 producer still in net cash position in the sector. It also offers Source: Bloomberg, HKUST team analysis, as of October 31, 2012 attractive ROE comparing to peers. Key data . Focus on managing receivables risks – management has shifted 2011A 2012E 2013E 2014E focus onto managing receivables risks, we have conducted Growth Revenue 43.9% 13.6% 15.7% 17.0% detailed analysis and found this risk manageable. We believe Operating profit 66.5% 18.0% 11.4% 12.2% Net profit 72.9% 14.3% 82.4% 220.0% market should not discount Zoomlion for this risk. Margin . Smart positioning in excavator market – We believe Zoomlion is Gross margin 32.4% 31.4% 30.6% 29.7% Operating margin 20.7% 21.5% 20.7% 19.9% well position in concrete and crane machinery markets. And its Net margin 17.4% 17.5% 16.8% 16.2% Efficiency strategy to avoid highly competitive excavator market is prudent. Asset turnover 0.65 0.44 0.43 0.43 We would avoid excavator producers, such as Sany, as the Inventory days 157 250 250 250 Receivable days 271 485 465 460 industry is still in over-supply situation. Payable days 433 600 600 600 Return ROA 11.4% 7.7% 7.4% 7.1% RNOA 13.4% 9.1% 8.7% 8.3% Valuation ROE 22.8% 21.8% 20.5% 19.6% Profit margin 17.4% 17.5% 16.8% 16.2% Our target price of HK$14.22 implies a 2013E PE of 10.7x, which is still at Total asset turnover 0.65 0.44 0.43 0.43 discount of Zoomlion’s H-share comparable universes’ average Equity multiplier 2.02 2.85 2.81 2.80 Gearing forward PE ratio. We believe the stock presents an attractive Asset/Equity 0.65 0.44 0.43 0.43 Total liabilities/Equity 1.02 1.84 1.80 1.79 opportunity. Total interest-bearing debt / Equity 0.37 0.36 0.34 0.33 Net interest coverage 267.7x 28.2x 27.3x 27.1x Valuation P/E 9.9x 8.7x 7.8x 7.0x Risks P/B 2.3x 1.9x 1.6x 1.4x Key investment risks include: (1) Macroeconomic risks , (2) EV/EBITDA 7.7x 7.0x 5.9x 5.1x Dividend yield 2.39% 2.86% 3.19% 3.58% Competition risks that may lead to margin erosion; (3) Reputation risks; Source: Bloomberg, HKUST team analysis, as of October 31, 2012 and (4) Credit risks.

Contributing analysts: Disclaimer: This report is published for Becky Lu, [email protected] Daisy Li, [email protected] educational purposes only by students Byron Fan, [email protected] Marcus Chu, [email protected] competing in the CFA Institute Research Challenge. Refer to last page for details. CFA Institute Research Challenge - HKUST Student Research 1 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Business description

Incorporated in 1999 and headquartered in Changsha, China, Zoomlion Heavy Industry Science and Technology Co., Ltd. (“Zoomlion” or “the Company”) is China’s second-largest and the world’s seventh-largest construction equipment manufacturer ranked by 2011 turnover, according to International Construction Yellow Table 2012. Benefiting from China’s booming property development and significant infrastructure investment, Zoomlion has been growing at a stunning rate in the past decade, especially in its core products concrete machinery and crane machinery (Exhibit 1 and 2).

Exhibit 1: Zoomlion has experienced tremendous growth in Exhibit 2: Concrete machinery and crane machinery segments the past, mostly driven by the domestic market are the two biggest revenue contributors for Zoomlion Revenue composition by geography, since 2006 Zoomlion’s revenue breakdown by operating segments

100% RMBbn Finance lease services 50 46.3 80% Other machinary products 40 24% Material handling 32.2 34% 34% machinary and systems 60% 46% 30 40% Earth working machinary 20.8 20 40% Road construction and 13.5 pile foundation machinary 58% 10 9.0 Environmental and 4.6 20% 44% 46% 35% 34% sanitation machinary Crane machinary 0 2006 2007 2008 2009 2010 2011 0% Concrete mahinary Domestic Overseas 2008 2009 2010 2011 1H2012

Source: Annual reports Source: Annual reports Zoomlion controls dominant market share in China’s heavy machinery market, which has higher entry barriers and competition is highly consolidated. The Company has a diversified product portfolio consisting of concrete machinery, crane machinery, earth working machinery, environmental and sanitation machinery, road construction and pile foundation machinery, and material handling machinery. In 2012, Zoomlion became China’s top producer of concrete pumps, it is also the largest supplier of tower cranes, and ranks in top 3 positions for producing large-tonnage cranes.

The Company was listed on the Shenzhen Stock Exchange on October 12, 2000 (stock code: 000157), and on the Stock Exchange of Hong Kong on December 23, 2010 (stock code: 1157). It is so far the only Chinese construction machinery manufacturer with A+H listing status. Industry overview and competitive positioning

The robust sales growth of construction equipment over the past decade was spurred by rapid urbanization, explosive fixed asset investments and increasing mechanization needs. Sales growth were extremely strong from 2009 to 1H2011, driven by the government’s RMB 4trillion stimulus package.

The industry slowed down from 2H201 onwards after the government implemented austerity measures while only heavy machinery sales (concrete, tower cranes, large-tonnage truck cranes and high-end excavators) stayed robust.

We remain positive on the industry’s long term outlook. As China’s urbanization and infrastructure per capita rates are still below developed countries standard (Exhibit 3 and 4). The need to replace labor is rising because of wage inflation and increasing quality requirements.

We are particularly bullish about China’s heavy machinery demand, as the country’s urbanization and industrialization process further deepens, demand will increasingly shifts towards heavy construction equipment. For example in Shanghai, the concrete pumps sold this year are mostly the upgraded high-end and high-boom length models. Large-tonnage cranes are increasingly widely applied on building and industrials sites to replace trucks and manual labor.

Exhibit 3: Urbanization level in China is increasing steadily, yet Exhibit 4: Transportation infrastructure in China has large still has a large potential relative to other regions potential to improve its coverage and penetration Urban population growth in China, compared with other regions, 2011 figures Railway/highway length relative to total land area

80% 77.42% km railway per 10,000 km2 km highway per km2 China 1,400 3.5 70% 1,200 3.0 60% 1,000 2.5 51.27% 52.08% 48.34% 49.95% 800 2.0 50% 45.89% 46.99% 44.34% 600 1.5 40% 400 1.0 200 0.5 0 0.0

Source: National Bureau of Statistics, United Nations World Urbanization Prospects 2011 Source: Department of Transportation, CIA the World Fact Book, Goldman Sachs

CFA Institute Research Challenge - HKUST Student Research 2 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Key products markets analysis We conducted detailed analysis on the various categories of construction equipment, the three most important products categories are concrete machinery (about 30% total industry value, based on 1H2012 industry sales estimates), crane (26%) and excavators (23%).

. Concrete machinery: outlook remains robust, driven by urbanization and demand upgrade needs. . Crane machinery: recovery in 2013, driven by destocking and improving construction activities. . Excavator: concerned about industry profitability, fierce competition and high inventory issues.

Concrete machinery market analysis Among the three main construction machinery categories, we are most bullish on the demand outlook for concrete machinery, due to still low penetration of ready-mixed concrete in China and further product upgrade potential.

This market is highly consolidated due to high entry barriers, therefore the leading producers are able to enjoy high margins, Zoomlion and Sany control almost 90% market share in the high-end equipment segment.

The capital and R&D investment are intensive for developing high-end concrete products. Zoomlion and Sany have been consistently launching new products and enhancing products performance, which further lifted industry entry barriers. Therefore we expect competitive landscape to remain stable in this product market. . Benefit from further penetration of ready-mixed concrete application. The Chinese government has prohibited on-site cement mixing in about 100 cities since 2004, leading to an impressive growth for the past few years (Exhibit 5). According to China Bulk Cement Association of Popularization and Development, China’s concrete to cement ratio was only 53.2% in September 2012, far below 90% of developed countries’ levels. We believe the considerable penetration potential will continue to drive the demand for concrete machinery for the next five years, with Tier 3 cities as the main growth markets for ready-mixed concrete and concrete machinery. . Demand recovery to be boosted by construction activity recovery. Concrete machinery is the only product category delivery positive sales growth throughout 2012, it benefited from ready-mixed concrete penetration into lower tier cities and demand upgrade in developed markets. We expect a recovery in FAI and real estate construction activities. Given the weak global economic backdrop, we believe the new government is likely to relax the tightening measures in 2013. Our correlation analysis illustrates those concrete machinery sales units would benefit most from FAI real estate investment and infrastructure investment (Appendix “Correlation study”). Therefore we prefer exposure to concrete machinery producers to benefit from the construction activity recovery.

Exhibit 5: Chinese concrete machinery market Exhibit 6: China’s exponential growth of ready-mix has expanded rapidly concrete compared with developed countries Concrete machinery monthly sales volume Volume of ready-mix concrete, from 2001 to 2010

Units Concrete sales volume (units) Growth YoY Million cubic meters 50,000 300% 1,400 54.7% 60% 47.7% 250% 1,200 50% 40,000 200% 40.4% 1,000 35.6% 150% 32.6% 32.6% 40% 30,000 800 100% 26.5% 25.1% 30% 20,000 50% 600 14.9% 16.2% 20% 0% 400 10,000 -50% 200 10% 0 -100% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Europe USA Japan China China YoY growth

Source: CCMA Source: CNRMC . Sales growth potential analysis – We conducted detailed analysis on the industry and Zoomlion’s concrete machinery sales growth potential. According to CNRMC, China’s concrete mixing plants have very high average output, about 180 thousand cubic meters per plant, 5-8 times that of developed countries. This indicates on the country level, the concrete mixing business is still highly profitable, even though it might be challenging in some over-developed area, such as Beijing and Shanghai. Typically each concrete mixing plant would have 1-2 concrete pumps and 10-20 concrete mixing trucks. Considering the trend of ready- mixed concrete penetration, we expect the number of concrete mixing plans in China to grow at 15% CAGR over the next 3 years. Given the upgrading demand for long-boom length concrete pumps and tailor mounted –pumps, we forecast Zoomlion’s concrete machinery sales will grow at 20% CAGR from 2013-2015.

. Upgrading demand offsets declining sales in mature markets – While demand for concrete machinery remains robust in lower tier cities, demand growth has slowed in developed cities, such as Shanghai and Beijing. However, we noticed these regions started to upgrade to long-arm (>52m) concrete pumps to meet increasingly complex demand. Long-arm concrete pumps cover a wider area and operates more efficiently. According to our research among the end customers, the long-boom length concrete pumps could save 30% to 50% working hours compared to short-boom models. Zoomlion is the first domestic producer to commercially launch long-boom concrete pump products. It continues to hold the leading position in terms of product features development.

CFA Institute Research Challenge - HKUST Student Research 3 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Crane machinery market analysis We expect a moderate recovery in crane machinery (truck crane, crawler crane, and tower crane) in 2013. The industry has been through more than a year of de-stocking. The crane machinery segment’s competition is more fragmented than concrete machinery market, but less severe than excavator markets. Zoomlion is the largest and most dominate producer in tower crane market, one of the 3 most dominant producers in truck and crawler crane markets. . Truck crane demand depends on industrials and construction new starts recovery – Truck cranes have wide applications, it can be used in industrials activities, such as equipment installation in power industries (Exhibit 8). It also can be used in construction activities. Recently the NDRC has approved a string of new projects, but we expect the construction starts will be pushed back into 2013, after the new government takes office. . Social housing supports tower crane demand growth - Zoomlion is China’s largest tower crane producer, with more than 20% market share while the second largest producer’s market share is less than 2%. The company’s strategy is to become the key supplier of tower cranes for social housing projects and targeting at large property developers. The strategy worked well in 2012 and Zoomlion now has 8 production bases (Exhibit 9) across China, which will help Zoomlion to better address regional markets going forward.

Exhibit 7: Development of social housing propels the Exhibit 8: Further expansion in power plants is growth of construction machinery sector expected in medium run Units of newly started flats, actual numbers since 2008 2009 and 2020E power generation capacity forecasts

Thermal Hydro Wind Nuclear Solar Others 9M2012 7.20

Capacity as 652GW 196GW Insignificant Insignificant 2011 10.43 16GW (2%) 9GW (1%) of 2009 (74%) (23%) amount amount

2010 5.90

2009~2020E 4% 6% 26% 22% NM NM 2009 3.30 CAGR

2008 1.00 Capacity Million 1,000GW 380GW 200GW target of 80GW (5%) 20GW (1%) 5GW (0%) (59%) (23%) (12%) 2020 0 2 4 6 8 10 12 Note: “Others” refer to biomass, geothermal, and waste-to-energy, etc.

Source: Ministry of Housing and Urban-Rural Development, CEIC database Source: CEIC database, China Electricity Council, National Bureau of Statistics, BTM Consult Aps., Goldman Sachs, HKUST team estimates . Advancement in product technology – Zoomlion concentrated its development focus on large- tonnage tower and truck cranes. It is now the world’s largest tower crane producer. In 2011, the Company acquired the exclusive rights of flat top tower crane technology from German company JOST Crane. It enabled Zoomlion to gain high-end machinery orders in both domestic and overseas markets, for instance Zoomlion got JOST-series tower crane approved to sell in the Singapore market where regulations on machinery quality are very strict. . Strong overseas sales potential - In 2012 Zoomlion set up a JV in India with ElectroMech, which is the largest industrial crane manufacturer in India. Zoomlion also plans to open more production facilities in overseas markets, to better serve international clients. In a lot of products categories, Zoomlion already own world leading technologies and production capacity, such as tower crane and crawler cranes.

Exhibit 9: Zoomlion has eight tower crane production sites in Exhibit 10: Domestic players are flooding into the highly China and one under construction in India competitive small-to-mid range excavators Location of Zoomlion’s tower crane production sites Share of excavator market by country origin

100% 19% 17% 28% 25% 24% 80% 34% 18% 21% 60% 27% 38% 37% 20% 38% 20% 40% 20% India 11% 12% 20% 10% 40% 46% 26% 29% 18% 23% 0% 2007 2008 2009 2010 2011 1H2012 Area covered Domestic US & EU Japan Korean

Source: Annual reports Source: Annual reports Excavator market analysis We believe domestic producers will continue to take market share away from foreign producers (Exhibit 10). But we are concerned about the over-supply situation. In March 2011, total domestic excavator production reached 27.5K units, implying an annual industry production capacity of 330.5K units. Total industry production in the last 12 months shrunk to 165.3K units, but average sale/production ratio is still at 79%. Therefore, we prefer to avoid the segment until industry consolidation starts (Exhibit 11).

Sany has about 21% revenue exposure to excavators at 1H2012, while Zoomlion had about 3%. We notice that Zoomlion focuses on developing large-tonnage excavators, which do not face competition from low-end producers. This is one of the reason we prefer Zoomlion to Sany, as the company avoids competition with low-end domestic producers by not entering the small-tonnage segment. Sany’s earnings would be highly susceptible to competitive pressure in the excavator market, while it is insignificant for Zoomlion.

CFA Institute Research Challenge - HKUST Student Research 4 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Exhibit 11: Overcapacity in production remains a serious issue for Excavator Excavator sales and production

Units Excavator - Sales Excavator - Production Sales/Production 30,000 120% 25,000 100% 20,000 80% 15,000 60% 10,000 40% 5,000 20% 0 0%

Source: Annual reports Comparison against key competitors Zoomlion’s main competitors in China market are Sany and XCMG. Zoomlion’s product mix is well- balanced and focuses on high-end equipment, which enjoys higher margins due to higher entry barriers and limited supplies. Sany’s earnings are heavily geared towards its ability to turnaround its business in the highly competitive excavator market, which suffers severe over-supply situation. XCMG’s earnings growth is limited, as crane products are its main earnings contributor.

The leading Chinese producers managed to localize most of the equipment market, such as the concrete, crane and earth working machinery markets. For certain construction equipment, the Chinese producers’ production capacity is now at world-leading scale. China also starts to become a large exporter of construction machinery. Excavator is the only product segment that is still dominated by foreign producers in China market, due to the lack of a mature domestic supply chain. The leading producers, such as Zoomlion, Sany and XCMG, are trying to penetrate into this segment. (Please refer to Appendix for market share comparison)

China’s construction machinery industry is going through consolidation; weak demand is forcing the closure of excess production capacity and small-scale producers to exit the business. We believe Zoomlion would be one of the leading large-scale producers to thrive through the consolidation.

The Company has been focused on developing high-end products, it was the first domestic producer to launch high-end long boom concrete pump in China, and it also controls dominant market share in crawler and tower crane markets.

Investment summary Attractive valuation Zoomlion is currently trading at 36.5% discount to its HK-listed comparable companies universe average forward PER. The company has strong balance sheet and in net cash position, also offers attractive ROE. We expect a recovery in China’s FAI and real estate construction activities in 2013, after the new government takes office. Zoomlion is the cheapest construction activity recovery play in HK market. When the new government announces plans to resume FAI projects, the stock’s multiples would expand.

We also believe the market under-estimates Zoomlion’s earnings growth potential,, under-values China’s demand for heavy machinery. 1Q2013 results in April 2014 would be a medium term positive catalyst. If Zoomlion can prove it is increasing its revenue exposure of heavy equipment, we believe the market would re-evaluate the stock’s multiples.

Exhibit 12 : Zoomlion’s share price is now trading at trough level comparing with its historical PE ratio Historical PE ratio band

18 P/E Mean +1 SD -1 SD 16 14 12 10 8 6 4 2 0

Source: Bloomberg, HKUST team estimates

CFA Institute Research Challenge - HKUST Student Research 5 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Robust business model Zoomlion enjoys the highest EBIT and net profit margins among the top three domestic players (Exhibit 13), largely because of its more efficient cost management and better product mix. A shift of product mix towards the more profitable concrete machinery segment, and right strategies focusing on direct sales differentiate the company from the rest of producers.

Exhibit 13: Zoomlion has sustained margin expansion due to Exhibit 14: Concrete machinery offers a higher gross more efficient cost management and better product mix margin than other construction machinery Margin comparison among top three players Gross margin of major sub-categories, 2011 figures 2008 2009 2010 2011 1H2012 Gross margin 50% Zoomlion Sany XCMG Average Zoomlion 27.4% 25.7% 30.3% 32.4% 34.0% 42.2% 41.8% Sany 33.6% 35.5% 36.9% 36.5% 35.3% 40% 36.2% 35.1% XCMG 18.8% 19.2% 21.3% 20.7% 20.9% 33.8% 33.9% 30.5% 29.9% 30% 26.8% 27.4% 27.5% 26.2% EBIT margin 24.5% 25.3% 23.9% Zoomlion 15.1% 15.0% 18.0% 20.8% 23.7% 20% Sany 13.5% 18.4% 20.9% 22.5% 22.2% 16.6% XCMG 11.2% 10.0% 13.2% 12.0% 10.5% 10% Net profit margin Zoomlion 11.4% 11.8% 14.5% 17.4% 19.3% 0% Sany 11.4% 15.9% 18.2% 18.4% 17.1% Concrete machinery Crane machinery Earth working Road construction XCMG 9.3% 8.2% 11.4% 10.2% 8.9% machinery machinery

Source: Annual reports Source: Annual reports

Bottom-up analysis reveal Zoomlion’s earnings potential We conducted detailed bottom-up analysis on the various construction machinery equipment markets. We prefer heavy equipment producer in China market, the competitive landscape is healthier than other low-entry barrier equipment markets, such as earth-working equipment. China’s heavy equipment market is controlled by 2-3 large scale domestic producers, Zoomlion is one of the largest producers for concrete and crane equipment.

We believe China just started a demand upgrading cycle, for the high-end equipment, as the country’s urbanization and industrialization process deepens. Zoomlion has more than 70% revenue exposure to heavy machinery products, also holds leading position in production capacity and product quality in the key heavy machinery products segments. The company is well positioned to benefit from the rising demand for high-end equipment.

New strategy should reduce investor concerns We believe one of the key concerns about the company is its finance lease receivables default risks. Chinese producers started to offer financing terms to sell equipment only since 2009. The stimulus packaged from 2009 to 2011 fuelled growth of sales methods through finance leases. The company has acknowledged the potential risk if they continue to offer finance leases while demand growth slows down.

The management launched a new initiative recently to balance risks and sales growth target. The company lowered sales growth target, tightened criteria for cash collection and quality of customers. In 3Q2012, the company’s long term receivables declined while sales grew 10% YoY, this demonstrates its sales were not bolstered by credit terms.

Zoomlion remains the only producer in net cash position in China’s construction machinery sector. We believe a slower rate of demand growth will help to accelerate the industry's consolidation process, and the company’s new strategy is prudent at this juncture. Its more important to focus on earnings quality, cash collection than earnings growth during a down cycle. The company will emerge as a stronger player to capture the demand recovery opportunities.

Exhibit 15: Our implied forward 2013E PE of 10.7x is 10.1% below two-year average forward PE Forward PE ratio band

Forward PE Average +1 SD -1 SD 18

16

14

12

10

8

6

4 Jun 11 Jun 12 Apr 11 Apr 12 Feb 11 Feb 12 Oct 11 Oct 12 Aug 11 Aug 12 Dec 10 Dec 11

Source: Bloomberg, HKUST team estimates

CFA Institute Research Challenge - HKUST Student Research 6 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Valuation

We obtained our price target of HK$14.22 with 2013E Forward PER of 10.7x and crossed check with DCF valuation (Appendix). Our assumed 2013E Forward PER is at a 36.5% discount of Zoomlion’s H- Share comparable universe average and a 10.1% discount of its historical average Forward PER. We expect a recovery in China’s FAI and real estate construction activities in 2013, after the new government takes office. We also believe the market under-estimates Zoomlion’s earnings growth potential, under-values China’s demand for heavy machinery. 1Q2013 results in April 2014 would be a medium term positive catalyst. If Zoomlion can prove it is increasing its revenue exposure of heavy equipment, we believe the market would re-evaluate the stock’s multiples.

In our model, we projected revenue growth of each product segment and obtained total revenue growth of 13.6%, 15.7% and 17.0% from 2012 to 2014, implying 16.4% CAGR (FY07 – FY 11 CAGR: 50.7%). We estimated gross margin of each product segment based on reported data of FY11 and 1H12, factoring in margin erosion of 1% per year due to competition and inflation. However, we expect gross margin of the firm to increase due to increasing weight in the higher margin concrete machinery business. Expenses, inventory, receivables, payables, and capital expenditure ratios were estimated from historical data of FY07 – 1H12.

Comparable Analysis

P/E P/B EV/EBITDA ROE Net gearing Company Ticker Currency Price 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2012E China construction machinery Sany Heavy 600031 CH Equity CNY 9.10 7.78 6.56 2.79 2.18 5.63 4.80 36.33 50.63 Zoomlion (A) 000157 CH Equity CNY 8.37 6.98 6.15 1.45 1.23 5.49 4.84 21.97 5.91 Zoomlion (H) 1157 HK Equity HKD 10.68 9.23 8.56 1.95 1.66 7.48 6.79 22.08 5.91 Guangxi Liugong 000528 CH Equity CNY 8.32 11.65 8.94 0.95 0.87 7.35 5.77 10.59 16.17 Lonking Holdings 3339 HK Equity HKD 1.74 11.30 8.45 1.08 0.98 4.80 4.23 9.40 59.10 Heli 600761 CH Equity CNY 7.92 10.78 9.03 1.53 1.38 6.53 5.53 12.53 2.12 Shantui 000680 CH Equity CNY 4.39 29.07 14.73 NA NA 6.59 5.20 1.85 71.95 Sunw ard I ntel 002097 CH Equity CNY 6.92 49.43 28.83 NA NA 13.08 10.42 NA 42.66 Xiaman XGMA Machinery 600815 CH Equity CNY 6.27 10.63 11.88 NA NA 10.91 7.81 NA 99.73 China Average 16.32 11.46 1.62 1.38 7.54 6.15 16.39 39.35 China Median 10.78 8.94 1.49 1.30 6.59 5.53 12.53 42.66

Global construction machinery Komatsu 6301 JP Equity JPY 1628.00 8.72 10.20 1.51 1.42 4.28 4.49 18.53 53.32 Hitachi Construction Machinery 6305 JP Equity JPY 1296.00 11.33 8.64 0.85 0.80 2.81 2.88 7.90 89.13 Volvo VOLVB SS Equity SEK 87.90 12.35 10.63 1.98 1.82 5.09 4.66 16.39 108.82 Caterpillar CAT US Equity USD 84.25 9.21 9.58 3.10 2.48 4.72 4.73 37.54 235.30 Terex Corp TEX US Equity USD 22.04 10.96 8.45 1.01 0.90 3.64 3.18 10.43 69.73 Doosan Infracore 042670 KS Equity KRW 16000.00 11.95 8.35 NA NA NA NA NA 145.44 Deere & Co. DE US Equity USD 85.47 11.01 10.30 NA NA 6.71 6.39 38.74 325.10 Global Average 10.79 9.45 1.69 1.48 4.54 4.39 21.59 146.69 Global Median 11.01 9.58 1.51 1.42 4.50 4.57 17.46 108.82

H Share China capital goods Zoomlion (H) 1157 HK Equity HKD 10.72 9.19 8.65 1.96 1.66 7.45 6.81 22.17 5.91 Lonking 3339 HK Equity HKD 1.88 12.21 9.13 1.16 1.05 5.18 4.57 9.40 59.10 China Rongsheng 1101 HK Equity HKD 1.67 32.75 34.08 0.75 0.73 7.64 7.27 2.99 140.17 Weichai Power 2338 HK Equity HKD 28.45 15.34 12.41 1.94 1.70 9.43 7.88 13.66 -18.57 Sany Heavy Equipment 631 HK Equity HKD 4.20 14.14 11.86 2.12 1.86 11.59 9.27 16.02 -24.89 China Communications Construction Co.1800 HK Equity HKD 7.24 9.74 8.82 1.41 1.25 4.21 3.73 14.96 75.21 China Railway Group 390 HK Equity HKD 4.00 12.70 11.27 1.12 1.02 4.30 3.93 9.08 86.55 China State Construction 3311 HK Equity HKD 9.21 16.05 12.99 2.76 2.41 13.75 10.66 18.80 8.43 China Railway Construction Corp. 1186 HK Equity HKD 7.87 12.47 11.16 1.37 1.23 4.27 3.89 11.35 30.65 CSR Corp. 1766 HK Equity HKD 6.16 20.40 17.40 2.58 2.33 9.69 8.44 15.88 14.01 Shanghai Electric Group 2727 HK Equity HKD 3.25 11.61 11.02 1.30 1.20 7.10 6.55 11.30 -42.67 Zhuzhou CSR Times Electric 3898 HK Equity HKD 23.05 22.89 17.83 4.04 3.45 17.32 13.77 18.60 -25.54 Dongfang Electric Corp. 1072 HK Equity HKD 13.60 10.34 10.53 1.72 1.51 6.39 6.23 17.03 -27.02 Mean 15.37 13.63 1.86 1.65 8.33 7.15 13.94 21.64 Median 12.70 11.27 1.72 1.51 7.45 6.81 14.96 8.43

Source: Bloom berg, as of October 29, 2012

CFA Institute Research Challenge - HKUST Student Research 7 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Financial analysis Key earnings drivers

Concrete and crane machinery are the key earnings drivers We forecast Zoomlion will generate 57.9% and 22.9% of total revenue from concrete and crane machinery sales in 2013, respectively. These two products sales volume growth and gross profit margins are the key earnings drivers for the company.

We have conducted sensitivity analysis on these two products sales volume growth and margins trends to back up our forecasts. Within the concrete and crane machinery categories, Zoomlion has been launching and increasing the high-end models sales, in a weak market this year, both products gross profit margins have expanded.

In our bottom-up model, we projected revenue growth of each product segment and obtained total revenue year-over-year growth rate of 13.6%, 15.7% and 17.0% for 2012 to 2014, implying a CAGR of 16.4% (FY07 – FY 11 CAGR: 50.7%).

We estimated gross margin of each product segment based on margins trends of the company, industry level and competitor pressure analysis. We have factored in margin erosion of 1% per year due to competition and inflation. We expect the company’s overall gross margin to increase due to increasing revenue contribution from higher margin concrete machinery and improving margins trend from excavator business (due to economies of scale gains). Sensitivity analysis Concrete Machinery Revenue YoY Growth Concrete Machinery GPM 2013 Net Profit Change from 2013 yoy Growth 2013 Net Profit Change from 2013 yoy Growth Base case 20% yoy growth 10,256 Base case from 2012 Base case 34% GPM 10,256 Base case from 2012 28% 10,734 3.5% 16.4% 38% 11,446 10.3% 24.2% 26% 10,614 2.3% 15.1% 37% 11,148 7.5% 20.9% 24% 10,495 1.2% 13.9% 36% 10,851 4.6% 17.7% 22% 10,375 0.0% 12.6% 35% 10,553 1.7% 14.5% 20% 10,256 -1.2% 11.3% 34% 10,256 -1.1% 11.3% 18% 10,137 -2.3% 10.0% 33% 9,959 -4.0% 8.0% 16% 10,017 -3.5% 8.7% 32% 9,661 -6.9% 4.8% 14% 9,898 -4.6% 7.4% 31% 9,364 -9.7% 1.6% 12% 9,778 -5.8% 6.1% 30% 9,066 -12.6% -1.6%

Crane Machinery Revenue YoY Growth Crane Machinery GPM 2013 Net Profit Change from 2013 yoy Growth 2013 Net Profit Change from 2013 yoy Growth Base Case 5% yoy growth 10,256 Base case from 2012 Base Case 24% GPM 10,256 Base case from 2012 13% 10,382 0.9% 12.6% 28% 10,726 3.4% 16.4% 11% 10,351 0.6% 12.3% 27% 10,609 2.3% 15.1% 9% 10,319 0.3% 11.9% 26% 10,491 1.1% 13.8% 7% 10,288 0.0% 11.6% 25% 10,374 0.0% 12.5% 5% 10,256 -0.3% 11.3% 24% 10,256 -1.1% 11.3% 3% 10,224 -0.6% 10.9% 23% 10,138 -2.3% 10.0% 1% 10,193 -0.9% 10.6% 22% 10,021 -3.4% 8.7% -1% 10,161 -1.2% 10.2% 21% 9,903 -4.5% 7.4% -3% 10,130 -1.5% 9.9% 20% 9,786 -5.7% 6.2% Operating margins assumptions Expenses, inventory, receivables, payables, and capital expenditure ratios were estimated from historical data of FY07 – 1H12. We expect the operating costs will remain table, as the company started to implement efficiency optimization program since the beginning of this year. We have studied the company’s three quarterly results, discovered improved gross profit grains from improving production efficiency, lowered SG&A costs from stream-lined management process. For instance, the company has identified areas to save cost in its procurement process. Recruiting an industrial design expert from Caterpillar, it has improved product designs including truck crane. It has benefited from economy of scale in the production of truck-mounted concrete mixer. Tower crane business has also registered an increase of 3.7% in its gross margin. Management has reiterated the confidence of increasing margins in 4Q. Thus, we expect Zoomlion to maintain its margin leadership.

Zoomlion has expanded EBIT margin, thanks to its insistence on direct sales method in concrete machinery, despite Sany’s aggressive move of turning to distributors. Distributors may extend sales network, and it is commonly used in excavator sales. However, we consider it inappropriate for concrete machinery, as concrete machinery is more pricey requires higher degree of customization. Moreover, management has indicated that distributors ask for a 10% profit share, while in-house sales force only takes 1%. Such a difference has given Zoomlion an advantage in sales expense relative to total revenue (Exhibit 13).

CFA Institute Research Challenge - HKUST Student Research 8 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Exhibit 13: Zoomlion has sustained margin expansion due to Exhibit 14: Concrete machinery offers a higher gross more efficient cost management and better product mix margin than other construction machinery Margin comparison among top three players Gross margin of major sub-categories, 2011 figures 2008 2009 2010 2011 1H2012 Gross margin 50% Zoomlion Sany XCMG Average Zoomlion 27.4% 25.7% 30.3% 32.4% 34.0% 42.2% 41.8% Sany 33.6% 35.5% 36.9% 36.5% 35.3% 40% 36.2% 35.1% XCMG 18.8% 19.2% 21.3% 20.7% 20.9% 33.8% 33.9% 30.5% 29.9% 30% 26.8% 27.4% 27.5% 26.2% EBIT margin 24.5% 25.3% 23.9% Zoomlion 15.1% 15.0% 18.0% 20.8% 23.7% 20% Sany 13.5% 18.4% 20.9% 22.5% 22.2% 16.6% XCMG 11.2% 10.0% 13.2% 12.0% 10.5% 10% Net profit margin Zoomlion 11.4% 11.8% 14.5% 17.4% 19.3% 0% Sany 11.4% 15.9% 18.2% 18.4% 17.1% Concrete machinery Crane machinery Earth working Road construction XCMG 9.3% 8.2% 11.4% 10.2% 8.9% machinery machinery

Source: Annual reports Source: Annual reports

Exhibit 16: Zoomlion product mix is shifting weight to the high-margin concrete machinery business Segment revenue as % of total

100% Finance lease services

80% Other machinary products 24% Material handling machinary 60% 34% 34% and systems 46% 40% Earth working machinary

40% Road construction and pile foundation machinary 58% Environmental and sanitation 20% 44% 46% 35% 34% machinary Crane machinary

0% Concrete mahinary 2008 2009 2010 2011 1H2012

Source: Annual reports Working capital and balance sheet assumptions We have examined the company’s receivables risks closely, as we believe this is one of the major factors holding back the company’s valuation. Finance lease and other vendor financing operations are industry common practice globally. Global competitors like Caterpillar, Volvo, Komatsu and John Deere have subsidiaries, some of which are listed, offering below-market interest rates to facilitate machinery sales (Appendix “Payment options”).

In 1H2012, about 35% of Zoomlion’s concrete machinery sales was made through finance lease, on par with last year. Average down payment plus security deposit was about 15%, only slightly lower than last year. Default ratio (number of defaulted concrete pump trucks as a percentage of sales over the last 3 years) was about 1.5%, slightly higher on an annualized basis than last year as a whole (2.2% in FY11), but it is still under control. According to management, Zoomlion do not see notable losses after reselling these defaulted machines. We observe current trade and finance lease receivables grew 51.3% yoy and the non-current proportion grew at only 29.2% yoy. Given a revenue growth of 20.6% yoy, we think Zoomlion’s receivable repayment is well managed.

In our conference call with Zoomlion, management claimed that the company’s strategy focus have turned to receivables management since July 2012. Besides an internal risk control committee to monitor and control commercial terms, two effective risk control methods are in place: 1) Sales and management share receivable defaults losses with the Company, so that credit granting is more disciplined at all levels; 2) All machines are sold with GPS installed – Zoomlion can monitor the operating statistics to learn about current status of clients and interfere the machine operation if repayment is not made on time.

Exhibit 17: Zoomlion gains more market share from Exhibit 18: Direct sales method brings lower sales Sany and expands margin faster than Sany expense to Zoomlion, contributing to EBIT margin Sales of concrete machinery and respective gross margin Sales expense as % of total revenue and EBIT margin

RMBmm 25% 23.7% 22.5% 30,000 50% 20.9% 20% 22.2% 18.0% 25,000 6.0% 40% 18.4% 20.8% 9.7% 6.3% 20,000 9.8% 13.0% 15% 15.0% 30% 15,000 10% 20% 10,000 5% 10.8% 9.4% 10% 8.3% 7.3% 5,000 6.0% 6.7% 6.8% 5.1% 0% 0 0% 2009 2010 2011 1H2012 2008 2009 2010 2011 1H2012 Zoomlion sales Sany sales Zoomlion GM Sany GM Zoomlion Sany Zoomlion EBIT margin Sany EBIT margin

Source: Annual reports Source: Annual reports

CFA Institute Research Challenge - HKUST Student Research 9 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Investment risks Macroeconomic/fiscal risks Since the construction machinery market highly depends on FAI investment in the downstream industries including real estate, roads and railway etc. a faster/slower-than-expected macroeconomic investment or unexpected government policies will generate positive/negative effects on Zoomlion’s top line growth. However Zoomlion benefits from machinery demand upgrade trend, being a key heavy machinery producer in China, it will fare better than the smaller producers. . Property industry. Most of Zoomlion’s products are exposed to property industry. Concerns over social housing funding may slow down the project progress though we believe the execution will be reinforced after the 18th national congress where new standing committees will be elected in Nov 2012. . Railway and roads FAI. Though Ministry of Railway (MOR)’s fourth bond issuance this year in Aug has brought in RMB20bn for railway construction, the MOR’s cumulative bond balance will break the 40% warning line of corporate assets. The remaining 2012’s funding has been secured in our view, but a lack of market-oriented mechanism may cause future problems on fund raising. We have seen positive signs since the government has attempted to reform the sector such as opening the railway sector to private investors. Further reforms may affect the funding issue and thus investment in the FAI. . Interest rate increase/decrease can affect the cost of financing and leasing business of Zoomlion.

Competition risks Zoomlion faces intense competitions from both domestic and international players. Though Zoomlion has leading positions in concrete machinery, truck crane and tower crane markets, it is facing with strong competition from domestic players such as Sany and XCMG in its core business lines. The two companies are expanding by M&A activities, for instance, Sany’s acquisition of Putzmeister in Jan 2012, may affect Zoomlion’s technical advantage of carbon-boom pumps from integration of CIFA in 2009. International players such as Caterpillar may also intensify the competitive landscape. But Zoomlion’s products competition exposures are much more healthier than excavator and light equipment markets.

Reputation risks In Oct 2011, Chinese media reported quality problems of Zoomlion’s cranes in Gansu Province. The sudden break and toppling of the machine with a weight of 1 thousand ton caused 5 people to die. Though the genuine cause of the event is uncertain, if similar events happen, it may hurt Zoomlion’s brand image.

Credit risks While receivable risk of Zoomlion is fully reflected on its balance sheet, finance lease receivables of the closest peer Sany is off-balance sheet. Those receivables are on the balance sheet of Sany’s parent company, consolidated through another subsidiary. Therefore, we cannot see the receivable risk of Sany in the full extend.

In 1H2012, Zoomlion has net cash of RMB1,712mm, offering flexibility in taking opportunities and implementing strategies and a strong buffer in liquidity. In contrast, both Sany and XCMG have net debt of RMB15,810mm and RMB3,239mm, respectively. Net cash flow from operating activities of Zoomlion turned positive from RMB(1,442)mm in 1Q2012 to RMB2,028mm in 2Q2012. Besides, as a industry common practice to transfer risk and secure working capital, Zoomlion is able to sell receivables to banks by factoring. As at June 30, 2012, the total factoring borrowings obtained by the Zoomlion from banks amounted to RMB26.776mm.

Well-managed receivable risk and sound liquidity of Zoomlion should ease concerns about Zoomlion’s vendor financing operations, which makes it one of the most shorted equities in early 2012.

CFA Institute Research Challenge - HKUST Student Research 10 This page intentionally left blank October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 1: Summary financials

Income Statement Statement of Cash Flow RMBmm 2011A 2012E 2013E 2014E RMBmm 2011A 2012E 2013E 2014E Revenue 46,323 52,606 60,873 71,244 Cash from operating activities 1,880 (306) 9,719 8,207 Cost of sales (31,316) (36,071) (42,230) (50,103) Cash used in investing activities (1,287) (1,631) (1,887) (2,351) Gross Profit 15,007 16,534 18,643 21,141 Cash from/(used in) financing activities (3,275) (706) (1,026) (1,399) Other revenues and net income 14 105 122 214 Increase in cash and equivalents (2,682) (2,644) 6,806 4,457 Sales and marketing expense (3,160) (2,630) (3,044) (3,562) Effect of foreign exchange rate changes (74) - - - General and administrative expense (1,861) (2,209) (2,557) (2,992) Cash and cash equivalent BOP 18,758 16,002 13,358 20,164 Research and development expense (398) (473) (548) (641) Cash and cash equivalent EOP 16,002 13,358 20,164 24,621 Operating Profit 9,602 11,326 12,616 14,159 Income tax (1,429) (1,584) (1,762) (1,977) Non-controlling interests 107 122 136 153 Net Profit 8,066 9,218 10,256 11,507 Key ratios EPS (RMB) 1.05 1.20 1.33 1.49 2011A 2012E 2013E 2014E EPS (HKD) 1.30 1.48 1.65 1.85 Growth Revenue 43.9% 13.6% 15.7% 17.0% Operating profit 66.5% 18.0% 11.4% 12.2% Balance Sheet Net profit 72.9% 14.3% 82.4% 220.0% RMBmm 2011A 2012E 2013E 2014E Non-current assets 23,701 40,659 44,079 51,117 Margins Property, plant and equipment 4,886 5,780 6,815 8,098 Gross margin 32.4% 31.4% 30.6% 29.7% Intangible assets 1,216 1,216 1,216 1,287 Operating margin 20.7% 21.5% 20.7% 19.9% Other non-current assets 17,599 33,663 36,048 41,732 Net margin 17.4% 17.5% 16.8% 16.2% Current asset 47,842 79,901 96,433 113,121 Inventories 9,656 24,706 28,925 34,317 Efficiency Trade and other receivables 13,614 25,943 29,186 34,158 Asset turnover 0.65 0.44 0.43 0.43 Receivables under finance lease 7,089 14,413 16,678 18,543 Inventory days 157 250 250 250 Pledged bank deposits 1,481 1,481 1,481 1,481 Receivable days 271 485 465 460 Cash and cash equivalents 16,002 13,358 20,164 24,621 Payable days 433 600 600 600 Current liabilities 26,652 67,634 78,758 92,699 Loans and borrowings 6,049 7,049 8,049 9,049 Return Trade and other payables 19,314 59,296 69,420 82,361 ROA 11.4% 7.7% 7.4% 7.1% Income tax payable 1,289 1,289 1,289 1,289 RNOA 13.4% 9.1% 8.7% 8.3% Non-current liabilities 9,296 10,296 11,296 12,296 ROE 22.8% 21.8% 20.5% 19.6% Loans and borrowings 7,089 8,089 9,089 10,089 Profit margin 17.4% 17.5% 16.8% 16.2% Other non-current liabilities 1,789 1,789 1,789 1,789 Total asset turnover 0.65 0.44 0.43 0.43 Deferred tax liabilities 418 418 418 418 Equity multiplier 2.02 2.85 2.81 2.80 Non-controlling interests 188 310 446 599 Gearing Shareholders' equity 35,407 42,321 50,013 58,643 Asset/Equity 0.65 0.44 0.43 0.43 Total liabilities/Equity 1.02 1.84 1.80 1.79 Share capital 7,706 7,706 7,706 7,706 Total interest-bearing debt / Equity 0.37 0.36 0.34 0.33 Reserves 27,701 34,615 42,307 50,937 Net interest coverage 267.7x 28.2x 27.3x 27.1x

CFA Institute Research Challenge - HKUST Student Research 12 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 2: Income statement

Income Statement (Fiscal year ending December 31) Reported Period Projected Period RMB' million 2007A 2008A 2009A 2010A 2011A 1H12A 2H12E 2012E 2013E 2014E

Revenue 8,973 13,548 20,762 32,193 46,323 29,120 23,486 52,606 60,873 71,244 Machinery Concret e machinery 3,509 4,682 7,157 14,085 21,212 16,906 12,473 29,379 35,254 42,305 Crane machinery 4,206 6,237 8,298 11,077 15,618 7,044 6,231 13,275 13,939 15,054 Environmental and sanitation machinery 564 871 1,230 1,874 2,978 1,201 1,926 3,127 3,752 4,503 Road construction and pile foundation machinery 487 610 787 1,246 1,737 779 263 1,042 1,094 1,149 Earth working machinery - 116 445 772 1,048 1,324 353 1,677 2,683 4,024 Material handling machinery and systems - 261 873 422 504 204 350 554 610 671 Other machinery products 193 635 1,575 1,674 1,643 879 1,010 1,889 1,795 1,705 Other Segm ents Finance lease services 14 136 397 1,043 1,583 783 879 1,662 1,745 1,833

Cost of Sales and Services (6,405) (9,842) (15,422) (22,424) (31,316) (19,208) (16,863) (36,071) (42,230) (50,103) Machinery Concret e machinery (2,383) (3,390) (5,115) (9,575) (13,668) (10,783) (8,313) (19,096) (23,268) (28,344) Crane machinery (3,090) (4,599) (6,335) (7,995) (11,595) (5,117) (4,839) (9,956) (10,594) (11,592) Environmental and sanitation machinery (381) (600) (824) (1,282) (2,061) (868) (1,321) (2,189) (2,664) (3,242) Road construction and pile foundation machinery (404) (375) (527) (765) (1,072) (453) (277) (730) (777) (827) Earth working machinery - (111) (373) (607) (834) (989) (352) (1,341) (2,146) (3,219) Material handling machinery and systems - (197) (787) (390) (453) (184) (321) (505) (555) (610) Other machinery products (145) (561) (1,296) (1,456) (1,426) (790) (911) (1,701) (1,615) (1,535) Other Segm ents Finance lease services (2) (9) (165) (354) (207) (24) (530) (554) (611) (733)

Gross Profit 2,568 3,706 5,340 9,769 15,007 9,912 6,622 16,534 18,643 21,141 Machinery Concret e machinery 1,126 1,292 2,042 4,510 7,544 6,123 4,160 10,283 11,986 13,961 Crane machinery 1,116 1,638 1,963 3,082 4,023 1,927 1,392 3,319 3,345 3,462 Environmental and sanitation machinery 183 271 406 592 917 333 605 938 1,088 1,261 Road construction and pile foundation machinery 83 235 260 481 665 326 (13) 313 317 322 Earth working machinery - 5 72 165 214 335 0 335 537 805 Material handling machinery and systems - 64 86 32 51 20 30 50 55 60 Other machinery products 48 74 279 218 217 89 100 189 179 171 Other Segm ents Finance lease services 12 127 232 689 1,376 759 349 1,108 1,134 1,100

Other revenues and net income 19 142 105 54 14 (87) 192 105 122 214 Sales and marketing expenses (691) (959) (1,250) (2,146) (3,160) (1,473) (1,157) (2,630) (3,044) (3,562) General and administrative expenses (400) (734) (878) (1,645) (1,861) (1,207) (1,002) (2,209) (2,557) (2,992) Research and development expenses (83) (120) (194) (265) (398) (251) (222) (473) (548) (641)

Profit from operations 1,413 2,035 3,123 5,767 9,602 6,894 4,432 11,326 12,616 14,159

Gain on disposal of lease prepayments 106 ------Gain/(loss) on disposal of subsidiaries and Associates 12 3 (6) - 12 - - - - - Net finance costs (60) (301) (295) (365) (36) (203) (199) (402) (462) (522) Share of profits less losses of associates - 7 6 14 24 8 (8) - - -

Profit before taxation 1,471 1,744 2,828 5,416 9,602 6,699 4,226 10,925 12,154 13,637

Income tax (34) (191) (409) (828) (1,429) (950) (634) (1,584) (1,762) (1,977)

Profit for the period 1,437 1,553 2,419 4,588 8,173 5,749 3,591 9,340 10,392 11,660

Profit attributable to: Owners of the Company 1,439 1,544 2,447 4,666 8,066 5,622 3,596 9,218 10,256 11,507 Non-controlling interests (2) 9 (28) (78) 107 127 (5) 122.3 136.1 152.6

EBIT 1,531 2,045 3,123 5,781 9,638 6,902 4,424 11,326 12,616 14,159 Adjustm ents: Gains and losses (118) (10) - (14) (36) (8) 8 - - - Depreciation of property, plant and equipment 84 179 245 327 369 201 220 421 487 570 Amortization of lease prepayments 9 19 21 24 27 15 38 53 61 71 Amortization of intangible assets 4 18 63 64 60 31 22 53 61 71 EBITDA 1,510 2,251 3,452 6,182 10,058 7,141 4,711 11,852 13,225 14,871

Basic and Diluted EPS 0.34 0.37 0.59 0.75 1.05 0.73 0.47 1.20 1.33 1.49 Dividend 0.10 0.10 0.25 0.26 0.25 0.30 0.33 0.37

CFA Institute Research Challenge - HKUST Student Research 13 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 3: Balance sheet

Balance Sheet (Fiscal year ending December 31) Reported Period Projected Period RMB' million 2006A 2007A 2008A 2009A 2010A 2011A 1H12A 2012E 2013E 2014E NON-CURRENT ASSETS Property, plant and equipment 1,108 1,383 3,006 3,683 4,135 4,886 5,556 5,780 6,815 8,098 Lease prepayments 291 344 914 907 1,119 1,390 1,446 1,600 1,844 2,129 Intangible assets 47 49 1,386 1,432 1,256 1,216 1,190 1,216 1,216 1,287 Goodwill - - 2,029 2,082 1,907 1,793 1,742 1,793 1,793 1,793 Interests in associates 55 87 78 71 86 103 166 103 103 103 Other financial assets 2 16 12 15 50 43 116 43 43 43 Trade and other receivables 62 86 106 229 585 912 3,355 3,603 4,169 4,880 Receivables under finance lease - 255 1,432 5,060 9,775 12,780 14,368 25,943 27,518 32,206 Pledged bank deposits 53 74 98 234 185 261 626 261 261 261 Deferred tax assets 19 67 124 148 274 317 388 317 317 317 TOTAL 1,637 2,361 9,185 13,861 19,372 23,701 28,953 40,659 44,079 51,117

CURRENT ASSETS Inventories 1,502 2,632 5,171 6,272 8,678 9,656 11,413 24,706 28,925 34,317 Trade and other receivables 1,186 2,437 4,782 6,265 8,260 13,614 18,836 25,943 29,186 34,158 Receivables under finance lease - 126 815 3,283 6,397 7,089 8,073 14,413 16,678 18,543 Pledged bank deposits 132 248 356 755 1,577 1,481 1,476 1,481 1,481 1,481 Cash and cash equivalents 805 729 2,913 3,439 18,758 16,002 18,842 13,358 20,164 24,621 TOTAL 3,625 6,172 14,037 20,014 43,670 47,842 58,640 79,901 96,433 113,121

TOTAL ASSETS 5,262 8,533 23,222 33,875 63,042 71,543 87,593 120,560 140,512 164,237

CURRENT LIABILITIES Loans and borrowings 921 847 6,234 8,553 8,107 6,049 10,121 7,049 8,049 9,049 Trade and other payables 2,085 3,518 6,920 10,632 17,203 19,314 28,157 59,296 69,420 82,361 Income tax payable 1 80 70 283 757 1,289 879 1,289 1,289 1,289 TOTAL 3,007 4,445 13,224 19,468 26,067 26,652 39,157 67,634 78,758 92,699

NET CURRENT ASSETS 618 1,727 813 546 17,603 21,190 19,483 12,267 17,676 20,421

NON-CURRENT LIABILITIES Loans and borrowings 9 324 4,154 5,621 7,690 7,089 7,009 8,089 9,089 10,089 Other non-current liabilities - - 61 684 1,379 1,789 1,716 1,789 1,789 1,789 Deferred tax liabilities - 13 572 550 471 418 426 418 418 418 TOTAL 9 337 4,787 6,855 9,540 9,296 9,151 10,296 11,296 12,296

TOTAL LIABILITIES 3,016 4,782 18,011 26,323 35,607 35,948 48,308 77,930 90,054 104,995

NET ASSETS 2,246 3,751 5,211 7,552 27,435 35,595 39,285 42,631 50,459 59,242

EQUITY Share capital 507 761 1,521 1,673 5,797 7,706 7,706 7,706 7,706 7,706 Reserv es 1,699 2,868 3,550 5,755 21,579 27,701 31,312 34,615 42,307 50,937 Equity attributable to owners of the Company 2,206 3,629 5,071 7,428 27,376 35,407 39,018 42,321 50,013 58,643 Non controlling interests 40 122 140 124 59 188 267 310 446 599

TOTAL EQUITY 2,246 3,751 5,211 7,552 27,435 35,595 39,285 42,631 50,459 59,242

CFA Institute Research Challenge - HKUST Student Research 14 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 4: Statement of cash flow

Cashflow Statement (Fiscal year ending December 31) Reported Period Projected Period RMB' million 2007A 2008A 2009A 2010A 2011A 1H12A 2H12E 2012E 2013E 2014E

CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation 1,471 1,744 2,828 5,416 9,602 6,699 4,226 10,925 12,154 13,637 Adjustments for: Depreciation of property, plant and equipment 84 179 245 327 369 201 220 421 487 570 Amortization of lease prepayments 9 19 21 24 27 15 38 53 61 71 Amortization of intangible assets 4 18 63 64 60 31 22 53 61 71 Interest expense 65 347 438 740 695 405 (3) 402 462 522 Loss on disposal of property, plant and equipment 26 5 10 37 6 12 (12) - - - Gain on disposal of lease prepayments (106) ------(Gain)/loss on disposal of subsidiaries and associates (12) (3) 6 - (12) - - - - - Impairment loss on property, plant and equipment and intangible assets 5 24 5 5 8 2 (2) - - - Gain on remeasurement of derivative financial instruments at fair value - - - - (19) 18 (18) - - - Gain on bargain purchase (29) ------1,492 2,161 3,179 6,503 10,498 7,243 4,609 11,852 13,225 14,871

Change in working capital items: (Increase)/decrease in inventories (979) (1,182) (1,093) (2,416) (965) (1,757) (13,293) (15,050) (4,218) (5,392) Increase in trade and other receivables (857) (576) (1,703) (2,371) (5,670) (7,693) (7,327) (15,020) (3,809) (5,683) Increase in receivables under finance lease (381) (1,866) (6,096) (7,829) (3,697) (2,572) (17,914) (20,486) (3,840) (6,554) Increase in trade and other payables 1,042 448 4,206 7,083 2,689 6,650 33,332 39,982 10,124 12,942 Cash generated from operating activities 317 (1,015) (1,507) 970 2,855 1,871 (593) 1,278 11,481 10,184

Income tax paid (4) (274) (256) (519) (975) (1,417) (167) (1,584) (1,762) (1,977) Net cash inflow from operating activities 313 (1,289) (1,763) 451 1,880 454 (760) (306) 9,719 8,207

CASH FLOWS FROM INVESTING ACTIVITIES Payment for the purchase of property, plant and equipment (386) (720) (829) (910) (1,210) (701) (614) (1,315.15) (1,522) (1,852) Lease prepayments (111) (173) (3) (236) (260) (71) (192) (263) (304) (356) Payment for purchase of intangible assets (6) (12) (70) (27) (112) (46) (7) (53) (61) (142) Net cash flows from investing activities (517) (2,733) (963) (1,833) (1,287) (1,200) (431) (1,631) (1,887) (2,351)

CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from loans and borrowings 3,869 1,934 (2,393) 4,084 (2,084) 2,000 2,000 2,000 Interest paid (65) (231) (498) (743) (695) (432) 30 (402) (462) (522) Dividends paid (20) (76) (152) (711) (1,657) - (2,305) (2,305) (2,564) (2,877) Net cash flows from financing activities 128 6,232 3,250 16,755 (3,275) 3,593 (4,299) (706) (1,026) (1,399)

NET CHANGE IN CASH AND CASH EQUIVALENTS (76) 2,210 524 15,373 (2,682) 2,847 (5,491) (2,644) 6,806 4,457 Cash and cash equivalents at beginning of year 805 729 2,913 3,439 18,758 16,002 18,842 16,002 13,358 20,164 Effect of foreign exchange rate changes - (26) 2 (54) (74) (7) 7 - - - CASH AND CASH EQUIVALENTS AT END OF YEAR 729 2,913 3,439 18,758 16,002 18,842 13,358 13,358 20,164 24,621

CFA Institute Research Challenge - HKUST Student Research 15 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 5: Key assumptions

Income Statement Assumptions 2007A 2008A 2009A 2010A 2011A 1H12A 2H12E 2012E 2013E 2014E Growth YoY Revenue 51.0% 53.2% 55.1% 43.9% 20.6% 5.9% 13.6% 15.7% 17.0% Machinery Concret e machinery 33.4% 52.9% 96.8% 50.6% 51.8% 23.8% 38.5% 20.0% 20.0% Crane machinery 48.3% 33.0% 33.5% 41.0% -14.2% -15.9% -15.0% 5.0% 8.0% Environmental and sanitation machinery 54.4% 41.2% 52.4% 58.9% -5.0% 12.4% 5.0% 20.0% 20.0% Road construction and pile foundation machinery 25.3% 29.0% 58.3% 39.4% -22.6% -64.0% -40.0% 5.0% 5.0% Earth working machinery NA 283.6% 73.5% 35.8% 96.7% -5.9% 60.0% 60.0% 50.0% Material handling machinery and systems NA 234.5% -51.7% 19.4% -27.7% 57.8% 10.0% 10.0% 10.0% Other machinery products 229.0% 148.0% 6.3% -1.9% 5.6% 24.6% 15.0% -5.0% -5.0% Other Segm ents Finance lease services 871.4% 191.9% 162.7% 51.8% 4.5% 5.4% 5.0% 5.0% 5.0%

Profitability Gross margin 28.6% 27.4% 25.7% 30.3% 32.4% 34.0% 28.2% 31.4% 30.6% 29.7% Machinery Concret e machinery 32.1% 27.6% 28.5% 32.0% 35.6% 36.2% 33.3% 35.0% 34.0% 33.0% Crane machinery 26.5% 26.3% 23.7% 27.8% 25.8% 27.4% 22.3% 25.0% 24.0% 23.0% Environmental and sanitation machinery 32.4% 31.1% 33.0% 31.6% 30.8% 27.7% 31.4% 30.0% 29.0% 28.0% Road construction and pile foundation machinery 17.0% 38.5% 33.0% 38.6% 38.3% 41.8% -5.1% 30.0% 29.0% 28.0% Earth working machinery NA 4.3% 16.2% 21.4% 20.4% 25.3% 0.1% 20.0% 20.0% 20.0% Material handling machinery and systems NA 24.5% 9.9% 7.6% 10.1% 9.8% 8.5% 9.0% 9.0% 9.0% Other machinery products 24.9% 11.7% 17.7% 13.0% 13.2% 10.1% 9.9% 10.0% 10.0% 10.0% Other Segm ents Finance lease services 85.7% 93.4% 58.4% 66.1% 86.9% 96.9% 39.7% 70.0% 65.0% 60.0% EBITDA margin 16.8% 16.6% 16.6% 19.2% 21.7% 24.5% 20.1% 22.5% 21.7% 20.9% Operating margin 15.7% 15.0% 15.0% 17.9% 20.7% 23.7% 18.9% 21.5% 20.7% 19.9% EBIT margin 17.1% 15.1% 15.0% 18.0% 20.8% 23.7% 18.8% 21.5% 20.7% 19.9% Net profit margin 16.0% 11.4% 11.8% 14.5% 17.4% 19.3% 15.3% 17.5% 16.8% 16.2%

Other revenue Other revenue and net income % of revenue 0.2% 1.0% 0.5% 0.2% 0.0% -0.3% 0.8% 0.2% 0.2% 0.3% Expenses Sales and marketing expenses % of Revenue 7.7% 7.1% 6.0% 6.7% 6.8% 5.1% 4.9% 5.0% 5.0% 5.0% General and administrative expenses % of Revenue 4.5% 5.4% 4.2% 5.1% 4.0% 4.1% 4.3% 4.2% 4.2% 4.2% Research and development expenses % of Revenue 0.9% 0.9% 0.9% 0.8% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Depreciation of property, plant and equipment % of Revenue 0.9% 1.3% 1.2% 1.0% 0.8% 0.7% 0.9% 0.8% 0.8% 0.8% Amortization of lease prepayments % of Revenue 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.2% 0.1% 0.1% 0.1% Amortization of intangible assets % of Revenue 0.0% 0.1% 0.3% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%

Effectiv e tax rate 2.3% 11.0% 14.5% 15.3% 14.9% 14.2% 15.0% 14.5% 14.5% 14.5% Dividend payout ratio 29.41% 27.03% 42.37% 57.33% 23.81% 25.00% 25.00% 25.00% Net finance cost % net debt Pledged bank deposits 8.05% 35.45% 2.12% 3.20% 0.23% 1.17% 3.00% 3.00% 3.00%

Share outstanding (million) 7,706 7,706 7,706 7,706 7,706

Balance sheet assumptions 2006A 2007A 2008A 2009A 2010A 2011A 1H12A 2012E 2013E 2014E Non-current assets Days sales outstanding for trade and other receivables 2.5 2.3 4.2 7.2 13.3 10.3 50.7 25 25 25 Days sales outstanding for receivables under finance lease - 6.9 56.6 160.1 221.8 144.9 217.2 180 165 165 Current asset s Days inventory held 85.6 97.6 275.5 267.1 276.9 157.2 255.7 250 250 250 Days sales outstanding for trade and other receivables 48.2 65.7 189.2 198.2 187.4 154.4 284.7 180 175 175 Days sales outstanding for receivables under finance lease - 3.4 32.2 103.9 145.1 80.4 122.0 100 100 95 Non-current liabilities Increment in loans and borrowings 1000 1000 1000 Current liabilit ies Days payable outstanding 77.32 187.46 294.66 251.63 571.55 432.73 684.01 600 600 600 Increment in loans and borrowings 1000 1000 1000

Cash flow statement assumptions 2007A 2008A 2009A 2010A 2011A 1H12A 2H12E 2012E 2013E 2014E Capital Expenditures Payments for the purchase of property, plant and equipment % of Revenue 4.3% 5.3% 4.0% 2.8% 2.6% 2.4% 2.6% 2.5% 2.5% 2.6% Lease prepayment % of Revenue 1.2% 1.3% 0.0% 0.7% 0.6% 0.2% 0.8% 0.5% 0.5% 0.5% Payment for purchase of intangible assets % of Revenue 0.1% 0.1% 0.3% 0.1% 0.2% 0.2% 0.0% 0.1% 0.1% 0.2%

CFA Institute Research Challenge - HKUST Student Research 16 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 6: Discounted cash flow analysis

Discounted Cash Flow Analysis (Fiscal year ending December 31)

Mid-Year Convention Y

Reported Period CAGR Projected Period CAGR RMB' million 2007 2008 2009 2010 2011 ('07-'11) 2012 2013 2014 ('12-'14)

Turnover 8,973 13,548 20,762 32,193 46,323 50.7% 52,606 60,873 71,244 16.4% % growth NA 51.0% 53.2% 55.1% 43.9% 13.6% 15.7% 17.0% COGS (6,405) (9,842) (15,422) (22,424) (31,316) (36,071) (42,230) (50,103) ------Gross Profit 2,568 3,706 5,340 9,769 15,007 55.5% 16,534 18,643 21,141 13.1% % m argin 28.6% 27.4% 25.7% 30.3% 32.4% 31.4% 30.6% 29.7% SG&A (1,058) (1,455) (1,888) (3,587) (4,949) (4,682) (5,418) (6,269) ------EBITDA 1,510 2,251 3,452 6,182 10,058 60.7% 11,852 13,225 14,871 12.0% % m argin 16.8% 16.6% 16.6% 19.2% 21.7% 22.5% 21.7% 20.9% Depreciation & amortization (97) (216) (329) (415) (456) (526) (609) (712) ------EBIT 1,413 2,035 3,123 5,767 9,602 61.5% 11,326 12,616 14,159 11.8% % margin 15.7% 15.0% 15.0% 17.9% 20.7% 21.5% 20.7% 19.9% Taxes (33) (223) (452) (882) (1,429) (1,642) (1,829) (2,053) ------EBIAT 1,380 1,812 2,671 4,885 8,173 56.0% 9,684 10,787 12,106 11.8%

Plus: Depreciation and amortization 97 216 329 415 456 526 609 712 Less: Capital expenditures (503) (905) (902) (1,173) (1,582) (1,631) (1,887) (2,351) Less: Increase in working capital (1,175) (3,176) (4,686) (5,533) (7,643) (10,575) (1,744) (4,687) ------Unlevered free cash flow (1,995) 7,765 5,780 WACC 9.9% Discount period 0 0.5 1.5 Discount factor 1.00 0.95 0.87 Present value of free cash flow (1,995) 7,407 5,018

Enterprise Value Implied Equity Value and Share Price WACC Calculation Cumulative enterprise value of free cash flow 10,430 Enterprise v alue 90,489 Capital Structure Less: Total debt (15,138) Debt-to-total capitalization 26.2% Implied Upside Terminal value Less: Preferred securities - Equity-to-total capitalization 73.8% Terminal year EBITDA (2014E) 14,871 Less: Non-controlling interest (310) Exit Multiple 6.5x Plus: Cash and cash equivalent 13,358 Cost of Debt Terminal value 96,665 Implied equity value 88,399 Cost of Debt 5.4% Existing debt Discount factor 0.83 Tax rate 15.0% Present value of terminal value 80,059 Fully diluted shares outstanding 7,706 After-tax cost of debt 4.6% % of enterprise value 88.5% Implied share price RMB 11.47 Cost of Equity Enterprise value 90,489 Risk free rate 3.3% Team estimates Exchange rate RMB/USD 1.24 Equity risk premium 4.5% Team estimates Terminal year free cash flow (2014E) 5,780 Implied share price HKD 14.22 Sovereign risk premium 2.0% Team estimates WACC 9.9% Levered beta 1.30 A & H average Terminal value 96,665 Current share price HKD 10.44 Cost of equity 11.8%

Implied perpetuity growth rate 3.4% Implied upside 36.3% WACC 9.9%

Implied EV/EBITDA Implied P/E Implied P/B Enterprise v alue 90,489 Implied share price 14.22 Implied share price 14.22 LTM June 30, 2012 EBITDA 11,450 TTM Earnings (2H11 - 1H12) 1.18 Book value (1H12) 5.10 Forward Earnings (FY12) 1.20

Implied TTM P/E 12.1x Implied EV/EBITDA 7.9x Implied Forward P/E 11.9x Implied P/B 2.8x

CFA Institute Research Challenge - HKUST Student Research 17 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 7: DCF sensitivity analysis

Implied share price WACC 7.9% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4% 11.9% 8.5x 18.85 18.68 18.52 18.35 18.19 18.03 17.87 17.71 17.56 8.0x 17.82 17.66 17.51 17.35 17.20 17.05 16.90 16.75 16.60 7.5x 16.80 16.65 16.50 16.35 16.21 16.06 15.92 15.78 15.65 7.0x 15.77 15.63 15.49 15.35 15.22 15.08 14.95 14.82 14.69 Exit Multiples 6.5x 14.74 14.61 14.48 14.35 14.22 14.10 13.98 13.86 13.74 6.0x 13.71 13.59 13.47 13.35 13.23 13.12 13.00 12.89 12.78 5.5x 12.68 12.57 12.46 12.35 12.24 12.14 12.03 11.93 11.82 5.0x 11.66 11.55 11.45 11.35 11.25 11.15 11.06 10.96 10.87 4.5x 10.63 10.53 10.44 10.35 10.26 10.17 10.08 10.00 9.91

Implied upside (downside) WACC 36.3% 7.9% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4% 11.9% 8.5x 80.6% 79.0% 77.4% 75.8% 74.2% 72.7% 71.2% 69.7% 68.2% 8.0x 70.7% 69.2% 67.7% 66.2% 64.7% 63.3% 61.8% 60.4% 59.0% 7.5x 60.9% 59.4% 58.0% 56.6% 55.2% 53.9% 52.5% 51.2% 49.9% 7.0x 51.0% 49.7% 48.4% 47.0% 45.7% 44.5% 43.2% 42.0% 40.7% Exit Multiples 6.5x 41.2% 39.9% 38.7% 37.5% 36.3% 35.1% 33.9% 32.7% 31.6% 6.0x 31.3% 30.2% 29.0% 27.9% 26.8% 25.7% 24.6% 23.5% 22.4% 5.5x 21.5% 20.4% 19.4% 18.3% 17.3% 16.2% 15.2% 14.2% 13.3% 5.0x 11.6% 10.7% 9.7% 8.7% 7.8% 6.8% 5.9% 5.0% 4.1% 4.5x 1.8% 0.9% 0.0% -0.9% -1.7% -2.6% -3.4% -4.2% -5.1%

CFA Institute Research Challenge - HKUST Student Research 18 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 8: History and development

The Company was listed on the Shenzhen Stock Exchange on October 12, 2000 (stock code: 000157), and on the Stock Exchange of Hong Kong on December 23, 2010 (stock code: 1157). It is so far the only Chinese construction machinery manufacturer with A+H listing status.

Exhibit A1: Zoomlion has quickly evolved into a globally renowned brand and player since its inception 2012: Issued US dollar Key corporate milestones denominated bond, raising US$400mm

1999: Zoomlion was incorporated in 2010: Listed on SEHK Changsha, Hunan (stock code: 1157), Province of the PRC raising HK$15.0 bn

2006: Implemented 2010: Completed 2000: Listed on SZSE share reform, whereby Non-public A-share (stock code: 000157), non-tradable shares Offering, raising raising RMB614mm become tradable RMB5.6bn Capital market Capital

2000 2002 2004 2006 2008 2010 2012

2003: Acquired 2008: Acquired CIFA Zhongbiao, entering and became the global the environmental leader in concrete and sanitation machinery machinery market 2008: Acquired Shaanxi 2012: Established a New Huanggong, joint-venture plant 2003: Acquired entering earth working manufacturing Hunan Puyuan, machinery market tower crane in India M&A activities M&A strengthening its truck crane business 2008: Acquired Huatai, entering material handling machinery business

Source: Annual reports

CFA Institute Research Challenge - HKUST Student Research 19 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 9: Shareholding structure

Exhibit A2: Zoomlion has an SOE background, and 99.98% of its outstanding shares are non-restricted Shareholding structure, as of Oct 31, 2012 State-owned Free float H (Hunan SASAC), shares, 18.56% 16.19%

Other domestic shares, 65.26%

Source: Annual report 2011, 3Q2012 earnings report

CFA Institute Research Challenge - HKUST Student Research 20 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 10: M&A track record

Exhibit A3: Actively integrates parts production, acquires Strong M&A execution capability is proven to spur leading technology and expands product portfolio History of corporate M&A activities Zoomlion’s splendid topline growth entering the new

Parts and technology millennium, which has been actualized by extending Nov-01 Acquired Powermole Engineering Britain Dec-02 Acquired Hunan Machine Tool Works Machine tool China product offerings, integrating upstream suppliers, and Mar-07 Acquired Zhongchen Steel product China solidifying technological leadership. Mar-07 Acquired Zhongwang Mechanical parts China Jun-08 Acquired Hunan Auto Axle Vehicle chassis China Dec-08 Acquired Xincheng Hydraulics Hydraulic component China Zoomlion acquired Zhongbiao’s environmental and Jun-11 Boughtout exclusive rights from JOST Flat top tower crane technology Germany Oct-12 JV factory with RIBA in Italy Carbon fiber boom Italy sanitation (E&S) machinery business, and Hunan Machinery products Puyuan’s truck crane business in 2003, which broadened Aug-03 Acquired Zhongbiao Environmental and sanitation machinery China Nov-03 Acquired Hunan Puyuan Truck crane China its offerings and delivered a stunning sales growth of Mar-08 Acquired Shaanxi New Huanggong Earth working machinery China Jul-08 Acquired Huatai Heavy Machinery Material handling machinery China 188.1% the year after. Till 2011, E&S machinery segment Sep-08 Acquired CIFA Concrete machinery Italy witnessed a CAGR of 65.3% and remained the only Aug-12 JV factory with ElectroMech in India Tower crane India Source: Annual reports, company website, News articles sizeable player in the market, while truck crane contributed 25.9% of its 1H10 turnover. With two acquisitions completed in 2008, Zoomlion added earth moving machinery and material handling machinery into Exhibit A4: Historically, product expansion through M&A its portfolio, which diversified the company’s revenue activities has spurred and bolstered strong revenue growth base and improved its resilience against bad times. Total revenue, concrete machinery revenue and respective growth, since 2000 50,000 1st wave (2002-04): Stunning 250% growth driven by crane and We have seen substantial technological advancements E/S machinery acquisitions 40,000 188% 200% arising from these synergistic acquisitions. Among others, the notable CIFA transaction brings along a series of 30,000 150% 124% cutting-edge technologies that have been quickly 85% 97% 20,000 79% 100% transferred and seamlessly integrated across Zoomlion’s 64% 59% 94% 76% 51% 51% 71% 10,000 33% 50% product lines. CIFA’s patented K-tronic system provides 53% 55% 52% 51% -3% 41% 44% 35% 33% the most sophisticated stability control and data logger 0 0% 2nd wave (2009 onwards): functions. With the application of CIFA’s secret sauce -26% Tremendous growth in concrete machinery after CIFA acquisition (10,000) -50% known as CARBOTECH, Zoomlion is able to replace the 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total revenue (RMBmm) Concrete revenue (RMBmm) Total revenue growth Concrete revenue growth steel arm with carbon fiber material on its concrete Source: Annual reports pump, which gives record-breaking length, 40% lighter in weight, 50% less amplitude of the arm, and 20-year usage life thanks to carbon fiber’s no-fatigue feature. Coupled with the growing popularity of long-arm Exhibit A5: Zoomlion gains considerable technological leadership concrete pump truck, we expect that Zoomlion will from M&A activities and in-house R&D horsepower R&D expense, number of new models and patent applications, since 2007 continue to deliver explosive growth, especially from its 1,600 concrete machinery segment. 1,600 Acquired the leading technology of flat top tower crane from JOST 1,400 Record-breaking 80-meter, 6-axle truck-mounted concrete pump 1,200 1,000 The first manufacturer of super 800 capacity track crane in China

600 ISO/TC96 Cranes: First ISO secretariat established in PRC 398 365 400 238 265 280 165 194 200 133 120 129 146 83 30 43 0 2007 2008 2009 2010 2011 R&D expense (RMBmm) No. of new models delivered

Source: Prospectus, Annual Reports, Macquarie Capital, Company website, News articles

CFA Institute Research Challenge - HKUST Student Research 21 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 11: Product portfolio

Segment Key products Description Dig trenches, holes or foundations, handle bulky materials, Excavator demolish buildings, dredge river or port and lift heavy materials Earth working Loader Shovel, load and deliver bulky materials machinery Bulldozer Push soil, sand, rubber, etc.

Truck-mounted concrete pump Deliver and pump concrete

Trailer-mounted concrete pump Deliver and pump concrete Mix concrete while transport them from mixing plant to Concrete Truck-mounted concrete mixer machinery construction site Mix hard concrete, semi-hard concrete, plastic concrete, and Concrete mixing plant other kinds of concrete in different ratios Conjunct different concrete pumps for deliver and pouring of Concrete placing boom concrete Lorry crane Crane is placed on the chassis of the lorry Reach varying heights through telescopic boom; larger lifting Truck crane capacity than lorry crane Crane All-terrain truck crane Travel across rough terrain and roadways machinery Transport materials on rough terrain; larger lifting capacity than Crawler crane truck crane Used in space-constrained urban areas, or long-term/high rise Tower crane building sites Motor grader Create a flat surface for road construction Roll and compact asphalt concrete, sand mixture and dry hard Road Road roller concrete construction machinery Paver Lay asphalt on roads Remove worn pavement to a certain slope for open to traffic or Road surface cold planner overlay with new asphalt

Excavator Loader Bulldozer

Truck-mounted Trailer-mounted Truck-mounted Concrete mixing Concrete concrete pump concrete pump concrete mixer plant placing boom

Lorry crane Truck crane All-terrain crane Crawler crane Tower crane

Motor grader Road roller Paver Road surface cold planner

CFA Institute Research Challenge - HKUST Student Research 22 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 12: Supply chain (upstream)

Exhibit A6: Raw materials and key components are the Steel products and machinery components are the two cost centers of construction machinery Indicative cost structure of construction machinery industry two most important cost factors in the upstream of the manufacturing process (Exhibit A7). Engine and hydraulic parts, . In recent years, steel remains over supplied, 35% exerting a pressure on the price (Exhibit A8). There is an evident over-capacity in the production of steel products, resulting in a small possibility of a Transmission parts, price surge going forward. Nevertheless, specially- 20% Steel products, featured steel products required in construction 30% machinery are largely imported at a premium Labor, 9% price. Thus, steel continues to account for one- Fuel and energy, Others, 4% 2% third of the product cost. . The other big chunk of the cost is attributed to key Source: CCMA, Masterlink Securities parts such as hydraulic pumps. So far, the supply of these components are primarily dominated by a few companies from Germany, United States Exhibit A7: Steel price is an important factor affecting the and Japan (Exhibit 9). Set forth as a key strategic profitability of construction machinery industry direction during the 12th Five-Year Plan period and MEPS carbon steel products - world price over the long run, the development of parts and

US$/tonne components is likely to achieve breakthroughs 1,200 that will have practical impact on Chinese

1,000 construction machinery manufacturers’ P&L. Meanwhile, vertical integration by Zoomlion and 800 other leading players continues to be worth a 600 close look. 400

200

0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Source: Bloomberg, MEPS Steel

Exhibit A8: Supply of key components is largely dominated by foreign players due to technological barriers Construction machinery industry key components supplier overview Key parts and components Major suppliers Country Axle Dana United States FAG Germany Chassis Mercedes-Benz Germany General Motors United States Diesel engine Cummins United States Deutz Engine Germany ISUZU Japan Hydraulic pump Kawasaki Japan Rexroth Germany Sauer United States Transmission ZF Germany Allison United States Electrical control systems Omron Japan Schneider France

Source: HKUST team analysis, Macquarie Capital

CFA Institute Research Challenge - HKUST Student Research 23 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 13: Supply chain (manufacturing process)

Procurement of raw materials, parts and components

Welding Heat treatment External processing by 3rd parties Abrasive blasting Machining

Internal in-house processing Inspection

Assembly into semi-finished products

Assembly and integration of the semi-finished products into final product

Coating

Commissioning

Warehousing or distribution to customers Source: Prospectus

CFA Institute Research Challenge - HKUST Student Research 24 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 14: Macro correlation study

Exhibit A9 : Zoomlion’s products are closely related to Exhibit A10: Sales of concrete machinery is highly infrastructure and real estate sectors correlated with FAI Downstream exposure by product Correlation table of concrete machinery sales

Product Exposure Leading N months Total FAI FAI real estates FAI construction FAI transportation

Infrastructure Real estate Mining Municipal N = 4 0.65 0.65 0.48 0.61

Concrete machinery xx xx N = 3 0.79 0.80 0.70 0.71 Truck crane xx xx x N = 2 0.79 0.80 0.69 0.71 Crawler crane xx N = 1 0.81 0.82 0.73 0.73 Tower crane xx N = 0 0.82 0.82 0.74 0.73 Earth working machinery xx xx xx x N = -1 0.76 0.77 0.67 0.64 Road construction machinery xx

Environmental and sanitation machinery xx N = -2 0.67 0.70 0.57 0.54

Source: HKUST analysis, Goldman Sachs Source: CEIC, CCMA, HKUST team estimates

Construction machinery is a traditional manufacturing business Chinese construction machinery industry grows rapidly into world’s that occupies an important part in the economy largest market, benefiting from fixed asset Investments Industry landscape FAI and total sales revenue of construction machinery industry in China

Upstream Downstream RMBbn 2006-11 FAI CAGR: 23.1% Machinery 35,000 Raw Parts and manufacturer 2006-11 revenue CAGR: 29.0% 31,102 Distributor1 End customer material components 30,000 27,812 25,000 22,460 . Steel . Axle . Excavators . Real estate . Chassis . Concrete machinery . Infrastructure 20,000 17,283 . Transmission . Crane machinery . Mining 15,000 13,732 . Diesel engine . Industrial trucks . Municipal 11,000 . Hydraulic parts . Road construction 10,000 . Etc. machinery 5,000 . Etc. 162 222 277 316 437 579 0 2006 2007 2008 2009 2010 2011 Urbanization Fixed asset investments (FAI) Mechanization Total sales revenue Total FAI

Note: 1 Except for direct sales method Source: HKUST team analysis Source: China Construction Machinery Association (“CCMA”), National Bureau of Statistics, CEIC database

CFA Institute Research Challenge - HKUST Student Research 25 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 15: Supply chain (downstream)

Exhibit A11: Property construction activities stimulate Exhibit A12: There is significant increase in railway the demand for construction machinery FAI in recent years GFA newly started, GFA under development and real estate FAI in railway, and as % of total FAI, since 2006 investment yoy growth, since 2006 RMBbn GFA newly started monthly yoy growth 800 4% 250% GFA under development monthly yoy growth 700 3% 200% Real estate investment monthly yoy growth 600 3% 500 150% 2% 400 100% 2% 300 50% 200 1% 100 1% 0% 0 0% -50% 2006 2007 2008 2009 2010 2011 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Railway FAI % Railway of total

Source: National Bureau of Statistics, CEIC database Source: National Bureau of Statistics, CEIC database

Exhibit A13: There is significant increase in Exhibit A14: China has much higher output per mixing highway FAI in recent years plant, 5~8 times of the developed regions FAI in highway, and as % of total FAI, since 2006 Number of mixing plants and average annual output, 2010 figures

RMBbn Units No. of mixing plants Output per plant ‘000 cubic meters 1,600 6% 10,000 200 1,400 180 5% 7,809 1,200 8,000 160 4% 1,000 6,300 6,000 120 800 3% 600 4,000 2% 4,000 3,662 80 400 1% 200 2,000 39 40 23 23 0 0% 2006 2007 2008 2009 2010 2011 0 0 Europe USA Japan China Highway FAI % Highway of total

Source: National Bureau of Statistics, CEIC database Source: CNRMC

Railway and highway projects

CFA Institute Research Challenge - HKUST Student Research 26 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 16: Export

Exhibit A15: Export value has achieved a new record, reflecting the strong growth of Chinese construction machinery industry Import/export of construction machinery, since 2006

US$bn 2006-11 export CAGR: 26.0% 15.9 16 13.4

12 10.3 9.0 8.7 8.4 9.0 7.7 8 6.0 5.0 4.9 5.1 3.9 4 3.3

0 2006 2007 2008 2009 2010 2011 1H2012 Import Export

Source: China Customs

CFA Institute Research Challenge - HKUST Student Research 27 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 17: Tower crane

Exhibit A16: Tower crane has demonstrated a promising growth opportunity Tower crane industry sales volume and growth, since 2003

Units 50,000 59.7% 60% 41,785 53.8% 53.0% 40,000 36,335 40% 31,020 29,300 24.0% 30,000 27,918 20%

6.7% 19,422 5.0% 15.0% 20,000 0% 12,693 10,486 -10.0% 10,000 -21.3% -20% 8,255 0 -40% 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sales volume YoY growth

Source: Annual reports

CFA Institute Research Challenge - HKUST Student Research 28 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 18: Competitors Sany Heavy Industry (600031 CH) Sany is principally engaged in the development, manufacturing and sale of construction machinery, including concrete machinery, excavators, crawler cranes, truck cranes, pile foundation machinery and road construction machinery. As of June 30, 2011, it produced more than 500 models of construction machinery across the six main product lines, including over 260 models of concrete machinery, 30 excavators, 20 crawler cranes, 80 truck cranes, 40 pile foundation machinery, and 70 road machinery.

During 2008-2011, Sany’s revenue and gross profit grew at a CAGR of 52.76% and 57.08%, respectively. Over the same period, its net income grew by a CAGR of 87.17%. Concrete machinery contributed 53.1% to total sales in 2011, followed by 21.3% from excavators, and 11.7% from crane machinery. Overseas sales accounted for 7.0% of the total sales in 2011.

Sany is listed on the Shanghai Stock Exchange. Its subsidiary Sany Heavy Equipment International is listed on the SEHK (stock code: 0631 HK), which manufactures coal mining equipment.

XCMG Construction Machinery (000425 CH) XCMG is a China-based manufacturer of civil engineering machines. The company is principally engaged in development, manufacture and distribution of mainframes, hydraulic pressure parts and other basic spare parts of hoisting machinery, road machinery, compaction machinery, bulldozers, transportation machinery, heavy-loaded trucks, elevated fire extinguishing devices, special vehicles and chassis for civil engineering machinery, among others. The company distributes its products in domestic and overseas markets.

During 2008-2011, XCMG’s revenue and gross profit grew at a CAGR of 26.56% and 30.65%, respectively. Over the same period, its net income grew by a CAGR of 30.57%. Crane machinery contributed 47.7% to total sales in 2011, followed by 17.2% from earth working machinery, and 6% from concrete machinery. Overseas sales accounted for 8.4% of the total sales in 2011.

XCMG is listed on the Shenzhen Stock Exchange.

Exhibit A17: Zoomlion’s share price has Exhibit A18: Chinese construction machinery companies outperformed its close peers become increasingly influential on the global stage Last twelve month share price chart World’s largest construction equipment manufacturers ranked by annual sales revenue, 2007-2011 HK$ 12 HSI 11 Zoomlion 10 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 9 Shanghai composite 2010 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 8

XCMG 2009 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 7 (rebased)

6 Sany 2008 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 5 Nov-11 Jan-12 May-12 Aug-12 Nov-12 2007 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Source: Annual reports Source: International Construction Yellow Table 2008-2012

Exhibit A19: Earth working machinery, concrete machinery, crane machinery are the three largest sub-categories of construction machinery Major sub-categories, approximate size, respective products and leading players

2010 >RMB150bn Earth working machinery Sales Excavator Bulldozer Loader Motor grader

2010 >RMB90bn Concrete machinery Sales Truck-mounted Trailer-mounted Truck-mounted Concrete concrete pump concrete pump concrete mixer mixing plant

2010 >RMB40bn Crane machinery Sales Truck crane Crawler crane Tower crane Truck-mounted crane

Source: HKUST team analysis

CFA Institute Research Challenge - HKUST Student Research 29 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 19: Gross margin analysis

Exhibit A20: Concrete machinery offers a very high gross margin to Zoomlion Gross margin of major product segments of Zoomlion

50% 2008 2009 2010 2011 1H2012

40%

30%

20%

10%

0% Concrete Crane Earth working Environmental Road Material and sanitation construction handling and pile foundation

Source: Annual reports

CFA Institute Research Challenge - HKUST Student Research 30 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Appendix 20: Payment options

Exhibit A21: Zoomlion has adopted different payment options to stimulate sales and diversify credit risks Payment options commonly used by machinery companies

Option Downpayment as % of total price Term and interest Riskiness Cash 100% from customers Not applicable No risk

2~3 years offered by Mortgage 100% from banks Low banks, with interest

3rd-party joint 2~4 years offered by 3-rd Negotiable Moderately low guarantee party, with interest

2~4 years offered by Finance lease Negotiable, usually 20% ~ 30% Moderate company , with interest

Installment Negotiable 2~4 years, no interest High

Source: Annual reports, HKUST team analysis

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Appendix 21: Market share comparison

2009 truck-mounted concrete pump market Market Top players 2009 Sales volume Ownership type share Sany Heavy 2,450 50.1% Domestic Zoomlion 1,845 37.7% Domestic Putzmeister (Shanghai) 320 6.5% Foreign Liugong Shanghai Hold 109 2.2% Domestic Others 169 3.5% Total 4,893 100.0%

Source: CCMA

2009 trailer-mounted concrete pump market Market Top players 2009 Sales volume Ownership type share Sany Heavy 2,800 53.3% Domestic Zoomlion 1,345 25.6% Domestic Liugong Shanghai Hold 341 6.5% Domestic Fangyuan 260 5.0% Domestic Others 508 9.7% Total 5,252 100.0%

Source: CCMA

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Appendix 21: Market share comparison (con’t)

2009 other concrete machinery market Top players 2009 Sales volume Market share Ownership type Concrete mixing plant Fangyuan Group 942 20.7% Domestic Sany Heavy 680 14.9% Domestic Gaoyongli Constructin Machinery 630 13.8% Domestic Zoomlion 395 8.7% Domestic Fujian South Highway Machinery 345 7.6% Domestic Others 1,569 34.4% Total 4,561 100.0% Truck-mounted concrete mixer CAMC 5,034 22.7% Domestic CIMC 4,200 19.0% Domestic Sany Heavy 3,670 16.6% Domestic Zoomlion 3,170 14.3% Domestic Foton 2,062 9.3% Domestic Shanghai Huajian 1,806 8.2% Domestic Liebherr (Xuzhou) 882 4.0% Foreign Others 1,328 6.0% Total 22,152 100.0%

Source: CCMA

Excavator market overview 2010 Player 2010 sales volume (units) market Ownership type share Komatsu 24,020 14.1% Foreign Doosan 22,112 12.9% Foreign Hitachi CM 17,581 10.3% Foreign Kobelco 14,777 8.6% Foreign Sany 14,154 8.3% Domestic Top-5 players 92,644 54.2% Others 78,287 45.8% Total 170,931 100.0%

Source: 6300.net

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Appendix 22: Glossary Concrete machinery industry jargon explanation 1. Ready-mix concrete’s benefit to the industry Ready-mix concrete can save cement by 10-15%, gravel by 12%, project cost by 5%. From environmental and energy-saving perspective, ready-mix concrete will be further promoted by plans. According to Ccement, ready-mix concrete only accounted for 38% of total concrete output in 2009 in China, far lagging that of Germany, USA, Japan which have ratios over 60-80%.

In terms of the current consumption of ready-mix concrete, a small-sized, medium-sized, large-sized and metropolitan city requires approx. 1 million, 1 million to 3 million, 3 million to 5 million and over 5 million cubic meters respectively. A key procedure of utilizing ready-mix concrete is to transport them from mixing plants to construction sites through truck-mounted concrete mixers and other transportation tools. Every city needs truck-mounted concrete mixers from tens to hundreds by approximation.

2. Mixing plants’ substantial growth in China According to CNRMC, the phenomenon of more mixing plants with lower output per station will benefit the development of concrete industry and will become the trend for the industry to grow. Reasons include but not limited to the more reasonable layout for supply and service as well as lower degrees of pollution. Since ready-mix concrete can not be delivered to farther places, the supply range of each mixing plant is limited and caters to local demand only. A supply distance of 15 km is optimal. Although retarder can be added to prolong the period, the transportation cost will rise a lot. Therefore, an optimal layout of more mixing plants with fewer output per plant is on the way for China to develop, given its high output of 180 thousand cubic meters per plant, 5-8 times that of developed countries. We believe that Chinese concrete mixing plants will increase at a double-digit rate in the following years. CNRMC estimates that the amount will double before 2015.

3. Long-arm truck-mounted concrete pump’s efficiency over short-arm According to company management, the length of mainstream products of truck-mounted concrete pumps varies from 52m to 56m. A longer-arm truck mounted concrete pump involves fewer moves when the construction is taking place and thus decreases the time to complete the project. A basic move takes 1 to 2 hours normally.

4. Estimated replacement of machinery due to measures on lay-off of Yellow-tag Vehicles Yellow-tag vehicles represent vehicles with high degree of pollution. Since they are tagged with yellow labels, people call them yellow-tag vehicles. Yellow-tag vehicles account for a large proportion in concrete mixers, with a ratio of 86% and a gross of amount of 3000-plus in Beijing. According to our calculation If we and suppose all Yellow-tag Vehicles to be replaced in 5 years, the increasing demand can account for over 60% of the current sales.

5. Dry-mixed mortar According to the company management, dry-mixed mortar can only be mixed by machines but cannot be mixed manually. It can be widely used in linking high-speed ways and housing industry. The main advantages of dry-mixed mortar include but nor limited to, that it can prolong the life of materials from 10 years to 30 years and saving material as well as maintenance costs. However, the ASP of dry-mixed mortar is extremely high (20-30 million RMB). The market only accounts for 1/3 of concrete market but the products enjoy high gross margin of over 40%.

6. Flat top tower crane Flat top tower crane refers to tower crane without a tower top. The overall height has been reduced, while the hook height has been maintained. This makes the crane suitable for congested sites as it can easily overfly other cranes on site. Some of the cranes sold to the local market will be used on sites where space is a problem. It is also easier to install and remove a flat top tower crane than tower crane with the tower top.

CFA Institute Research Challenge - HKUST Student Research 34 October 31, 2012 Zoomlion Heavy Industry (1157.HK)

Disclosure Ownership and material conflicts of interest: . The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. . The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: . Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: . The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: . The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: . The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with The Hong Kong University of Science and Technology, The Hong Kong Society of Financial Analysts, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge - HKUST Student Research 35

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with The Hong Kong University of Science and Technology, The Hong Kong Society of Financial Analysts, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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