30 Jun 2020

CMB International Securities | Equity Research | Sector Update

China Construction Machinery & HDT Sector

Raise industry sales forecast in 2020E-21E; Solid upcycle OUTPERFORM (Maintain)

We believe the timely issuance of local government bonds since early this year Capital Goods will continue to lend strong support to the infrastructure growth and machinery demand going forward. In addition, strict measures on emission control and Wayne Fung, CFA market share gain remain the key positive factors for the industry leaders. We (852) 3900 0826 revise up our HDT and excavator sales projection in 2020E-21E. Our key BUY [email protected] calls are (3808 HK, TP: HK$26, Top pick), Jiangsu Hengli (601100

CH, TP: RMB93), Heavy (600031 CH, TP: RMB24.7) and

(2338 HK, TP: HK$18.6; 000338 CH, TP: RMB16.6). Besides, we continue to like the long-term structural growth story of Zhejiang Dingli (603338 CH, TP: RMB81).

 Local government bond issuance on track. The amount of local government bond issued surged 3.3x YoY to RMB1.3tn in May. In 5M20, a total amount of RMB3.2tn were raised, up 65% YoY. Excluding bonds for refinancing, the amount of new bond issuance reached RMB2.7tn in 5M20, representing ~95% of the quota assigned by the Ministry of Finance. The investment mainly covers the infrastructure projects. In May, infrastructure FAI Related Reports grew 10.9% YoY, accelerated from 4.8% in Apr. We expect the momentum to 1. Zhejiang Dingli – A (603338 CH, BUY) – Riding on the strong continue. momentum; Raised earnings est.  Higher HDT sales forecast. We expect the demand for HDT will be well & TP – 8 Jun 2020 2. China Construction Machinery supported by the infrastructure spending, stringent measures on anti- Sector – Excavator sales in Apr overloading, and the ongoing elimination of NES III . We revise up our +60% YoY; Growth to continue to 2020E/21E HDT sales forecast by 16%/8% to 1.36mn/1.27mn units. We May/Jun – 12 May 2020 3. China Construction Machinery & expect a 15% YoY sales growth in Jun-Dec 2020, after a 17% YoY growth in HDT Sector – HDT sales +43% 5M20, which will take the full year growth to 16% YoY. We forecast the HDT YoY in Apr; Expect robust growth sales to drop 7% YoY in 2021E and stabilize in 2022E. We believe our for other machinery – 11 May 2020 4. SANY Heavy Industry – A (600031 assumption is not aggressive given that the GDP value per operating HDT will CH, BUY) – 2019 net profit +83% remain stable at RMB12mn. Such figure will be similar to the average over the YoY in line; Expect a strong 2Q20 past few years, and higher than the figure of RMB10mn in 2010 when the – 24 Apr 2020 5. China Construction Machinery sector started seeing overcapacity. Sector – Lift forecast on excavator on strong demand; BUY SANY &  Higher excavator sales forecast. Excavator is highly exposed to Hengli – 13 Apr 2020 infrastructure spending. We revise up our excavator sales forecast in 6. Sinotruk (Hong Kong) (3808 HK, 2020E/2021E by 4%. We expect sale volume growth in Jun-Dec 2020E to BUY) – Returning to growth territory in 2020E – 2 Apr 2020 reach 15%, taking the full year growth to 17%. We expect a 5% growth in 7. (1157 HK, BUY) – 2021E, driven by continuous elimination of low NES models, replacement of Dividend cut a surprise; Positive labour and substitution of wheel loaders. We estimate every 1% increase in on the recovery story – 31 Mar 2020 infrastructure FAI will drive 2.5% of annual excavator sales. 8. Weichai Power (2338 HK, BUY) – Correction offers buying  Major catalysts: Based on our check, we believe the industry sales figure of opportunity; Diversification HDT and excavator in Jun (to be released in the first and second week of Jul, strategy on track – 30 Mar 2020 respectively) will remain strong given the strong infrastructure spending and 9. China Construction Machinery Sector – Four structural drivers to low base effect. Following that, we expect earnings surprise in 2Q20E, driven extend the upcycle to 2020-21E – by strong operating leverage. 27 Nov 2019

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PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 MORE REPORTS FROM BLOOMBERG: CMBR AND http://www.cmbi.com.hk 30 Jun 2020

Company snapshot

Sinotruk (3808 HK, BUY, TP: HK$26.0) - Recovery underestimated by market; our top pick

We incorporate our new HDT industry sales forecast into our model and revise up Sinotruk’s earnings forecast in 2020E-22E by 10-12%, making us 27-29% above consensus. We believe Sinotruk’s sales recovery and strong operating leverage are substantially underestimated by the market. Our TP is lifted from HK$20.5 to HK$26, based on 6x 2020E EV/EBITDA (up from 5x to reflect the resumption of growth, and in line with our target multiple for Weichai). Sinotruk is now our sector top pick.

Weichai Power (2338 HK, BUY, TP: HK$18.6; 000338 CH, BUY, TP: RMB16.6) - Higher HDT and engine assumptions; further market share gain

We maintain our positive view on Weichai: (1) The increased number of Shandong provincial SOEs under the control of SHIG, parent company of Weichai, will help boost Weichai’s upcoming sales of engines and powertrain; (2) Strong infrastructure spending growth should boost the demand for construction trucks and machinery in 2H20E; (3) Industry consolidation will continue on the back of the implementation of strict emission standard. We incorporate our new HDT & construction machinery forecast into our model and revise up Weichai’s earnings forecast in 2020E/22E by 3-7%, making us 5-7% above consensus. Our H-share SOTP-based TP is lifted from HK$16.0 to HK$18.6, while our A- share SOTP-based TP is lifted from RMB14.3 to RMB16.6.

Jiangsu Hengli Hydraulic (601100 CH, BUY, TP: RMB93) – Order intake remains strong

We incorporate our new industry sales forecast of excavator into our model and revise up Hengli’s earnings forecast in 2020E-22E by 9-11%, making us 10-13% above consensus. Hengli is highly exposed to the infrastructure spending growth. Besides, Hengli’s growth will be driven by motor, pump & valve, where import substitution potential remains huge. We believe all these will continue to support Hengli’s premium valuation. We raise our TP to RMB93 from RMB85, based on unchanged 45x 2020E P/E multiple.

SANY Heavy Industry – A (600031 CH, BUY, TP: RMB24.7) – Growth at a reasonable price

We incorporate our new industry sales forecast for excavator into our model and revise up SANY’s earnings forecast in 2020E-22E by 5-7%, making us 5-8% above consensus. We expect SANY to deliver continuous market share gain. Besides, we expect solid replacement demand on concrete machinery in 2020E-21E. We raise our TP from RMB23.5 to RMB24.7, based on 14.3x 2020E P/E (multiple unchanged). Trading at <11x 2020E P/E in the A-share market, we believe SANY remains a good value play under our universe.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 30 Jun 2020

Figure 1: Peers comp table Ticker Company Rating Price TP Upside/ Market cap PE (x) PB (x) EV/EBITDA (x) Yield (%) (local (local (downside) (US$ mn) FY20E FY21E FY20E FY21E FY20E FY21E FY20E currency) currency) HK listed 631 HK Equity SANY INTERNATIONAL BUY 3.52 5.92 68% 1,402 8.9 6.7 1.3 1.1 5.3 4.0 4.5 3339 HK Equity HOLD 2.27 2.30 1% 1,244 6.9 7.0 0.9 0.9 3.5 3.6 9.4 1157 HK Equity ZOOMLION HEAVY-H BUY 5.80 6.90 19% 6,678 8.2 7.4 0.9 0.8 6.7 6.1 3.0 2338 HK Equity WEICHAI POWER-H BUY 14.34 18.60 30% 14,918 10.2 9.0 1.9 1.7 4.9 4.3 3.9 3808 HK Equity SINOTRUK HK LTD BUY 19.92 26.00 31% 7,043 9.0 8.7 1.6 1.4 4.4 4.2 3.9 1839 HK Equity CIMC -H BUY 5.45 6.60 21% 1,232 6.6 6.2 0.8 0.8 4.1 3.9 4.5 564 HK Equity ZHENGZHOU COAL-H NR 3.43 - - 1,320 4.7 4.3 0.5 0.4 3.7 3.5 3.2 HK listed average 7.8 7.0 1.1 1.0 4.6 4.2 4.6 A share 000338 CH Equity WEICHAI POWER-A BUY 13.51 16.60 23% 15,441 10.9 9.7 2.1 1.8 5.2 4.6 3.7 601100 CH Equity JIANGSU HENGLI-A BUY 75.19 93.00 24% 9,626 36.5 29.4 9.7 7.9 30.5 25.3 1.1 603338 CH Equity ZHEJIANG DINGLI -A BUY 75.00 81.00 8% 5,285 38.8 27.4 9.0 7.0 34.3 23.8 0.5 600031 CH Equity SANY HEAVY-A BUY 18.64 24.70 33% 22,823 10.8 9.7 2.8 2.3 8.4 7.8 2.9 000157 CH Equity ZOOMLION HEAVY-A BUY 6.21 6.85 10% 6,913 10.0 9.0 1.1 1.0 8.1 7.5 2.5 000425 CH Equity XCMG-A NR 5.86 - - 6,663 9.9 8.3 1.3 1.1 9.3 8.3 1.9 000528 CH Equity GUANGXI LIUGONG-A NR 6.26 - - 1,341 7.4 6.2 0.8 0.7 7.9 7.1 3.5 603638 CH Equity YANTAI EDDIE P NR 49.13 - - 4,270 57.1 43.1 12.6 10.1 43.9 34.2 0.3 600761 CH Equity ANHUI HELI CO-A NR 9.56 - - 1,027 9.9 8.9 1.3 1.2 5.0 4.5 3.8 603298 CH Equity HANGCHA GROUP-A NR 10.82 - - 1,361 10.3 8.9 1.7 1.5 7.9 6.8 4.4 000951 CH Equity CNHTC JINAN T-A NR 29.15 - - 2,839 13.7 12.7 2.4 2.4 9.4 8.8 2.1 601717 CH Equity ZHENGZHOU COAL-A NR 5.81 - - 1,366 9.0 8.2 0.9 0.7 7.0 6.8 1.7 600582 CH Equity TIAN DI -A NR 2.91 - - 1,748 10.0 8.7 n/a n/a 4.5 4.0 2.4 A-share average 14.8 12.4 2.8 2.3 11.2 9.6 2.6 Overseas CAT US Equity CATERPILLAR INC NR 122.4 - - 66,242 24.5 17.3 4.8 5.1 10.8 9.3 3.5 DE US Equity DEERE & CO NR 149.0 - - 46,628 24.5 17.4 3.8 3.5 18.8 14.1 2.0 6305 JP Equity HITACHI CONST NR 2,939.0 - - 5,884 24.2 15.4 1.3 1.2 11.0 9.3 1.7 6301 JP Equity KOMATSU LTD NR 2,153.0 - - 19,488 18.1 13.9 1.1 1.1 9.4 8.1 3.3 042670 KS Equity DOOSAN INFRACORE NR 6,790.0 - - 1,220 6.9 5.9 0.6 0.5 6.7 6.1 0.0 VOLVB SS Equity VOLVO AB-B NR 146.7 33,552 26.4 14.2 2.0 1.9 12.8 9.5 4.6 Average 20.8 14.0 2.2 2.2 11.6 9.4 2.5 Hydraulic components PH US Equity PARKER HANNIFIN NR 172.5 - - 22,123 18.1 18.5 3.5 3.2 13.1 12.8 2.1 ETN US Equity EATON CORP PLC NR 85.5 - - 34,200 23.6 18.1 2.4 2.4 15.6 13.4 3.4 7012 JP Equity KAWASAKI HVY IND NR 1,487.0 - - 2,312 26.9 10.9 0.5 0.5 6.9 5.8 3.1 7242 JP Equity KYB CORP NR 1,985.0 - - 476 n/a n/a 0.8 0.8 n/a n/a 0.0 6474 JP Equity NACHI-FUJIKOSHI NR 3,370.0 - - 782 19.0 12.8 0.7 0.7 7.2 6.0 3.0 6268 JP Equity NABTESCO CORP NR 3,220.0 - - 3,750 20.0 16.9 2.0 1.9 10.1 8.8 2.5 Average 21.5 15.4 1.7 1.6 10.6 9.4 2.3 Source: Bloomberg, Company data, CMBIS estimates

Figure 2: Change in industry sales assumptions Old New Change 2020E 2021E 2020E 2021E 2020E 2021E Sales volume (unit) Earth moving machinery Excavator 270,554 284,081 282,632 296,763 4% 4% Wheel loader 123,563 117,385 123,563 117,385 0% 0% Crane crane 48,256 53,081 48,812 53,694 1% 1% Tower crane 27,464 32,957 27,464 32,957 0% 0% Concrete machinery Concrete mixer truck 63,967 69,084 63,967 69,084 0% 0% Concrete pump truck 7,461 8,954 7,461 8,954 0% 0% Heavy-duty truck (HDT) (000 units) 1,175 1,177 1,360 1,271 16% 8% Old New Change (ppt) 2020E 2021E 2020E 2021E 2020E 2021E Sales volume growth (YoY) Earth moving machinery Excavator 12% 5% 17% 5% 5.0 0.0 Wheel loader 0% -5% 0% -5% 0.0 0.0 Crane Truck crane 15% 10% 15% 10% 0.0 0.0 Tower crane 30% 20% 30% 20% 0.0 0.0 Concrete machinery Concrete mixer truck 15% 8% 15% 8% 0.0 0.0 Concrete pump truck 30% 20% 30% 20% 0.0 0.0 Heavy-duty truck (HDT) 1% 0% 16% -7% 14.5 (6.8) Source: CCMA, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 30 Jun 2020

Figure 3: Local gov’t special bond issue amount Figure 4: Local gov’t special bond issue amount (monthly) (YTD)

RMB bn RMB bn 1,200 3,000

1,000 2,500

800 2,000

600 1,500

400 1,000

200 500 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 1M 2M 3M 4M 5M 6M 7M 8M 9M 10M 11M 12M 2018 2019 2020 2018 2019 2020

Source: Ministry of Finance, CMBIS Source: Ministry of Finance, CMBIS

Figure 5: Local gov’t bond average duration (YTD) Figure 6: Investment targets of the new local gov’t bond

100% Natural disaster prevention & Year other fields 20 90% 18 Poverty alleviation, agriculture, forestry & water conservancy 16 80% 14 Infrastructure of food reserves, 70% logistics & energy 12 60% 10 Education, science, culture, health & social security 8 50% 6 Ecological construction & 40% environmental protection 4 2 30% Construction of indemnificatory housing & renovation of shanty 0 20% areas Municipal construction & 10% industrial park infrastructure

0% Transportation infrastructure General Special Average Jan-20 Feb-20 Mar-20 Apr-20 May-20

Source: Ministry of Finance, CMBIS Source: Ministry of Finance, CMBIS estimates

Figure 7: Breakdown of infrastructure FAI Figure 8: China infrastructure FAI (monthly)

100% RMB bn 2,500 11.3% 10.9% 15% 7.7% 80% 6.0%6.4% 5.9% 10% 4.9%4.9% 5.2% 4.8% 3.5% 3.3%3.0% 3.9% 2,000 2.5% 1.7% 2.7% 2.0% 2.0% 5% 60% -1.1%-0.9% -2.1% 0% 1,500 -5.4%-5.8% -8.0% -5% 40% -10% 1,000 20% -15%

500 -20% -26.9% 0% -25% 0 -30%

FAI - water preservation, environmental protection and public facilities (RMB bn)

FAI - Power, heat, gas and water supply (RMB bn)

FAI -Transportation and warehouse (RMB bn) Infrastructure FAI (RMB bn) Growth (YoY) RHS

Source: Wind, NBS, CMBIS Source: Wind, NBS, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4 30 Jun 2020

Figure 9: China monthly excavator sales Figure 10: CMBIS excavator sales projection

(Units) (Units) 60,000 350,000 120% 300,000 100% 50,000 80% 250,000 60% 40,000 200,000 40% 30,000 150,000 20% 0% 20,000 100,000 -20% 50,000 10,000 -40% 0 -60% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2020 2019 2018 2017 2016 Replacement New demand Growth (YoY) - RHS

Source: CCMA, CMBIS Source: CCMA, CMBIS estimates

Figure 11: Excavator utilisation hours (China) Figure 12: Excavator utilisation hours (Shandong)

180 200 160 180 140 160 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2019 2020 2019 2020

Source: CCMA, CMBIS Source: CCMA, CMBIS

Figure 13: Excavator utilisation hours (Guangdong) Figure 14: Excavator utilisation hours (Guangxi)

160 180

140 160

120 140 120 100 100 80 80 60 60 40 40 20 20 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2019 2020 2019 2020

Source: CCMA, CMBIS Source: CCMA, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5 30 Jun 2020

Figure 15: Excavator utilisation hours (Henan) Figure 16: Excavator utilisation hours (Hubei)

180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2019 2020 2019 2020

Source: CCMA, CMBIS Source: CCMA, CMBIS

Figure 17: China monthly wheel loader sales Figure 18: CMBIS wheel loader projection

(Units) (Units) 20,000 300,000 60% 18,000 250,000 40% 16,000 14,000 200,000 20% 12,000 150,000 0% 10,000 8,000 100,000 -20% 6,000 50,000 -40% 4,000 2,000 0 -60% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2020 2019 2018 2017 Replacement New demand Growth (YoY)

Source: CCMA, CMBIS Source: CCMA, CMBIS estimates

Figure 19: China monthly truck crane sales Figure 20: CMBIS truck crane sales projection

(Units) Units 8,000 60,000 140% 120% 7,000 50,000 100% 6,000 80% 40,000 5,000 60% 30,000 40% 4,000 20% 20,000 3,000 0% -20% 2,000 10,000 1,000 -40% 0 -60% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Sales volume (units) Growth (YoY) - RHS 2020 2019 2018 2017

Source: CCMA, CMBIS Source: CCMA, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 6 30 Jun 2020

Figure 21: China monthly HDT sales Figure 22: CMBIS HDT sales projection

(Units) 000' units 250,000 1,600 80% 59% 60% 1,400 53% 45% 60% 200,000 1,200 30% 32% 40% 22% 1,000 18% 16% 11% 20% 150,000 4% 3% 800 2% 0% -4% -7% -13% 0% 600 100,000 -26% -28% -20% 400 -36% 50,000 200 -40% 0 -60% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2020 2019 2018 2017 2016 Replacement demand New demand Growth (YoY) - RHS

Source: Cvworld, CMBIS Source: Cvworld, Wind, CMBIS estimates

Figure 23: China HDT fleet size Figure 24: GDP per unit of operating HDT

10,000 70% RMB mn 57% 9,000 60% 18 8,000 50% 16 16 7,000 40% 14 6,000 25% 30% 13 14 13 13 13 13 13 5,000 17% 12 12 12 13% 12 12 12 9% 12%12% 20% 4,000 7% 8% 6% 6% 7% 7% 8% 6% 12 11 11 4% 3% 5% 11 11 3,000 -1% 10% 10 10 -8% 0% 10 2,000 8 1,000 -10% 8 0 -20%

6

2002 2004 2005 2007 2008 2009 2010 2012 2013 2015 2016 2017 2018 2003 2006 2011 2014 2019

2020E 2021E 2022E

HDT fleet size (000 units) Growth (YoY) RHS GDP (RMB mn)/ operating HDT

Source: Wind, CMBIS estimates Source: Wind, CMBIS estimates

Figure 25: HDT sales in China by company 2019 2020 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Sales volume (units) Company FAW 中国一汽 33,423 20,604 36,427 30,165 29,685 22,761 18,421 15,900 21,147 23,054 17,734 5,918 52,540 11,655 25,578 57,539 43,317 Dongfeng 东风 13,502 13,241 31,357 24,798 22,372 21,388 16,281 16,432 18,703 20,112 22,368 20,064 17,285 3,962 22,970 35,974 36,389 CNHTC 中国重汽 15,117 13,478 24,248 17,766 15,600 16,964 12,156 11,116 11,967 12,940 18,668 20,895 13,244 8,737 20,508 25,718 25,233 SXQC 陕汽集团 12,654 12,581 24,253 17,247 15,749 16,998 10,434 10,471 11,378 12,292 15,738 17,526 10,088 3,835 19,933 24,476 25,798 Foton 北汽福田 5,553 5,779 11,639 8,797 7,001 7,257 5,394 5,804 6,713 7,394 7,889 6,758 8,938 3,184 11,581 18,526 18,511 JAC 安徽江淮 4,386 2,690 4,425 3,461 3,452 3,417 2,246 2,034 2,382 2,676 3,408 3,547 3,951 1,415 5,655 5,412 6,524 SAIC-IVECO Hongyan 上汽依维柯红岩 6,517 3,020 5,530 6,150 5,020 5,100 4,100 4,011 3,803 4,001 5,502 5,406 4,007 1,858 5,005 9,018 10,119 Da Yun 成都大运 2,489 1,880 3,123 2,270 2,389 3,775 2,212 2,218 2,727 2,850 3,122 3,286 2,053 739 2,622 3,819 3,029 CAMC 安徽华菱 2,134 1,779 2,210 2,078 2,068 1,080 920 1,263 1,100 1,655 1,876 2,021 1,500 922 2,200 2,983 2,353 Others 其他 2,927 2,965 5,543 6,025 4,928 4,953 3,619 4,011 3,651 4,373 5,297 6,818 3,042 1,263 3,928 7,689 7,964 Total 98,702 78,017 148,755 118,757 108,264 103,693 75,783 73,260 83,571 91,347 101,602 92,239 116,648 37,570 119,980 191,154 179,237

Change (YoY) Company FAW 中国一汽 -2% 2% 9% 13% 26% -15% 37% 0% 17% 23% -11% -40% 57% -43% -30% 91% 46% Dongfeng 东风 -19% 19% 14% 9% 3% 4% 18% 19% 21% 25% 33% -3% 28% -70% -27% 45% 63% CNHTC 中国重汽 -18% -4% 17% -11% -16% -7% -9% -7% -2% 3% 24% 43% -12% -35% -15% 45% 62% SXQC 陕汽集团 -13% 14% 18% -4% -7% -6% -4% 2% -4% 7% 5% 30% -20% -70% -18% 42% 64% Foton 北汽福田 -22% 5% -15% -35% -41% -34% -38% -21% -9% -3% -3% -17% 61% -45% 0% 111% 164% JAC 安徽江淮 -18% -21% -22% -35% -15% 48% -30% -10% -11% 7% 47% 133% -10% -47% 28% 56% 89% SAIC-IVECO Hongyan 上汽依维柯红岩 23% 0% -17% -11% -28% -18% -18% 11% 16% 8% 57% 42% -39% -38% -9% 47% 102% Da Yun 成都大运 -1% 1% 1% 2% 1% 6% 0% -21% 1% 1% 1% 9% -18% -61% -16% 68% 27% CAMC 安徽华菱 51% 33% -16% -19% 2% -18% -16% -7% -27% -19% -18% -6% -30% -48% 0% 44% 14% Others 其他 -24% -6% 14% 27% -11% 17% 24% 60% 42% 79% 64% 30% 4% -57% -29% 28% 62% Average -10% 4% 7% -3% -5% -7% 2% 2% 8% 14% 14% 12% 18% -52% -19% 61% 66%

Market share Company FAW 中国一汽 34% 26% 24% 25% 27% 22% 24% 22% 25% 25% 17% 6% 45% 31% 21% 30% 24% Dongfeng 东风 14% 17% 21% 21% 21% 21% 21% 22% 22% 22% 22% 22% 15% 11% 19% 19% 20% CNHTC 中国重汽 15% 17% 16% 15% 14% 16% 16% 15% 14% 14% 18% 23% 11% 23% 17% 13% 14% SXQC 陕汽集团 13% 16% 16% 15% 15% 16% 14% 14% 14% 13% 15% 19% 9% 10% 17% 13% 14% Foton 北汽福田 6% 7% 8% 7% 6% 7% 7% 8% 8% 8% 8% 7% 8% 8% 10% 10% 10% JAC 安徽江淮 4% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 4% 3% 4% 5% 3% 4% SAIC-IVECO Hongyan 上汽依维柯红岩 7% 4% 4% 5% 5% 5% 5% 5% 5% 4% 5% 6% 3% 5% 4% 5% 6% Da Yun 成都大运 3% 2% 2% 2% 2% 4% 3% 3% 3% 3% 3% 4% 2% 2% 2% 2% 2% CAMC 安徽华菱 2% 2% 1% 2% 2% 1% 1% 2% 1% 2% 2% 2% 1% 2% 2% 2% 1% Others 其他 3% 4% 4% 5% 5% 5% 5% 5% 4% 5% 5% 7% 3% 3% 3% 4% 4% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Note: CNHTC is the parent co of Sinotruk. is the second largest shareholder of Shaanxi Heavy-duty Motor with 49% stake. Weichai is the largest shareholder of Shaanxi Heavy-duty Motor with 51% stake. Source: Wind, CVworld, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 7 30 Jun 2020

Figure 26: Timetable for the implementation of NES Year Type of vehicles 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Heavy duty Diesel Gasoline Gas fueled Light duty vehicle Diesel Gasoline Gas fueled Off road vehicle Diesel

National emission standard No regulation I II III IV V VI(a) VI(b) Source: Ministry of Ecology and Environmental, CMBIS

Figure 27: CRCC’s value of new contracts Figure 28: CRG’s value of new contracts

RMB mn RMB mn 1,000,000 60% 1,200,000 45% 50% 900,000 46% 48% 50% 36% 800,000 40% 1,000,000 33% 40% 30% 700,000 40% 28% 29% 800,000 23% 30% 600,000 21% 20% 23% 30% 500,000 600,000 20% 12% 13% 14% 20% 400,000 9% 8% 7% 6% 300,000 5% 6% 400,000 10% 10% 0% 200,000 -3% -4% 0% 200,000 -6% 0% 100,000 0 -10% 0 -10%

Value of contracts (RMB mn) Change (YoY) RHS Value of new contracts (RMB million) Change (YoY) RHS

Source: Company data, CMBIS Source: Company data, CMBIS

Figure 29: CCCC’s value of new contracts Figure 30: CSCEC’s new contracts for infrastructure construction

RMB mn RMB mn 350,000 59% 70% 140,000 60% 300,000 120,000 40% 50% 250,000 40% 100,000

200,000 19% 18% 30% 13% 80,000 9% 10% 12% 20% 150,000 -1% 2% 0% 10% 60,000 0% 100,000 -11% 40,000 -19% -10% 50,000 -20% 20,000

0 -30% 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Value of new contracts (RMB mn) Series2 2020 2019 2018

Source: Company data, CMBIS Source: Company data, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 8 30 Jun 2020

CMB International Securities | Equity Research | Company Update

Sinotruk (Hong Kong) (3808 HK)

Recovery underestimated by market; our top pick BUY (Maintain)

Target Price HK$26.00 We incorporate our new HDT industry sales forecast into our model and we revise (Previous TP HK$20.50) Up/Downside +31% up Sinotruk’s earnings forecast in 2020E/22E by 10-12%, making us 27%-29% Current Price HK$19.92 above consensus. We believe Sinotruk’s sales recovery and strong operating leverage are substantially underestimated by the market. Our TP is lifted from HK$20.5 to HK$26, based on 6x 2020E EV/EBITDA (up from 5x to reflect the China Capital Goods resumption of growth, and in line with our target multiple for Weichai). Sinotruk is Wayne Fung, CFA now our sector top pick. Reiterate BUY. (852) 3900 0826  Significant improvement in May. CNHTC, the parent company of Sinotruk, [email protected] reported 62% YoY increase in HDT sales in May, accelerating from 45% in Apr. Besides, light-duty truck (LDT) sales surged 130% YoY in May, much Stock Data Mkt Cap (HK$ mn) 54,999 higher than the industry average of 43%. We expect both HDT and LDT sales Avg 3 mths t/o (HK$ mn) 75 to continue to see improvement going forward, on the back of the launch of 52w High/Low (HK$) 21.0/10.9 more new models. Total Issued Shares (mn) 2,761 Source: Bloomberg  Incorporated new industry forecast. We revise up our HDT industry demand forecast in 2020E/21E by 16%/8%, as we expect the robust Shareholding Structure CNHTC 51% infrastructure spending will continue to offer strong support to the construction MAN SE 25% truck demand (please refer to our industry note “Raise industry sales forecast Others 24% in 2020E-21E; Solid upcycle” published today). Accordingly, we revise up Source: HKEx

Sinotruk’s HDT and engine sales forecast in China by 8% in 2020E-22E. In Share Performance addition, we lift our HDT segment margin by 0.5ppt to 6.9% due to operating Absolute Relative leverage. 1-mth 8.7% 2.4% 3-mth 54.6% 47.9%  Expect earnings surprise. We revise up our earnings forecast by 10-12% in 6-mth 29.3% 48.6% 2020E-22E. We forecast 76% YoY earnings growth this year. Our strong Source: Bloomberg

earnings growth projection is also helped by a low base effect, as Sinotruk 12-mth Price Performance made a one-off impairment on receivables of RMB831mn, as well as switching (HK$) 3808 HK HSI (rebased) to double declining balance depreciation policy in 2019. 25.0 20.0  Major risk factors: (1) Slower-than-expected recovery of construction activities, and (2) failure to contain COVID-19. 15.0 10.0

Earnings Summary 5.0 (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E 0.0 Revenue (RMB mn) 61,785 62,227 69,111 72,032 74,134 6/2019 9/2019 12/2019 3/2020 YoY growth (%) 11.4 0.7 11.1 4.2 2.9 Source: Bloomberg Net profit (RMB mn) 4,345 3,334 5,523 5,709 5,869 EPS (RMB) 1.51 1.14 2.00 2.07 2.13 Auditor: PWC YoY growth (%) 50.0 (24.6) 76.2 3.4 2.8 Consensus EPS (RMB) N/A N/A 1.57 1.63 1.64 Related Reports 1. Sinotruk (3808 HK, BUY – P/E (x) 11.4 15.8 9.0 8.7 8.4 Returning to growth territory in EV/EBITDA (x) 5.6 6.0 4.4 4.2 4.1 2020E – 2 Apr 2020 P/B (x) 1.9 1.8 1.6 1.4 1.3 2. Sinotruk (3808 HK, BUY) – Yield (%) 3.3 2.2 3.9 4.0 4.1 Incrementally positive on the back ROE (%) 18.0 12.6 18.7 17.0 15.7 of more signs of recovery – 11 Mar Net gearing (%) Net cash Net cash Net cash Net cash Net cash 2020 3. Sinotruk (3808 HK, BUY) –SHIG to Source: Company data, Bloomberg, CMBIS estimates officially control Sinotruk after the equity transfer – 30 Sep 2019

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 9 MORE REPORTS FROM BLOOMBERG: CMBR AND http://www.cmbi.com.hk 30 Jun 2020

Figure 31: Change in key operating assumptions Sales volume (units) 2020 2021 2022 Old New Diff Old New Diff Old New Diff Truck 295,230 305,583 3.5% 312,876 325,867 4.2% 329,764 343,104 4.0% HDT 173,716 184,070 6.0% 179,211 189,772 5.9% 182,732 193,399 5.8% China 133,307 143,661 7.8% 135,973 146,534 7.8% 137,333 147,999 7.8% Export 40,409 40,409 0.0% 43,238 43,238 0.0% 45,400 45,400 0.0% LDT 121,514 121,514 0.0% 133,665 136,095 1.8% 147,032 149,705 1.8%

Engine 175,999 188,634 7.2% 179,370 192,257 7.2% 181,164 194,180 7.2% Internal use 161,095 173,730 7.8% 164,317 177,204 7.8% 165,960 178,976 7.8% External sales 14,904 14,904 0.0% 15,053 15,053 0.0% 15,204 15,204 0.0%

(RMB mn) Segment revenue Truck 63,726 66,853 4.9% 66,512 69,927 5.1% 68,815 72,284 5.0% HDT 52,462 55,589 6.0% 54,122 57,311 5.9% 55,185 58,406 5.8% LDT 11,264 11,264 0.0% 12,391 12,616 1.8% 13,630 13,878 1.8% Engine and gearbox 14,728 16,279 10.5% 15,191 16,773 10.4% 15,381 16,979 10.4% Finance 1,666 1,666 0.0% 1,683 1,683 0.0% 1,700 1,700 0.0% Intersegment sales -14,822 -15,688 5.8% -15,426 -16,351 6.0% -15,891 -16,828 5.9% Total 65,298 69,111 5.8% 67,960 72,032 6.0% 70,005 74,134 5.9%

Segment operating margin Truck 5.5% 6.0% 0.5 5.6% 6.0% 0.4 5.6% 6.0% 0.3 HDT 6.3% 6.9% 0.6 6.4% 6.9% 0.5 6.5% 6.9% 0.4 LDT 1.7% 1.7% 0.0 2.0% 2.0% 0.0 2.2% 2.2% 0.0 Engine and gearbox 13.2% 13.4% 0.2 13.2% 13.4% 0.2 13.2% 13.4% 0.2 Finance 57.0% 57.0% 0.0 56.0% 56.0% 0.0 56.0% 56.0% 0.0 Average 9.7% 10.3% 0.6 9.8% 10.2% 0.5 9.8% 10.2% 0.4 Source: Company data, CMBIS estimates

Figure 32: Key operating projection 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales volume (unit) Truck 122,590 137,806 155,036 136,865 169,472 263,903 302,094 279,900 305,583 325,867 343,104 HDT 90,346 96,370 102,675 81,959 91,511 156,243 168,048 169,433 184,070 189,772 193,399 China 63,841 71,789 77,674 54,959 66,507 125,627 131,748 129,424 143,661 146,534 147,999 Export 26,505 24,581 25,001 27,000 25,004 30,616 36,300 40,009 40,409 43,238 45,400 LDT 32,244 41,436 52,361 54,906 77,961 107,660 134,046 110,467 121,514 136,095 149,705

Engine 92,017 103,278 109,434 89,590 106,356 184,540 175,889 179,959 188,634 192,257 194,180 Internal use 72,969 86,237 94,113 79,287 97,741 170,700 159,531 157,936 173,730 177,204 178,976 External sales 19,048 17,041 15,321 10,303 8,615 13,841 16,358 14,757 14,904 15,053 15,204 % of total Internal use 79% 84% 86% 89% 92% 93% 91% 88% 92% 92% 92% External sales 21% 17% 14% 12% 8% 8% 9% 8% 8% 8% 8%

Growth (YoY) Truck -19% 12% 13% -12% 24% 56% 14% -7% 9% 7% 5% HDT -31% 7% 7% -20% 12% 71% 8% 1% 9% 3% 2% China -42% 12% 8% -29% 21% 89% 5% -2% 11% 2% 1% Export 27% -7% 2% 8% -7% 22% 19% 10% 1% 7% 5% LDT 47% 29% 26% 5% 42% 38% 25% -18% 10% 12% 10% Total -19% 13% 12% -11% 24% 53% 14% -7% 9% 7% 5%

Engine -32% 12% 6% -18% 19% 74% -5% 2% 5% 2% 1% Internal use -32% 18% 9% -16% 23% 75% -7% -1% 10% 2% 1% External sales -33% -11% -10% -33% -16% 61% 18% -10% 1% 1% 1%

ASP (RMB/unit) Truck 215,521 211,032 205,635 202,457 192,794 206,482 199,405 218,999 218,773 214,588 210,677 HDT - 271,978 275,394 280,506 275,929 291,630 290,361 301,514 302,000 302,000 302,000 LDT - 69,285 68,844 85,952 95,211 82,910 85,378 92,438 92,700 92,700 92,700 Engines 68,601 71,342 70,570 72,749 76,420 79,689 80,230 81,476 81,000 81,000 81,000 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 10 30 Jun 2020

Figure 33: Segment revenue and profit projection 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E (RMB mn) Segment revenue Truck 26,421 29,081 31,881 27,709 32,673 54,491 60,239 61,298 66,853 69,927 72,284 HDT - 26,211 28,276 22,990 25,251 45,565 48,795 51,086 55,589 57,311 58,406 LDT - 2,871 3,605 4,719 7,423 8,926 11,445 10,211 11,264 12,616 13,878 Engine and gearbox 6,312 7,368 7,723 6,518 8,128 14,706 14,111 14,662 16,279 16,773 16,979 Finance 254 264 382 450 526 1,132 1,415 1,587 1,666 1,683 1,700 Intersegment sales -5,099 -6,303 -7,176 -6,372 -8,369 -14,871 -13,981 -15,320 -15,688 -16,351 -16,828 Total 27,888 30,410 32,809 28,305 32,959 55,458 61,785 62,227 69,111 72,032 74,134

Segment operating profit Truck 248 447 374 376 653 1,739 2,646 2,282 4,027 4,207 4,335 HDT - 719 626 386 613 1,507 2,268 3,394 3,836 3,954 4,030 LDT - -272 -252 -10 40 232 377 -1,112 191 252 305 Engine and gearbox 281 261 434 176 530 2,351 2,213 1,922 2,181 2,248 2,275 Finance 173 188 200 187 208 546 851 935 950 942 952 Intersegment sales 150 117 164 45 -263 -352 -23 -289 -31 -33 -34 Total 852 1,013 1,173 785 1,129 4,285 5,687 4,849 7,127 7,364 7,529

Segment operating margin Truck 0.9% 1.5% 1.2% 1.4% 2.0% 3.2% 4.4% 3.7% 6.0% 6.0% 6.0% HDT - 2.7% 2.2% 1.7% 2.4% 3.3% 4.6% 6.6% 6.9% 6.9% 6.9% LDT - -9.5% -7.0% -0.2% 0.5% 2.6% 3.3% -10.9% 1.7% 2.0% 2.2% Engine and gearbox 4.4% 3.5% 5.6% 2.7% 6.5% 16.0% 15.7% 13.1% 13.4% 13.4% 13.4% Finance 68.0% 71.3% 52.4% 41.6% 39.6% 48.3% 60.1% 58.9% 57.0% 56.0% 56.0% Average 3.1% 3.3% 3.6% 2.8% 3.4% 7.7% 9.2% 7.8% 10.3% 10.2% 10.2% Source: Company data, CMBIS estimates

Figure 34: CNHTC’s HDT monthly sales volume Figure 35: CNHTC’s monthly LDT sales volume

(Units) Units 30,000 18,000 16,000 25,000 14,000 20,000 12,000

15,000 10,000 8,000 10,000 6,000 5,000 4,000 2,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020 2019 2018 2019 2020

Source: Cvworld, CMBIS Source: Chinatruck, CMBIS

Figure 36: Sinotruk’s LDT sales volume projection Figure 37: Sinotruk’s LDT segment profit projection 47% 160,000 42% 50% RMB mn 38% 600 6% 140,000 40% 29% 26% 400 4% 120,000 25% 30% 200 2% 100,000 20% 10% 10% 10% 0 0% 80,000 5% 10% 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E -200 -2% 60,000 0% -400 -4% 40,000 -10% -18% -600 -6% 20,000 -20% -800 -8% 0 -30% -1,000 -10% -1,200 -12%

LDT and bus sales volume Growth (YoY) -RHS LDT segment operation profit LDT segment margin

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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Figure 38: Sinotruk’s HDT sales volume projection Figure 39: Sinotruk’s EV/EBITDA band

Units HKD mn 250,000 71% 80% 120000

100000 10x 200,000 60%

40% 80000 8x 150,000 12% 7% 7% 8% 9% 20% 6x 1% 3% 2% 60000 100,000 0% -20% 40000 4x 50,000 -31% -20% 20000 2x 0 -40%

0

Jul-12 Jul-15 Jul-18

Jan-13 Jan-16 Jan-19

Jun-17 Jun-11 Jun-14

Oct-09 Oct-12 Oct-15 Oct-18

Feb-10 Sep-11 Sep-14 Sep-17 Feb-17 Feb-20

Apr-19 Apr-12 Apr-15

Dec-11 Dec-14 Dec-17

Mar-11 Mar-14 Mar-18

Aug-10 Nov-10 Aug-13 Nov-13 Aug-16 Nov-16 Aug-19 Nov-19

May-13 May-16 China Overseas Total HDT sales growth (YoY) - RHS May-10 Enterprise value

Source: Company data, CMBIS estimates Source: Bloomberg, Company data, CMBIS estimates

Figure 40: Sinotruk P/E band Figure 41: Sinotruk P/B band

HKD HKD 40 30

35 15x 25 1.9x 30 12x 20 1.5x 25

9x 20 15 1.1x

15 6x 10 0.7x 10 3x 5 5 0.3x

0 0

Jul-12 Jul-18 Jul-15

Jul-12 Jul-18 Jul-15

Oct-09 Apr-12 Oct-15 Apr-19 Oct-12 Apr-15 Oct-18

Jun-11 Jan-13 Jan-16 Jun-17 Jun-14 Jan-19

Oct-09 Oct-12 Apr-15 Oct-18 Apr-19 Apr-12 Oct-15

Jun-14 Jan-16 Jun-11 Jan-13 Jun-17 Jan-19

Mar-14 Mar-18 Mar-11

Feb-20 Feb-10 Feb-17

Aug-10 Nov-10 Sep-11 Nov-13 Dec-14 Aug-16 Nov-16 Sep-17 Dec-11 Aug-13 Sep-14 Dec-17 Aug-19 Nov-19

Feb-10 Mar-14 Feb-17 Mar-11 Mar-18 Feb-20

Nov-10 Dec-11 Nov-16 Dec-17 Nov-13 Dec-14 Nov-19

Sep-11 Aug-13 Sep-17 Aug-19 Aug-10 Sep-14 Aug-16

May-13 May-20 May-10 May-16

May-13 May-16 May-20 May-10

Source: Bloomberg, Company data, CMBIS estimates Source: Bloomberg, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 12 30 Jun 2020

Financial Summary

Income statement Cash flow summary YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E Revenue 61,785 62,227 69,111 72,032 74,134 Pretax profit 5,719 4,805 7,276 7,522 7,732 Cost of sales -50,610 -50,380 -55,911 -58,274 -60,049 Finance cost 89 141 18 10 7 Gross profit 11,175 11,847 13,200 13,758 14,086 Interest income -89 -45 -136 -159 -198 Operating expenses -5,532 -7,007 -6,122 -6,445 -6,609 Share of profit or loss of associates -77 -61 -80 -60 -65 EBIT 5,642 4,839 7,078 7,314 7,477 Depreciation 1,078 1,495 1,622 1,747 1,786 Net finance cost -0 -96 118 149 190 Amortization of intangible assets 102 67 75 75 75 Finance income 89 45 136 159 198 Income tax paid -1,043 -1,029 -1,273 -1,316 -1,353 Finance expenses -89 -141 -18 -10 -7 Change in working capital -1,639 1,853 -52 -521 1,722 Profit of JV and associates 77 61 80 60 65 Others 232 1,551 0 0 0 Pretax profit 5,719 4,805 7,276 7,522 7,732 Cash flow from operation 4,374 8,775 7,450 7,298 9,706 Income tax -993 -1,029 -1,273 -1,316 -1,353 Net capex on PP&E -1,343 -1,034 -2,000 -1,600 -500 After tax profit 4,726 3,776 6,003 6,206 6,379 Dividend received 0 6 8 6 7 MI -381 -442 -480 -496 -510 Interest received 89 45 136 159 198 Net profit 4,345 3,334 5,523 5,709 5,869 Others 2,223 1,190 0 0 0 Core net profit 4,157 3,134 5,523 5,709 5,869 Cash flow from investing 979 -29 -3,248 -1,435 -296 D&A 1,180 1,562 1,697 1,822 1,861 Proceeds from equity financing 0 0 0 0 0 EBITDA 6,823 6,401 8,775 9,135 9,337 Net bank borrowings -990 -2,000 -500 -200 0 Dividend paid -1,615 -1,555 -1,077 -1,933 -1,998 Interest paid -143 -141 -18 -10 -7 Others 117 -2,153 0 0 0 Cash flow from financing -2,630 -5,849 -1,595 -2,143 -2,006 Change in cash 2,723 2,897 2,607 3,720 7,405 Cash at beginning of the year 9,840 12,616 17,931 20,538 24,258 Exchange gains/(losses) and others 53 2,418 0 0 0 Cash at end of the year 12,616 17,931 20,538 24,258 31,662

Balance sheet Key ratios YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec FY18A FY19A FY20E FY21E FY22E Non-current assets 17,373 17,741 19,508 19,340 18,038 Revenue mix (%) PP&E 10,366 9,906 10,824 10,677 9,391 HDT 79.0 82.1 80.4 79.6 78.8 Land use right 1,612 1,629 1,629 1,629 1,629 LDT & bus 18.5 16.4 16.3 17.5 18.7 Investment in JV/associates 534 497 568 622 681 Engine & gearbox 22.8 23.6 23.6 23.3 22.9 Investment properties 713 797 797 797 797 Finance 2.3 2.5 2.4 2.3 2.3 Long term receivables 2,195 2,907 2,907 2,907 2,907 Intersegment sales (22.6) (24.6) (22.7) (22.7) (22.7) Intangible assets 324 279 204 129 54 Total 100.0 100.0 100.0 100.0 100.0 AFS / financial assets 212 0 0 0 0 Profit & loss ratio (%) Others 1,417 1,727 2,579 2,579 2,579 Gross margin 18.1 19.0 19.1 19.1 19.0 Current assets 44,308 48,210 53,827 56,296 67,438 EBIT margin 9.1 7.8 10.2 10.2 10.1 Inventories 11,594 9,721 12,644 11,305 13,373 Net profit margin 7.6 6.1 8.7 8.6 8.6 Trade and bills receivables 12,589 16,051 16,138 16,227 17,895 Growth (%) AFS / financial assets 4,601 1,715 1,715 1,715 1,715 Revenue 11.4 0.7 11.1 4.2 2.9 Others 554 2,532 2,532 2,532 2,532 Gross profit 11.4 6.0 11.4 4.2 2.4 Restricted cash 2,352 260 260 260 260 EBIT 32.1 -14.2 46.3 3.3 2.2 Cash 12,616 17,931 20,538 24,258 31,662 Net profit 43.7 -23.3 65.7 3.4 2.8 Core net profit 50.0 -24.6 76.2 3.4 2.8 Current liabilities 32,986 35,175 37,634 35,662 41,121 Balance sheet ratio Trade and bills payables 28,305 31,455 34,413 32,642 38,101 Current ratio (x) 1.3 1.4 1.4 1.6 1.6 Bank borrowings 3,000 1,000 500 300 300 Receivable turnover days 82 84 85 82 84 Provisions 929 1,219 1,219 1,219 1,219 Inventory turnover days 90 77 73 75 75 Others 752 1,501 1,501 1,501 1,501 Payable turnover days 205 216 215 210 215 Non-current liabilities 367 347 347 347 347 Net debt / total equity (%) Net cash Net cash Net cash Net cash Net cash Bank borrowings 0 0 0 0 0 Profitability (%) Deferred income 316 286 286 286 286 ROA 7.7 5.9 8.6 8.3 7.9 Others 50 62 62 62 62 ROE 18.0 12.6 18.7 17.0 15.7 Equity 28,328 30,428 35,354 39,627 44,007 Per share data Shareholders' equity 25,476 27,261 31,707 35,483 39,354 EPS (RMB) 1.57 1.21 2.00 2.07 2.13 MI 2,852 3,167 3,647 4,143 4,654 Core EPS (RMB) 1.51 1.14 2.00 2.07 2.13 BVPS (RMB) 9.23 9.87 11.48 12.85 14.25 DPS (RMB) 0.56 0.39 0.70 0.72 0.74 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 13 30 Jun 2020

CMB International Securities | Equity Research | Company Update

Weichai Power-H (2338 HK)

Higher HDT and engine assumptions; further market share gain BUY (Maintain)

Target Price HK$18.60 We maintain our positive view on Weichai: (1) The increased number of (Previous TP HK$16.00) Up/Downside +30% Shandong provincial SOEs under the control of SHIG, parent company of Current Price HK$14.34 Weichai, will help boost Weichai’s upcoming sales of engines and powertrain; (2) strong infrastructure spending growth should boost the demand for construction trucks and machinery in 2H20E; (3) Industry consolidation will continue on the China Capital Goods back of the implementation of strict emission standard. We incorporate our new Wayne Fung, CFA HDT & construction machinery forecast into our model and revise up Weichai’s (852) 3900 0826 earnings forecast in 2020E/22E by 3-7%, making us 5-7% above consensus. Our [email protected] SOTP-based TP is lifted from HK$16.0 to HK$18.6. Maintain BUY.

 New industry forecast. We revise up our HDT industry demand forecast in Stock Data 2020E/21E by 16%/8%, as we expect the robust infrastructure spending will Mkt Cap (HK$ mn) 116,483 continue to offer strong support to the construction truck demand (please refer Avg 3 mths t/o (HK$ mn) 176 52w High/Low (HK$) 17.48/10.56 to our industry note “Raise industry sales forecast in 2020E-21E; Solid upcycle” Total Issued Shares (mn) 1,934 (H) published today). 5,991 (A) Source: Bloomberg  Higher assumptions for Weichai. We revise up Weichai’s HDT engine sales volume projection by 10-13% in 2020E-22E. We expect Weichai’s market Shareholding Structure share to increase from ~33% in 2019 to 37% in 2022E, driven by the Weichai Holdings Group 16.8% Weifang Investment Group 3.7% implementation of NES VI in mid-21E and rising HDT engine sales to Sinotruk Free float (H-share) 24.2% (3808 HK, BUY). Weichai targets to sell 20k units of HDT engine to Sinotruk Free float (A-share) 55.3% this year, with a focus on 10.5L or below. The sales to Sinotruk will be further Source: HKEx

increased starting 2021E. For HDT, we revise up Shaanxi Heavy-duty Motor’s Share Performance sales volume in 2020E-22E by 3-9%. Absolute Relative 1-mth 4.6% -1.5%  Industry consolidation to continue. The number of engine manufacturers 3-mth 10.6% 5.8% in China reduced from 644 in late 2015 to 470 in Apr 2020, according to NBS. 6-mth -10.4% 3.0% Meanwhile, the number of loss-making players increased from 99 to 145 Source: Bloomberg

during the same period, with the loss-making ratio rising from 15% to 31%. 12-mth Price Performance With the implementation of strict emission standard going forward, we expect (HK$) 2338 HK HSI (rebased) the industry will continue to undergo a consolidation, which will offer room for 20.0 18.0 leading players such as Weichai to gain market share. 16.0 14.0 12.0  Risk factors: (1) unexpected slowdown of HDT and engine demand; (2) 10.0 8.0 further downside risk on KION business; (3) technology risk. 6.0 4.0 2.0 0.0 Earnings Summary 7/2019 10/2019 1/2020 4/2020

Source: Bloomberg (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E

Revenue (RMB mn) 159,256 174,361 174,306 184,527 192,309 Auditor: Ernst & Young YoY growth (%) 5.1 9.5 (0.0) 5.9 4.2

Net income (RMB mn) 8,658 9,105 10,094 11,429 11,987 Related Reports EPS (RMB) 1.08 1.15 1.27 1.44 1.51 1. China Construction Machinery & YoY growth (%) 27.2 6.0 10.9 13.2 4.9 HDT Sector – HDT sales +43% Consensus EPS (RMB) n/a n/a 1.19 1.35 1.45 YoY in Apr; Expect robust growth P/E (x) 11.5 11.2 10.2 9.0 8.6 for other machinery – 11 May 2020 EV / EBITDA (x) 5.3 5.0 4.9 4.3 4.1 2. Weichai Power (2338 HK, BUY) – Correction offers buying P/B (x) 2.5 2.2 1.9 1.7 1.5 opportunity; Diversification Yield (%) 3.7 2.2 3.9 5.0 5.2 strategy on track – 30 Mar 2020 ROE (%) 23.2 21.5 20.5 20.1 18.8 3. China Construction Machinery Net gearing (%) Net cash Net cash Net cash Net cash Net cash Sector – Four structural drivers to Source: Company data, Bloomberg, CMBIS estimates extend the upcycle to 2020-21E – 27 Nov 2019

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Figure 42: China multi-cylinder engine market share Figure 43: No. of engine manufacturers and loss making rate in China

100% 700 45% 90% 600 40% Others 35% 80% 500 Dongfeng Cummins 30% 70% 400 25% 60% Foton Cummins 300 20% 15% 50% Zhejiang Xinchai 200 10% 40% FAW 100 5% 30% Jiangling 0 0% 20% Yunnei Group

10%

2015-11 2016-02 2016-05 2016-08 2016-11 2017-02 2018-02 2018-05 2018-08 2018-11 2019-02 2019-05 2019-08 2017-08 2017-11 2019-11 2020-02 Yuchai 2017-05 0% Total number of company Weichai

Number of losing making company

Jul-19

Apr-19 Oct-19 Apr-20

Jan-19 Jan-20 Jun-19

Mar-19 Mar-20

Feb-19 Feb-20

Sep-19 Nov-19 Dec-19

Aug-19 Ratio of loss making companies - RHS May-20 May-19 Source: CICEIA, CMBIS Source: Wind, NBS, CMBIS

Figure 44: Weichai’s HDT engine market share Figure 45: Weichai’s engine sales volume breakdown

40% 100% Other components 35% 37.0% 90% 35.6% 36.2% 36.2% 36.5% 36.3% 30% 33.3% 33.4% 33.2% 80% 32.6% 31.6% 25% 70% 27.0% For other non-road 20% 60% 21.4% machinery 15% 50% 10% 40% For heavy-duty & 5% 30% medium-duty 0% 20% construction machinery 10% For HDT 0% Engine (for HDT) 2017 2018 2019 2020E2021E2022E Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 46: Change in key assumptions Change in key assumptions 2020E 2021E 2022E Sales volume (unit) Old New Change Old New Change Old New Change Engine sales volume breakdow n For HDT 408,514 451,723 10.6% 416,685 460,757 10.6% 420,852 472,276 12.2% Non-road machinery 268,120 270,920 1.0% 303,592 306,728 1.0% 333,951 337,401 1.0% For heavy-duty & medium-duty construction machinery 158,200 161,000 1.8% 177,184 180,320 1.8% 194,902 198,352 1.8% For other non-road machinery 109,920 109,920 0.0% 126,408 126,408 0.0% 139,049 139,049 0.0% Other components 121,126 121,126 0.0% 123,548 123,548 0.0% 126,019 126,019 0.0% Engine total 797,760 843,768 5.8% 843,825 891,033 5.6% 880,822 935,696 6.2% HDT (Shaanxi Heavy-duty Motor) 165,000 180,000 9.1% 170,000 177,000 4.1% 170,000 175,000 2.9% Gear box (Shaanxi Fast Gear Company) 1,030,000 1,100,000 6.8% 1,100,000 1,100,000 0.0% 1,130,000 1,130,000 0.0%

(RMB mn) Revenue Diesel engines 53,530 56,617 5.8% 56,621 59,788 5.6% 59,103 62,785 6.2% Automobiles and major components 72,895 78,080 7.1% 77,470 77,897 0.6% 79,300 79,605 0.4% Forklift trucks & supply chain solution 66,505 53,742 -19.2% 73,156 61,803 -15.5% 77,545 65,511 -15.5% Intersegment sales -14,470 -14,133 -2.3% -15,543 -14,962 -3.7% -16,196 -15,593 -3.7% Total revenue 178,460 174,306 -2.3% 191,703 184,527 -3.7% 199,752 192,309 -3.7%

Segment profit Diesel engines 8,565 9,512 11.1% 9,116 10,044 10.2% 9,516 10,548 10.8% Automobiles and major components 2,187 3,123 42.8% 2,402 3,116 29.7% 2,458 3,184 29.5% Forklift trucks & supply chain solution 3,658 1,720 -53.0% 4,316 3,585 -17.0% 4,575 3,865 -15.5% Intersegment sales -145 -141 -2.3% -155 -150 -3.7% -162 -156 -3.7% Total segment profit 14,265 14,213 -0.4% 15,678 16,595 5.8% 16,387 17,441 6.4%

Segment margin Change (ppt) Change (ppt) Change (ppt) Diesel engines 16.0% 16.8% 0.8 16.1% 16.8% 0.7 16.1% 16.8% 0.7 Automobiles and major components 3.0% 4.0% 1.0 3.1% 4.0% 0.9 3.1% 4.0% 0.9 Forklift trucks & supply chain solution 5.5% 3.2% -2.3 5.9% 5.8% -0.1 5.9% 5.9% 0.0 Average 8.0% 8.2% 0.2 8.2% 9.0% 0.8 8.2% 9.1% 0.9 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 15 30 Jun 2020

Figure 47: SOTP valuation SOTP valuation Valuation methodology Target EBITDA Estimated EV Net cash / Equity value multiple (Net debt) (x) 2020E (RMB mn) (RMB mn) (RMB mn) Weichai core business EV/EBITDA 6 14,552 87,312 24,881 112,194 KION Group Proportionate market value - - - 22,457 Share of JV/associates PB 1.5 - - - 7,067 Minority interest (Weichai core business) -10,140 Total NAV 131,577 NAV per share (RMB) 16.6 NAV per share (HK$) 18.6 Source: Company data, CMBIS estimates

Figure 48: Weichai Power-H P/E band Figure 49: Weichai Power-H P/B band

HKD HKD 30 25 3.5x 14x 25 20 12x 2.8x 20 15 10x 2.1x 15 8x

10 1.4x 6x 10

5 5 0.7x

0 0

Jul-12 Jul-18 Jul-15

Oct-09 Oct-12 Apr-15 Oct-18 Apr-19 Apr-12 Oct-15

Jun-14 Jan-16 Jun-11 Jan-13 Jun-17 Jan-19

Feb-10 Mar-14 Feb-17 Mar-11 Mar-18 Feb-20

Nov-10 Dec-11 Nov-16 Dec-17 Nov-13 Dec-14 Nov-19

Sep-11 Aug-13 Sep-17 Aug-19 Aug-10 Sep-14 Aug-16

May-13 May-16 May-20 May-10

Feb-10 May-10 Mar-11 Dec-11 Apr-12 Oct-12 Jan-13 Aug-13 Nov-13 Jun-14 Sep-14 Jul-15 May-16 Aug-16 Feb-17 Jun-17 Dec-17 Mar-18 Oct-18 Jan-19 Aug-19 Nov-19 Oct-09 Aug-10 Nov-10 Jun-11 Sep-11 Jul-12 May-13 Mar-14 Dec-14 Apr-15 Oct-15 Jan-16 Nov-16 Sep-17 Jul-18 Apr-19 Feb-20 May-20

Source: Bloomberg, Company data, CMBIS estimates Source: Bloomberg, Company data, CMBIS estimates

Figure 50: Wechai Power-A P/E band Figure 51: Weichai Power-A P/B band

RMB RMB 30 20 14x 3.7x 18 25 12x 16 3.0x 14 10x 20 12 2.3x 8x 10 15 1.6x 8 6x 10 6 0.9x 4 5 2

0 0

Jul-12 Jul-18 Jul-15

Oct-09 Apr-12 Oct-12 Oct-18 Apr-19 Apr-15 Oct-15

Jun-11 Jan-13 Jun-14 Jan-19 Jan-16 Jun-17

Feb-10 Mar-11 Mar-14 Feb-20 Feb-17 Mar-18

Jul-12 Oct-12 Jan-13 May-13 Aug-13 Nov-13 Mar-14 Jun-14 Sep-14 Dec-14 Apr-15 Jul-15 Oct-15 Jan-16 May-16 Aug-16 Nov-16 Feb-17 Oct-09 Feb-10 May-10 Aug-10 Nov-10 Mar-11 Jun-11 Sep-11 Dec-11 Apr-12 Jun-17 Sep-17 Dec-17 Mar-18 Jul-18 Oct-18 Jan-19 Apr-19 Aug-19 Nov-19 Feb-20 May-20

Nov-10 Dec-11 Nov-13 Nov-19 Dec-14 Nov-16 Dec-17

Aug-10 Sep-11 Aug-13 Aug-19 Sep-14 Aug-16 Sep-17

May-10 May-13 May-20 May-16

Source: Bloomberg, Company data, CMBIS estimates Source: Bloomberg, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 16 30 Jun 2020

Financial Summary

Income statement Cash flow summary YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E Revenue 159,256 174,361 174,306 184,527 192,309 Pretax profit 13,858 14,352 15,394 18,118 19,333 Cost of sales -123,686 -136,353 -137,179 -143,562 -149,616 Finance cost 1,135 1,288 1,299 1,272 1,255 Gross profit 35,569 38,008 37,127 40,965 42,693 Interest income -1,060 -1,067 -1,608 -1,935 -2,297 Operating expenses -21,757 -23,586 -22,072 -23,532 -24,419 Share of profit or loss of associates -174 -244 -238 -243 -248 EBIT 13,812 14,422 15,055 17,433 18,274 Depreciation 5,321 6,188 6,059 6,598 7,137 Other expenses -52 -94 -209 -221 -231 Amortization of intangible assets 2,016 1,820 1,863 1,863 1,863 Net finance cost -75 -220 310 664 1,043 Income tax paid -2,233 -2,445 -2,617 -3,080 -3,287 Finance income and others 1,060 1,067 1,608 1,935 2,297 Change in working capital 2,363 2,603 -843 247 -497 Finance expenses -1,135 -1,288 -1,299 -1,272 -1,255 Others 1,035 1,341 1,608 1,935 2,297 profit of JV & associates 174 244 238 243 248 Cash flow from operation 22,262 23,835 20,918 24,775 25,557 Pretax profit 13,858 14,352 15,394 18,118 19,333 Net capex on PP&E -1,952 -4,278 -7,000 -7,000 -7,000 Income tax -2,233 -2,445 -2,617 -3,080 -3,287 Investment in JV/associates -1,655 -243 0 0 0 After tax profit 11,626 11,907 12,777 15,038 16,047 Investment in subsidiaries 0 0 0 0 0 MI -2,968 -2,802 -2,683 -3,609 -4,060 Dividend received 181 135 143 146 149 Net profit 8,658 9,105 10,094 11,429 11,987 Others -3,754 -4,004 0 0 0 Cash flow from investing -7,181 -8,391 -6,857 -6,854 -6,851 D&A 7,404 8,071 7,922 8,461 9,000 Proceeds from equity financing 0 0 0 0 0 EBITDA 21,216 22,493 22,978 25,894 27,274 Net bank borrowings 635 1,137 -900 -400 -400 Dividend paid -4,039 -4,851 -2,269 -4,037 -5,143 Interest paid 0 0 -1,299 -1,272 -1,255 Others -3,577 -3,853 0 0 0 Cash flow from financing -6,980 -7,567 -4,468 -5,709 -6,798 Change in cash 8,100 7,877 9,593 12,211 11,908 Cash at beginning of the year 34,222 38,210 48,818 58,410 70,621 Exchange gains/(losses) and others -4,112 2,731 0 0 0 Cash at the end of the year 38,210 48,818 58,410 70,621 82,529

Balance sheet Key ratios YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec FY18A FY19A FY20E FY21E FY22E Non-current assets 97,171 110,647 109,819 108,455 106,554 Sales mix (%) PP&E 29,453 26,319 27,259 27,661 27,523 Diesel engines 28.2 28.7 32.5 32.4 32.6 Investment in JV/associates 4,464 4,711 4,806 4,903 5,002 Automobiles and major components 42.0 41.0 44.8 42.2 41.4 Goodwill 23,037 23,823 23,823 23,823 23,823 Forklift trucks & supply chain solution 38.0 38.5 30.8 33.5 34.1 Long term receivables 6,483 8,448 8,448 8,448 8,448 Intersegment sales (8.2) (8.2) (8.1) (8.1) (8.1) Intangible assets 23,299 23,436 21,573 19,710 17,847 Total 100.0 100.0 100.0 100.0 100.0 Others 10,434 23,911 23,911 23,911 23,911 Profit & loss ratio (%) Current assets 108,105 126,185 131,524 151,767 158,913 Gross margin 22.3 21.8 21.3 22.2 22.2 Prepayments 1,109 997 997 997 997 EBIT margin 8.7 8.3 8.6 9.4 9.5 Inventories 20,674 24,718 20,382 26,816 22,373 After tax profit margin 7.3 6.8 7.3 8.1 8.3 Trade receivables 13,155 14,285 14,368 15,965 15,647 Growth (%) Notes receivables 24,993 26,458 26,458 26,458 26,458 Revenue 5.1 9.5 (0.0) 5.9 4.2 Others 9,964 10,910 10,910 10,910 10,910 Gross profit 7.5 6.9 (2.3) 10.3 4.2 Cash 38,210 48,818 58,410 70,621 82,529 EBIT 23.4 4.4 4.4 15.8 4.8 Net profit 27.2 5.2 10.9 13.2 4.9 Current liabilities 88,617 105,877 100,881 109,260 104,100 Balance sheet ratio Trade and bills payables 30,869 36,749 31,653 39,931 34,672 Current ratio (x) 1.2 1.2 1.3 1.4 1.5 Notes payable 15,925 22,446 22,446 22,446 22,446 Receivable turnover days 31 29 30 30 30 Bank borrowings 12,371 15,013 15,113 15,213 15,313 Inventory turnover days 60 61 60 60 60 Others 29,451 31,669 31,669 31,669 31,669 Payable turnover days 91 91 91 91 91 Non-current liabilities 54,400 61,180 60,180 59,680 59,180 Net debt / total equity (%) Net cash Net cash Net cash Net cash Net cash Bank borrowings 23,174 21,669 20,669 20,169 19,669 Profitability (%) Long term payables 19,475 16,325 16,325 16,325 16,325 ROA 5.9 5.4 5.3 6.0 6.1 Others 11,751 23,186 23,186 23,186 23,186 ROE 23.2 21.5 20.5 20.1 18.8 Equity 62,259 69,775 80,283 91,283 102,186 Per share data Shareholders' equity 39,314 45,224 53,049 60,440 67,284 EPS (RMB) 1.08 1.15 1.27 1.44 1.51 MI 22,946 24,551 27,234 30,843 34,903 BVPS (RMB) 4.96 5.70 6.69 7.62 8.48 DPS (RMB) 0.46 0.29 0.51 0.65 0.68 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 17 30 Jun 2020

CMB International Securities | Equity Research | Company Update

Weichai Power-A (000338 CH)

Higher HDT and engine assumptions; further market share gain BUY (Maintain)

Target Price RMB16.60 We maintain our positive view on Weichai: (1) The increased number of (Previous TP RMB14.30) Up/Downside +23% Shandong provincial SOEs under the control of SHIG, parent company of Current Price RMB13.51 Weichai, will help boost Weichai’s upcoming sales of engines and powertrain; (2) strong infrastructure spending growth should boost the demand for construction trucks and machinery in 2H20E; (3) Industry consolidation will continue on the China Capital Goods back of the implementation of strict emission standard. We incorporate our new Wayne Fung, CFA HDT & construction machinery forecast into our model and revise up Weichai’s (852) 3900 0826 earnings forecast in 2020E/22E by 3-7%, making us 5-7% above consensus. Our [email protected] SOTP-based TP is lifted from RMB14.3 to RMB16.6. Maintain BUY.

 New industry forecast. We revise up our HDT industry demand forecast in Stock Data 2020E/21E by 16%/8%, as we expect the robust infrastructure spending will Mkt Cap (RMB mn) 106,234 continue to offer strong support to the construction truck demand (please refer Avg 3 mths t/o (RMB mn) 647 52w High/Low (RMB) 16.69/10.65 to our industry note “Raise industry sales forecast in 2020E-21E; Solid upcycle” Total Issued Shares (mn) 1,934 (H) published today). 5,991 (A) Source: Bloomberg  Higher assumptions for Weichai. We revise up Weichai’s HDT engine sales volume projection by 10-13% in 2020E-22E. We expect Weichai’s market Shareholding Structure share to increase from ~33% in 2019 to 37% in 2022E, driven by the Weichai Holdings Group 16.8% Weifang Investment Group 3.7% implementation of NES VI in mid-21E and rising HDT engine sales to Sinotruk Free float (H-share) 24.2% (3808 HK, BUY). Weichai targets to sell 20k units of HDT engine to Sinotruk Free float (A-share) 55.3% this year, with a focus on 10.5L or below. The sales to Sinotruk will be further Source: HKEx

increased starting 2021E. For HDT, we revise up Shaanxi Heavy-duty Motor’s Share Performance sales volume in 2020E-22E by 3-9%. Absolute Relative 1-mth 2.4% -4.6%  Industry consolidation to continue. The number of engine manufacturers 3-mth 7.3% -3.8% in China reduced from 644 in late 2015 to 470 in Apr 2020, according to NBS. 6-mth -11.8% -14.3% Meanwhile, the number of loss-making players increased from 99 to 145 Source: Bloomberg

during the same period, with the loss-making ratio rising from 15% to 31%. 12-mth Price Performance

With the implementation of strict emission standard going forward, we expect (RMB) 000338 CH the industry will continue to undergo a consolidation, which will offer room for 18.0 SHSZ300 (rebased) 16.0 leading players such as Weichai to gain market share. 14.0 12.0 10.0  Risk factors: (1) unexpected slowdown of HDT and engine demand; (2) 8.0 further downside risk on KION business; (3) technology risk. 6.0 4.0 2.0 0.0 Earnings Summary 7/2019 10/2019 1/2020 4/2020

Source: Bloomberg (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E

Revenue (RMB mn) 159,256 174,361 174,306 184,527 192,309 Auditor: Ernst & Young YoY growth (%) 5.1 9.5 (0.0) 5.9 4.2

Net income (RMB mn) 8,658 9,105 10,094 11,429 11,987 Related Reports EPS (RMB) 1.08 1.15 1.27 1.44 1.51 1. China Construction Machinery & YoY growth (%) 27.2 6.0 10.9 13.2 4.9 HDT Sector – HDT sales +43% Consensus EPS (RMB) n/a n/a 1.19 1.35 1.45 YoY in Apr; Expect robust growth P/E (x) 11.8 11.5 10.5 9.3 8.9 for other machinery – 11 May 2020 EV / EBITDA (x) 5.4 5.1 5.0 4.4 4.2 2. Weichai Power (2338 HK, BUY) – Correction offers buying P/B (x) 2.6 2.3 2.0 1.8 1.6 opportunity; Diversification Yield (%) 3.6 2.2 3.8 4.8 5.1 strategy on track – 30 Mar 2020 ROE (%) 23.2 21.5 20.5 20.1 18.8 3. China Construction Machinery Net gearing (%) Net cash Net cash Net cash Net cash Net cash Sector – Four structural drivers to Source: Company data, Bloomberg, CMBIS estimates extend the upcycle to 2020-21E – 27 Nov 2019

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CMB International Securities | Equity Research | Company Update

SANY Heavy Industry – A (600031 CH)

Growth at a reasonable price BUY (Maintain)

Target Price RMB24.70 We incorporate our new industry sales forecast for excavator into our model and (Previous TP RMB23.50) revise up SANY’s earnings forecast in 2020E-22E by 5-7%, making us 5-8% Up/Downside +33% above consensus. We expect SANY to deliver continuous market share gain. Current Price RMB18.64

Besides, we expect solid replacement demand on concrete machinery in 2020E- China Capital Goods 21E. We raise our TP from RMB23.5 to RMB24.7, based on 14.3x 2020E P/E (multiple unchanged). Trading at <11x 2020E P/E in the A-share market, we Wayne Fung, CFA believe SANY remains a good value play under our universe. Maintain BUY. (852) 3900 0826 [email protected]  New industry sales assumptions. We revise up our excavator sales projection in China by 4% in 2020E-21E. We expect excavator sales growth Stock Data Mkt Cap (RMB mn) 157,471 of 17%/5% in 2020E/21E (Please refer to our sector note “Raise industry sales Avg 3 mths t/o (RMB mn) 1,377 forecast in 2020E-21E; Solid upcycle” for more details). 52w High/Low (RMB) 21.03/12.37 Total Issued Shares (mn) 8,435  Higher forecast for SANY. We revise up SANY’s revenue in 2020E-22E by Source: Bloomberg 4-5%, due mainly to 11-12% increase in the assumptions on excavator revenue. We forecast SANY to deliver 28%/7% YoY growth of excavator Shareholding Structure SANY Group 30.0% revenue in 2020E/21E. Our blended gross margin in 2020E-22E is also Hong Kong CCASS 8.7% revised up by 0.3-0.8ppt, thanks to the operating leverage and cost efficiency Liang Wengen 3.4% to be achieved through production automation. Others 57.89% Source:  BUY into weakness. SANY’s share price recently entered into a range bound following the strong run in Mar-May. We believe valuation is attractive at <11x Share Performance Absolute Relative 2020E P/E, with potential upward revision on consensus earnings forecast. 1-mth 1.0% -5.9% 3-mth 7.4% -3.7%  Key risks: (1) risk of overseas business due to COVID-19; (2) increase in 6-mth 11.3% 8.1% component cost; (3) risk of expanding to financing business. Source: Bloomberg

Earnings Summary 12-mth Price Performance (RMB) 600031 CH (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E 25.0 SHSZ300 (rebased) Revenue (RMB mn) 55,822 75,666 92,009 100,294 106,213 20.0

YoY growth (%) 46 36 22 9 6 15.0 Net income (RMB mn) 6,116 11,207 14,621 16,212 17,436 10.0 EPS (RMB) 0.79 1.36 1.73 1.92 2.07 5.0 YoY growth (%) 189.6 71.4 27.9 10.9 7.5 Consensus EPS (RMB) N/A N/A 1.60 1.79 1.97 0.0 7/2019 10/2019 1/2020 4/2020 EV / EBITDA (x) 17.5 11.0 8.4 7.8 7.4 P/E (x) 23.6 13.8 10.8 9.7 9.0 Source: Bloomberg P/B (x) 4.6 3.5 2.8 2.3 2.0 Yield (%) 1.5 2.3 2.9 3.2 3.5 Auditor: Ruihua CPA ROE (%) 21.5 29.5 29.3 26.4 23.8 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Related Reports 1. China Construction Machinery Source: Company data, Bloomberg, CMBIS estimates Sector – Lift forecast on excavator on strong demand; BUY SANY & Hengli – 13 Apr 2020 2. SANY Heavy Industry–A (600031 CH, BUY) – To acquire financing company from parent co. – 12 Dec 2019 3. China Construction Machinery Sector – Four structural drivers to extend the upcycle to 2020-21E – 27 Nov 2019

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 19 MORE REPORTS FROM BLOOMBERG: CMBR AND http://www.cmbi.com.hk 30 Jun 2020

Figure 52: Change in key assumptions Old New Change (RMB mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E

Revenue Concrete machinery 28,036 31,401 33,913 28,036 31,401 33,913 0.0% 0.0% 0.0% Excavator 31,689 34,110 35,384 35,462 37,944 39,462 11.9% 11.2% 11.5% Crane machinery 16,872 18,728 20,164 16,872 18,728 20,164 0.0% 0.0% 0.0% Piling machinery 5,062 5,315 5,474 5,277 5,540 5,707 4.2% 4.2% 4.2% Earth moving machinery 2,262 2,375 2,446 2,262 2,375 2,446 0.0% 0.0% 0.0% Other machinery 2,274 2,388 2,507 2,274 2,388 2,507 0.0% 0.0% 0.0% Revenue (construction machinery) 86,195 94,316 99,888 90,182 98,376 104,199 4.6% 4.3% 4.3% Other business 1,827 1,918 2,014 1,827 1,918 2,014 0.0% 0.0% 0.0% Total revenue 88,022 96,234 101,903 92,009 100,294 106,213 4.5% 4.2% 4.2%

Revenue growth ppt Concrete machinery 20.8% 12.0% 8.0% 20.8% 12.0% 8.0% 0.0 0.0 0.0 Excavator 14.7% 7.6% 3.7% 28.4% 7.0% 4.0% 13.7 (0.6) 0.3 Crane machinery 20.7% 11.0% 7.7% 20.7% 11.0% 7.7% 0.0 0.0 0.0 Piling machinery 5.2% 5.0% 3.0% 9.7% 5.0% 3.0% 4.5 0.0 0.0 Earth moving machinery 5.3% 5.0% 3.0% 5.3% 5.0% 3.0% 0.0 0.0 0.0 Other machinery 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 0.0 0.0 0.0 Revenue (construction machinery) 16.6% 9.4% 5.9% 22.0% 9.1% 5.9% 5.4 (0.3) 0.0 Other business 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 0.0 0.0 0.0 Total revenue 16.3% 9.3% 5.9% 21.6% 9.0% 5.9% 5.3 (0.3) 0.0

Gross margin ppt Concrete machinery 32.0% 32.0% 31.0% 32.0% 32.0% 31.0% 0.0 0.0 0.0 Excavator 38.6% 38.4% 38.2% 40.0% 39.0% 38.5% 1.4 0.6 0.3 Crane machinery 25.7% 25.5% 25.5% 25.7% 25.5% 25.5% 0.0 0.0 0.0 Piling machinery 45.5% 45.0% 45.0% 45.5% 45.0% 45.0% 0.0 0.0 0.0 Earth moving machinery 36.5% 36.5% 36.5% 36.5% 36.5% 36.5% 0.0 0.0 0.0 Other machinery 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 0.0 0.0 0.0 Gross margin (construction machinery) 34.1% 33.8% 33.3% 34.8% 34.3% 33.6% 0.8 0.4 0.3 Other business 11.0% 11.0% 11.0% 11.0% 11.0% 11.0% 0.0 0.0 0.0 Blended gross margin 33.6% 33.4% 32.9% 34.3% 33.8% 33.2% 0.8 0.4 0.3 Net profit 13,692 15,503 16,511 14,621 16,212 17,436 6.8% 4.6% 5.6% Source: Company data, CMBIS

Figure 53: SANY revenue breakdown Figure 54: SANY gross margin trend

(RMB mn) 50% Other business 45% 120,000 40% Other machinery 35% 100,000 30% 80,000 Earth moving 25% machinery 20% 15% 60,000 Piling machinery 10% 40,000 5% Crane machinery 0% 20,000 Excavator 0 Concrete machinery Excavator Concrete machinery Crane machinery Piling machinery Earth moving machinery Other machinery

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

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Figure 55: SANY’s revenue breakdown by region Figure 56: SANY’s overseas revenue

100% RMB mn 16,000 180% 90% 155% 160% 80% 14,000 140% 70% 12,000 120% 60% 10,000 100% 50% 8,000 80% 40% 6,000 60% 30% 24% 25% 40% 20% 4,000 17% 2% 4% 20% 10% -7% 2,000 -10% 0% 0% 0 -20% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 China Overseas Overseas revenue Growth rate (RHS)

Source: Company data, CMBIS Source: Company data, CMBIS

Figure 57: Financial guarantee issued by SANY Figure 58: Write-off due to customers’ default

(RMB mn) (RMB mn) 40,000 8,000

35,000 7,000 30,000 6,000 25,000 5,000 20,000 15,000 4,000

10,000 3,000 5,000 2,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1,000

0 Mortgage Finance lease companies 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Company data, CMBIS Source: Company data, CMBIS

Figure 59: SANY’s P/E band Figure 60: SANY’s P/B band

RMB RMB 45 40

40 22x 4.7x 35 35 18x 30 3.9x 30 25 14x 25 3.1x 20 20 2.3x 10x 15 15 1.5x 10 10 6x

5 5

0 0

Feb-12 May-12 Aug-12 Sep-13 Dec-13 Apr-14 May-15 Aug-15 Nov-15 Dec-16 Mar-17 Jul-17 Aug-18 Nov-18 Feb-19 Mar-20 Jun-20 Oct-11 Nov-12 Mar-13 Jun-13 Jul-14 Oct-14 Jan-15 Feb-16 Jun-16 Sep-16 Oct-17 Jan-18 Apr-18 May-19 Sep-19 Dec-19

Feb-12 May-12 Aug-12 Sep-13 Dec-13 Apr-14 May-15 Aug-15 Nov-15 Feb-16 Mar-17 Jul-17 Oct-17 Nov-18 Feb-19 May-19 Jun-20 Oct-11 Nov-12 Mar-13 Jun-13 Jul-14 Oct-14 Jan-15 Jun-16 Sep-16 Dec-16 Jan-18 Apr-18 Aug-18 Sep-19 Dec-19 Mar-20

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 21 30 Jun 2020

Financial Summary

Income statement Cash flow summary YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E Total revenue 55,822 75,666 92,009 100,29 106,21 Pretax profit 7,550 13,454 17,560 19,471 20,940 Cost of sales -38,728 -50,932 -60,407 -66,3854 -70,9313 Finance cost 388 120 429 420 418 Gross profit 17,094 24,733 31,602 33,909 35,282 Interest income -344 -505 -791 -1,228 -1,744 Surcharge -326 -371 -460 -501 -531 P rofit or loss of associates -128 -140 -202 -200 -177 S&D expenses -4,447 -5,488 -6,441 -6,820 -6,904 F air value change -276 -673 0 0 0 Administrative expenses -3,800 -5,696 -6,441 -6,820 -7,116 Provision for assets -8 249 0 0 0 Fair value change -362 290 0 0 0 Depreciation and amortization 1,932 2,020 2,031 2,048 2,063 Asset impairment -1,095 -1,259 -1,564 -1,605 -1,593 Income tax paid -1,247 -1,960 -2,564 -2,843 -3,057 EBIT 7,063 12,209 16,696 18,163 19,138 Change in working capital 1,788 531 -3,297 -838 -1,617 Net finance income/(cost) -136 46 362 808 1,326 Others 870 167 0 0 0 Finance income 344 505 791 1,228 1,744 Cash flow from operation 10,527 13,265 13,167 16,831 16,827 Finance expenses -479 -458 -429 -420 -418 Net capex on PP&E -1,003 -2,157 -1,500 -1,500 -1,500 Other gains/(losses) 495 1,059 300 300 300 Investment in JV/associates -648 -11 -50 -50 0 Profit of JV and associates 128 140 202 200 177 Investment in subsidiaries 311 153 0 0 0 Pretax profit 7,550 13,454 17,560 19,471 20,940 Dividend received 13 14 20 20 0 Income tax -1,247 -1,960 -2,564 -2,843 -3,057 Interest received 344 505 791 1,228 1,744 After tax profit 6,303 11,494 14,996 16,628 17,883 Others -9,781 -10,485 -70 0 0 MI -187 -288 -375 -416 -447 Cash flow from investing -10,765 -11,981 -809 -302 244 Net profit 6,116 11,207 14,621 16,212 17,436 E quity financing/(repurchase) 0 0 0 0 0 Net bank borrowings 1,584 1,756 -300 -200 100 D&A 1,932 2,020 2,031 2,048 2,063 Dividend paid -1,233 -2,165 -3,516 -4,606 -5,107 EBITDA 8,995 14,230 18,728 20,212 21,201 Interest paid -479 -458 -429 -420 -418 Others 955 -283 0 0 0 Cash flow from financing 827 -1,151 -4,245 -5,226 -5,425 Change in cash 589 134 8,113 11,303 11,646 Cash at beginning of the year 4,104 11,985 13,527 21,640 32,942 Exchange and others 7,293 1,408 0 0 0 Cash at the end of the year 11,985 13,527 21,640 32,942 44,588

Balance sheet Key ratios YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec FY18A FY19A FY20E FY21E FY22E Non-current assets 21,879 22,041 21,256 21,674 20,681 Sales mix (%) PP&E 11,867 10,615 10,446 10,262 10,062 Concrete machinery 30% 31% 30% 31% 32% JV/associates 2,328 2,985 3,217 3,447 3,624 Excavator 34% 37% 39% 38% 37% Goodwill 51 49 49 49 49 Crane machinery 17% 18% 18% 19% 19% LT trade receivables 366 1,286 731 1,467 860 Piling machinery 8% 6% 6% 6% 5% Intangible assets 3,880 3,339 3,048 2,683 2,319 Earth moving machinery 4% 3% 2% 2% 2% AFS investments 1,121 0 0 0 0 Other machinery 4% 3% 2% 2% 2% Others 1,115 2,656 2,656 2,656 2,656 Other business 3% 2% 2% 2% 2% Deferred tax assets 1,152 1,109 1,109 1,109 1,109 Total 100% 100% 100% 100% 100% Current assets 51,896 68,500 85,223 96,357 113,13 Profit & loss ratio (%) Inventories 11,595 14,252 15,538 17,563 17,4163 Gross margin 30.6 32.7 34.3 33.8 33.2 Trade and bills receivables 20,802 21,793 29,632 26,423 32,358 EBIT margin 12.7 16.1 18.1 18.1 18.0 Other receivables 1,704 3,030 2,515 3,530 2,872 Net profit margin 11.3 15.2 16.3 16.6 16.8 Others 3,272 6,897 6,897 6,897 6,897 Growth (%) Cash 11,985 13,527 21,640 32,942 44,588 Revenue 45.6 35.5 21.6 9.0 5.9 Gross profit 48.3 44.7 27.8 7.3 4.0 Current liabilities 33,935 42,149 46,906 46,736 49,742 EBIT n/a 72.9 36.8 8.8 5.4 Trade and bills payables 17,191 20,295 25,052 24,782 27,688 Net profit 192.3 83.2 30.5 10.9 7.5 Bank borrowings 8,336 10,771 10,771 10,871 10,971 Balance sheet ratio Tax payable 524 1,490 1,490 1,490 1,490 Current ratio (x) 1.5 1.6 1.8 2.1 2.3 Others 3,567 4,162 4,162 4,162 4,162 Receivable turnover days 133 107 106 106 105 Non-current liabilities 7,337 2,866 2,566 2,266 2,266 Inventory turnover days 91 93 90 91 90 Bank borrowings 5,974 1,303 1,003 703 703 Payable turnover days 133 134 137 137 135 Deferred tax liabilities 650 714 714 714 714 Net debt / total equity (%) Net cash Net cash Net cash Net cash Net cash Others 471 728 728 728 728 Profitability (%) Equity 32,502 45,527 57,007 69,030 81,806 ROA 9.3 13.6 14.8 14.4 13.8 Shareholders' equity 31,485 44,421 55,526 67,133 79,462 ROE 21.5 29.5 29.3 26.4 23.8 MI 1,017 1,106 1,481 1,896 2,343 Per share data EPS (RMB) 0.79 1.36 1.73 1.92 2.07 BVPS (RMB) 4.04 5.27 6.58 7.96 9.42 DPS (RMB) 0.28 0.43 0.55 0.61 0.65 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 22 30 Jun 2020

CMB International Securities | Equity Research | Company Update

Jiangsu Hengli Hydraulic (601100 CH)

BUY (Maintain) Order intake remains strong Target Price: RMB93.0 (Previous TP RMB85.0) We incorporate our new industry sales forecast of excavator into our model and Up/Downside: +24% revise up Hengli’s earnings forecast in 2020E-22E by 9-11%, making us 10%- Current Price: RMB75.19

13% above consensus. Hengli is highly exposed to the infrastructure spending growth. Besides, Hengli’s growth will be driven by motor, pump & valve, where China Capital Goods import substitution potential remains huge. We believe all these will continue to Wayne Fung, CFA support Hengli’s premium valuation. We raise our TP to RMB93 from RMB85, (852) 3900 0826 based on unchanged 45x 2020E P/E multiple. Maintain BUY. [email protected]

 Incorporated new industry assumptions. We revise up our excavator sales projection in China by 4% in 2020E-21E. We expect excavator sales growth Stock Data of 17%/5% in 2020E/21E (Please refer to our sector note “Raise industry sales Mkt Cap (RMB mn) 66,318 forecast in 2020E-21E; Solid upcycle” for more details). Avg 3 mths t/o (RMB mn) 287 52w High/Low (RMB) 77.67/27.5  Robust order intake in 2Q. Based on our check, Hengli’s order intakes for Total Issued Shares (mn) 882 Source: Bloomberg hydraulic cylinders (for excavator) in Jun remains strong, following the delivery of 65k/63k units in Apr/May. Shareholding Structure WANG’s family 71.0%  High growth of pump & valve to continue. Hengli is currently adding two CCASS (Hong Kong) 6.5% new production lines for small-size pump & valve, which will take the total Deutsche Bank AG 2.2% production lines to five by year end. We forecast the revenue from pump & Free float 20.3% Source: Company data valve to grow 45%/45%/30% in 2020E/21E/22E. Besides, we expect the gross margin to further expand driven by operating leverage. Share Performance Absolute Relative  Key risks: (1) economic risk; (2) risk of overseas expansion; (3) increase in 1-mth 8.9% 1.5% raw materials cost. 3-mth 30.4% 16.9% 6- mth 53.1% 48.8% Source: Bloomberg Earnings Summary 12-mth Price Performance (YE 31 Dec) FY18A FY19A FY20E FY21E FY22E (RMB) Revenue (RMB mn) 4,211 5,414 7,058 8,450 9,540 601100 CH 90.0 SHSZ300 (rebased) YoY growth (%) 50.6 28.6 30.4 19.7 12.9 80.0 Net income (RMB mn) 837 1,296 1,816 2,252 2,610 70.0 60.0 EPS (RMB) 0.95 1.47 2.06 2.55 2.96 50.0 YoY growth (%) 119.1 54.9 40.1 24.0 15.9 40.0 30.0 Consensus EPS (RMB) NA NA 1.87 2.26 2.64 20.0 EV/EBITDA (x) 59.9 40.1 30.5 25.3 22.3 10.0 0.0 P/E (x) 79.3 51.2 36.5 29.4 25.4 7/2019 10/2019 1/2020 4/2020

P/B (x) 14.6 11.9 9.7 7.9 6.6 Source: Bloomberg Yield (%) 0.4 0.8 1.1 1.4 1.6 ROE (%) 19.9 25.6 29.2 29.5 28.2 Auditor: RSM Net debt / equity (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, Bloomberg, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 23 MORE REPORTS FROM BLOOMBERG: CMBR AND http://www.cmbi.com.hk 30 Jun 2020

Figure 61: Change in key assumptions

Old New Change (RMB mn) 2020E 2021E 2022E 2020E 2021E 2022E 2020E 2021E 2022E

Revenue Hydraulic cyclinder for excavator 2,703 2,973 - 2,716 2,987 3,137 0.5% 0.5% - Specialised hydraulic cyclinder for heavy equpment 1,743 2,004 - 1,764 1,993 2,093 1.2% -0.6% - Hydraulic pump and valve 1,558 2,259 - 1,684 2,442 3,174 8.1% 8.1% - Completed set of equipment 339 424 - 217 250 280 -35.9% -41.0% - Component 639 702 - 651 749 824 2.0% 6.6% - Revenue (hydraulic business) 6,981 8,363 - 7,032 8,421 9,507 0.7% 0.7% - Other business 47 52 - 26 29 32 -46.0% -43.6% - Total revenue 7,029 8,415 - 7,058 8,450 9,540 0.4% 0.4% -

Gross margin Hydraulic cyclinder for excavator 40.0% 40.0% - 42.0% 42.0% 42.0% 2.0 2.0 - Specialised hydraulic cyclinder for heavy equpment 40.0% 40.0% - 38.0% 38.0% 38.0% -2.0 -2.0 - Hydraulic pump and valve 36.0% 37.0% - 38.0% 40.0% 40.0% 2.0 3.0 - Completed set of equipment 21.0% 21.0% - 29.0% 29.0% 29.0% 8.0 8.0 - Component 35.0% 35.0% - 30.0% 30.0% 30.0% -5.0 -5.0 - Gross margin (hydraulic business) 37.7% 37.8% - 38.5% 39.0% 39.0% 0.8 1.2 - Other business 50.0% 50.0% - 66.0% 66.0% 66.0% 16.0 16.0 - Average gross margin 37.8% 37.9% - 38.6% 39.1% 39.1% 0.8 1.2 -

Net profit 1,670 2,027 - 1,816 2,258 2,627 8.7% 11.4% - Source: Company data, CMBIS estimates

Figure 62: Hengli’s revenue breakdown Figure 63: Gross margin for segment

(RMB mn) 45% Hydraulic Other business cyclinder for 10,000 40% excavator 9,000 Component 35% Specialised 8,000 hydraulic 7,000 30% cyclinder for 6,000 Completed set of heavy equpment equipment 25% Hydraulic pump 5,000 and valve 20% 4,000 Hydraulic pump and valve 3,000 15% Completed set 2,000 of equipment Specialised hydraulic 10% 1,000 cyclinder for heavy 0 equpment 5% Component Hydraulic cyclinder for 0% excavator 2016 2017 2018 2019 2020E 2021E 2022E

Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates

Figure 64: Hengli’s market share in hydraulic Figure 65: Hengli’s revenue of pump & valves cylinder for excavator

60% 56% 54% RMB mn 51% 51% 51% 49% 3,500 300% 47% 50% 47% 3,000 250% 40% 35% 35% 2,500 199% 30% 200% 30% 24% 2,000 143% 150% 19% 1,500 20% 92% 13% 12% 100% 1,000 10% 45% 45% 30% 500 50% 0% 0 0% 2017 2018 2019 2020E 2021E 2022E Hydraulic pump and valve Growth (YoY) - RHS

Source: Company data, CCMA, CMBIS estimates Source: Company reports, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 24 30 Jun 2020

Figure 66: Hydraulic components for an excavator Figure 67: Hydraulic components for an AWP

Note: A: Hydraulic cylinder, B: Remote control valve, C: Swing Note: A: Hydraulic cylinder, B: Axial Piston Pump, C: Control valve, D: motor, D: Flow sharing mobile valve, E: Single pump, F: Pilot control Motor device Source: Company, CMBIS Source: Company, CMBIS

Figure 68: Hengli’s P/E band Figure 69: Hengli’s P/B band

RMB RMB 140 120

53x 11.5x 120 100

100 43x 80 9.0x

80 33x 60 6.5x 60 23x 40 40 4.0x 13x 20 1.5x 20

0 0

Jul-14 Jul-17

Oct-17 Oct-11 Oct-14

Apr-18 Apr-14

Jun-13 Jun-16 Jan-15 Jan-18

Feb-12 Aug-12 Mar-13 Sep-13 Jul-14 Jan-15 Aug-15 Feb-16 Sep-16 Dec-16 Jul-17 Jan-18 Aug-18 Feb-19 Dec-19 Oct-11 May-12 Nov-12 Jun-13 Dec-13 Apr-14 Oct-14 May-15 Nov-15 Jun-16 Mar-17 Oct-17 Apr-18 Nov-18 May-19 Sep-19 Mar-20

Mar-13 Mar-17 Mar-20

Feb-12 Feb-16 Feb-19

Nov-12 Dec-13 Nov-15 Dec-16 Nov-18 Dec-19

Aug-12 Sep-13 Aug-15 Sep-16 Aug-18 Sep-19

May-12 May-15 May-19

Source: Bloomberg, Company data, CMBIS estimates Source: Bloomberg, Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 25 30 Jun 2020

Financial Summary

Income statement Cash flow summary YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E Total revenue 4,211 5,414 7,058 8,450 9,540 Pretax profit 963 1,493 2,110 2,617 3,031 Cost of sales -2,671 -3,369 -4,332 -5,145 -5,808 Finance cost -32 -33 52 44 41 Gross profit 1,540 2,045 2,726 3,305 3,732 Profit or loss of associates 0 0 0 0 0 Surcharge -43 -52 -71 -85 -95 Loss/(gain) on disposal PP&E/business 3 1 0 0 0 S&D expenses -115 -111 -169 -203 -229 Depreciation & amortization 232 264 293 317 341 Administrative expenses -385 -435 -600 -701 -763 Income tax paid -337 -375 -295 -366 -424 Asset impairment -119 -52 0 0 0 Change in working capital -345 66 -843 -45 -653 EBIT 879 1,395 1,886 2,317 2,645 Others 332 253 0 0 0 Net finance income/(cost) 30 31 139 198 291 Cash flow from operation 799 1,660 1,316 2,566 2,335 Finance income 168 187 190 243 332 Net capex on PP&E -361 -434 -500 -400 -400 Finance expenses -138 -156 -52 -44 -41 Investment in JV/associates 0 0 0 0 0 Other gains/(losses) 54 67 85 101 95 Investment in subsidiaries -117 0 0 0 0 Profit of JV and associates 0 0 0 0 0 Investment in intangibles -19 -4 -10 -10 0 Pretax profit 963 1,493 2,110 2,617 3,031 Dividend received JV/associates 0 0 0 0 0 Income tax -126 -195 -295 -366 -424 Others 216 -14 0 0 0 After tax profit 837 1,298 1,814 2,250 2,607 Cash flow from investing -281 -452 -510 -410 -400 MI -0 -2 2 2 3 Proceeds from equity financing/(repurchase) 0 0 0 0 0 Net profit 837 1,296 1,816 2,252 2,610 Net bank borrowings -8 -100 -150 -150 0 Dividend paid -139 -265 -529 -726 -901 D&A 232 264 293 317 341 Interest paid -3 -107 -52 -44 -41 EBITDA 1,110 1,659 2,179 2,633 2,986 Others -1 18 0 0 0 Cash flow from financing -152 -454 -731 -921 -942 Change in cash 366 754 75 1,235 994 Cash at beginning of the year 1,146 1,571 2,343 2,418 3,654 Exchange and others 59 18 0 0 0 Cash at the end of the year 1,571 2,343 2,418 3,654 4,647

Balance sheet Key ratios YE 31 Dec (RMB mn) FY18A FY19A FY20E FY21E FY22E YE 31 Dec FY18A FY19A FY20E FY21E FY22E Non-current assets 2,828 2,935 3,153 3,246 3,305 Sales mix (%) PP&E 2,233 2,364 2,583 2,678 2,748 Cylinder for excavator 43% 40% 38% 35% 33% JV/associates 0 0 0 0 0 Cylinder for 27% 25% 25% 24% 22% Goodwill 0 0 0 0 0 Hydraulic pump and valve 11% 21% 24% 29% 33% Intangible assets 279 273 272 270 258 Completed set of equipment 5% 3% 3% 3% 3% AFS investments 10 0 0 0 0 Component 13% 9% 9% 9% 9% Others 257 257 257 257 257 Other business 1% 0% 0% 0% 0% Deferred tax assets 49 41 41 41 41 Total revenue 100% 100% 100% 100% 100% Current assets 4,443 5,492 6,773 8,056 9,998 Profit & loss ratio (%) Inventories 1,050 997 1,614 1,488 2,013 Gross margin 36.6 37.8 38.6 39.1 39.1 Trade and bill receivables 1,328 1,639 2,229 2,402 2,825 EBIT margin 20.9 25.8 26.7 27.4 27.7 Prepayment 135 98 98 98 98 Net profit margin 19.9 24.0 25.7 26.6 27.3 Others 358 414 414 414 414 Growth (%) Pledged deposits 0 0 0 0 0 Revenue 50.6 28.6 30.4 19.7 12.9 Cash 1,571 2,343 2,418 3,654 4,647 Gross profit 67.9 32.7 33.3 21.2 12.9 Current liabilities 1,981 2,170 2,434 2,335 2,631 EBIT 90.9 58.7 35.2 22.8 14.2 Trade and bill payables 691 791 1,155 1,157 1,453 Net profit 119.1 54.9 40.1 24.0 15.9 Bank borrowings 905 937 837 737 737 Balance sheet ratio Tax payable 24 62 62 62 62 Current ratio (x) 2.2 2.5 2.8 3.4 3.8 Advance from customers 154 192 192 192 192 Receivable turnover days 100 100 100 100 100 Others 208 188 188 188 188 Inventory turnover days 128 111 110 110 110 Non-current liabilities 715 643 593 543 543 Payable turnover days 82 80 82 82 82 Bank borrowings 353 200 150 100 100 Net debt / total equity (%) Net cash Net cash Net cash Net cash Net cash Deferred tax liabilities 47 70 70 70 70 Profitability (%) Deferred income 165 223 223 223 223 ROA 12.5 16.5 19.8 21.2 21.2 Others 150 150 150 150 150 ROE 19.9 25.6 29.2 29.5 28.2 Equity 4,575 5,614 6,899 8,423 10,129 Per share data Shareholders' equity 4,547 5,584 6,871 8,397 10,105 EPS (RMB) 0.95 1.47 2.06 2.55 2.96 MI 28 30 29 26 24 BVPS (RMB) 5.16 6.33 7.79 9.52 11.46 DPS (RMB) 0.30 0.60 0.82 1.02 1.18 Source: Company data, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 26 30 Jun 2020

Disclosures & Disclaimers

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CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months

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