DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 25 January 2011 Asia Pacific/China Equity Research Construction & Farm Machinery China Construction Machinery Sector COMMENT Fixed asset investments dead? No! Figure 1: Post-Rmb4 tn eraplanned investments in newly started projects continue rising - 500 1,000 1,500 2,000 2,500 3,000 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10 (Rmb bn) Source: China Statistics Bureau ■ FY11 demand could be stronger. The upcoming strong season could be stronger than expected, as investments in newly started projects surged from November 2010. Manufacturers have turned more bullish recently on their own equipment sales and industry demand outlook for 2011. Even the industry growth of wheel loaders, expected to be the weakest among major equipment, is estimated at 15% in FY11. ■ Infrastructure should drive growth. Infrastructure should drive equipment demand, given the central governments target of taking GDP growth above 8% this year. Local governments are keen to start new projects to raise their urbanisation rates and economic growth. The expected interest rate hikes should not impact customers purchase intentions significantly, given strong downstream demand. ■ Top pick. We prefer Sany A, as: (1) it has the highest exposure to high- growth products; (2) it should continue gaining market share in the excavator and truck-mounted crane markets; (3) on a five-year view, the company is ahead of its competitors on overseas expansion strategy. It has two production bases one in India and another in Brazil. Based on our revised earnings estimates, Sany A is trading at 12x 2011E P/E, implying 34% potential upside. The upcoming strong season should lead to consensus upgrades and trigger stock price performance. Research Analysts Victoria Li 86 21 3856 0326 [email protected]
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
25 January 2011Asia Pacific/ChinaEquity Research
Construction & Farm Machinery
China Construction Machinery Sector
COMMENT
Fixed asset investments dead? No! Figure 1: Post-Rmb4 tn era�planned investments in newly started projects continue rising
-
500
1,000
1,500
2,000
2,500
3,000
May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 10 May 10 Aug 10 Nov 10
(Rmb bn)
Source: China Statistics Bureau
■ FY11 demand could be stronger. The upcoming strong season could be stronger than expected, as investments in newly started projects surged from November 2010. Manufacturers have turned more bullish recently on their own equipment sales and industry demand outlook for 2011. Even the industry growth of wheel loaders, expected to be the weakest among major equipment, is estimated at 15% in FY11.
■ Infrastructure should drive growth. Infrastructure should drive equipment demand, given the central government�s target of taking GDP growth above 8% this year. Local governments are keen to start new projects to raise their urbanisation rates and economic growth. The expected interest rate hikes should not impact customers� purchase intentions significantly, given strong downstream demand.
■ Top pick. We prefer Sany A, as: (1) it has the highest exposure to high-growth products; (2) it should continue gaining market share in the excavator and truck-mounted crane markets; (3) on a five-year view, the company is ahead of its competitors on overseas expansion strategy. It has two production bases � one in India and another in Brazil. Based on our revised earnings estimates, Sany A is trading at 12x 2011E P/E, implying 34% potential upside. The upcoming strong season should lead to consensus upgrades and trigger stock price performance.
Focus charts and tables Figure 2: Inland China FAI accounted for 64% in 2010E Figure 3: And growth is stronger than East China
0
20
40
60
80
100
1990 1993 1996 1999 2002 2005 2008
East China Central China West China
(%)
0
20
40
60
80
100
1990 1993 1996 1999 2002 2005 2008
East China Central China West China
(%)
0
10
20
30
40
1997 1999 2001 2003 2005 2007 2009
East China Central China West China
(%)
0
10
20
30
40
1997 1999 2001 2003 2005 2007 2009
East China Central China West China
(%)
Source: CEIC Source: CEIC
Figure 4: Investment growth for newly started projects trends up
Figure 5: Estimated sales growth for major equipment
010
20
30
40
50
Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10
-94191141191241291
YoY growth of new s tarted projects' planned investment (L)Loader sales growthExcavator sales growthBulldozer sales growthTruck-mounted c rane sales growthCrawler crane
* Earnings growth and valuations based on our estimates; Source: Company data, Credit Suisse estimates
25 January 2011
China Construction Machinery Sector 3
Fixed asset investments dead? No! Leading indicator shows positive signal The leading indicator, planned investments in newly started projects, saw its YoY growth accelerating to 47% in November 2010 from 17% in October 2010. and it continued to rise 2% MoM in December 2010. We think it�s a positive signal that sales growth YoY of major equipment in 1H11 could be higher than expected. Meanwhile, manufacturers have turned more bullish on major equipment demand recently. They raised their sales guidelines for 11E. They also estimate China�s construction machinery industry growth for 2011 at 20-25%, up from 15-20%. Even the industry growth of wheel loader, expected to be the weakest among major equipment, is estimated at 15% for 2011, versus 5-10% several months ago.
Infrastructure to play a leading role Local governments are taking up the central government�s role of increasing investments in infrastructure. In developed areas, or coastal China, local governments target to raise their urbanisation rates by expanding the scales of smaller cities. In inland China, there�s still huge demand for basic infrastructure construction and basic housing. Demand for construction machines should be supported mainly by: (1) infrastructure projects in inland China and mid-to-small cities and towns, including railways, highways, public facilities and BDAs (business development areas); (2) urban railway construction and overhead road construction in tier 1-3 cites; (3) construction projects for wind farms, nuclear power plants, hydro power plants, ports and shipyards; (4) residential houses in tier 2 and smaller cities, and towns; and (5) expansion and construction of petrochemical plants.
We expect China to hike interest rates further to control CPI inflation this year, but the impact should be low. Based on history and our checks with distributors, a small interest rate hike should not impact customers� purchase intention significantly, as long as equipment demand from downstream is strong. On the other hand, a 10% drop in new banking loans is acceptable and should not impact local governments� investment plans significantly, in our view.
Stock picks The construction machinery sector achieved a strong sales performance in 2010. Almost all the major players reported stronger than expected sales on some major equipment. On the other hand, manufacturers have turned more bullish on sector growth outlook and their own equipment sales in 2011. We revise up our earnings forecasts for major players.
Sany A is our top pick, as: (1) it has the greatest exposure to high-growth products; (2) it should continue gaining market share in the excavator and truck-mounted crane markets; (3) based on a five-year view, the company is ahead of its competitors on overseas expansion strategy. It has two production bases � one in India and another in Brazil. We believe it would be a conservative choice, should the worst case happen, i.e., FAI loses its power to drive China�s economic growth in 2011-12. Based on our revised earnings forecasts, Sany A is trading at 12x P/E 2011E, implying 34% potential upside. The upcoming strong season should lead to consensus upgrades and trigger stock price performance.
25 January 2011
China Construction Machinery Sector 4
Leading indicator shows positive signal Thanks to the Rmb4 tn stimulus package, the entire construction machinery sector achieved strong sales performance in 2010. Among major equipment, excavator was the winner with 78% YoY growth, followed by bulldozer (+64% YoY), wheel loader (+51% YoY), crawler crane (+50% YoY) and truck-mounted crane (+30% YoY). Now the whole sector is in the post-Rmb4 tn era. Obviously, the high growth in 2010 will not repeat in 2011, but 2011 should be a good year for construction equipment, in our view.
In 4Q10, YoY sales growth of major equipment didn�t slow down as much as the market had expected, given the high sales base in 4Q09. And in November, the leading indicator, YoY growth of newly started projects� planned investment, surged to 47% from 17% in October 2010. Although the YoY growth slowed to 23% in December due to the high base in December 2009, planned investments in newly started projects rose 2% MoM. We think it�s a positive signal that YoY sales growth of major equipment in 1H11 could be higher than expected.
Meanwhile, manufacturers have turned more bullish on major equipment demand this year. They now estimate China�s construction machinery industry growth at 20-25%, up from 15-20%; loader industry growth estimated at 15%, bulldozer demand growth at 20-25%. We as well as consensus might have had underestimated demand for construction machinery for 2011, in our view.
Figure 8: Investment growth for newly started projects trends up
0
10
20
30
40
50
Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10
-9
41
91
141
191
241
291
YoY growth of new started projects' planned investment (L)Loader sales growthExcavator sales growthBulldozer sales growthTruck-mounted crane sales growthCrawler crane
(%) (%)
0
10
20
30
40
50
Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10
-9
41
91
141
191
241
291
YoY growth of new started projects' planned investment (L)Loader sales growthExcavator sales growthBulldozer sales growthTruck-mounted crane sales growthCrawler crane
(%) (%)
Source: National Bureau of Statistics of China, China construction machinery network
Newly started project investment growth surged to 47% YoY in November 2010
Some manufacturers raised their sales guidance
25 January 2011
China Construction Machinery Sector 5
Figure 9: Infra investment didn�t fall in 2H10 Figure 10: Property investments recovered strongly
Figure 13: Excavator monthly data Figure 14: Wheel loader monthly data
-
5,000
10,000
15,00020,000
25,000
30,000
35,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100-50050100150200250300
Monthly sales volume YoY change
(%)
-
5,000
10,000
15,00020,000
25,000
30,000
35,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100-50050100150200250300
Monthly sales volume YoY change
(%)
-5,000
10,00015,000
20,00025,000
30,00035,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100-50
050
100150
200250
Monthly sales volume YoY change
(%)
-5,000
10,00015,000
20,00025,000
30,00035,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100-50
050
100150
200250
Monthly sales volume YoY change
(%)
Source: China Construction Machinery Network Source: China Construction Machinery Network
Figure 15: Bulldozer monthly data Figure 16: Truck-mounted crane monthly data
-
500
1,000
1,500
2,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100
-50
0
50
100
150
200
Monthly Sales volume YoY change
(%)
-
500
1,000
1,500
2,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100
-50
0
50
100
150
200
Monthly Sales volume YoY change
(%)
-
1,000
2,000
3,000
4,000
5,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100
-50
0
50
100
150
200
Monthly sales volume YoY change
(%)
-
1,000
2,000
3,000
4,000
5,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100
-50
0
50
100
150
200
Monthly sales volume YoY change
(%)
Source: China Construction Machinery Network Source: China Construction Machinery Network
Figure 17: Crawler crane monthly data Figure 18: Concrete machines production data (till Aug 10)
-
50
100
150
200
250
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100
-50
0
50
100
150
200
Monthly sales volume YoY change
(%)
-
50
100
150
200
250
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100
-50
0
50
100
150
200
Monthly sales volume YoY change
(%)
-
10,000
20,000
30,000
40,000
50,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100-50050100150200250300
Monthly production volume YoY change
(%)
-
10,000
20,000
30,000
40,000
50,000
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
-100-50050100150200250300
Monthly production volume YoY change
(%)
Source: China Construction Machinery Network Source: China Construction Machinery Network
25 January 2011
China Construction Machinery Sector 7
Infrastructure to play a leading role After the high-growth period of 2006-10, the China government targets to maintain its GDP growth at above 8% in 2011. Fixed asset investments should continue to be a major contributor to this growth, in our view. China�s fixed asset investments have been an important driver of China�s rapid economic growth. According to the National Bureau of Statistics of China, total fixed asset investments in China increased from Rmb3.7 tn in 2001 to Rmb22.5 tn in 2009, at a 25.3% CAGR, while total fixed asset investments for urban areas in China increased from about Rmb3.0 tn in 2001 to about Rmb19.4 tn in 2009, at a 26.3% CAGR. During the financial crisis, increase in fixed asset investments contributed 74% and 196% of GDP increment in 2008 and 2009, respectively.
Figure 19: FAI increment contribution (%) to GDP increase Figure 20: FAI total value and FAI YoY growth
Although the effect of the Rmb4 tn stimulus package is fading, local governments are taking up the central government�s role of increasing investments in infrastructure. In developed areas, or coastal China, local governments are targeting to raise their urbanisation rates by expanding the scales of the smaller cities. In inland China, there�s still huge demand for basic infrastructure construction and basic housing. The central government has shown its intention on encouraging fixed asset investments in middle and west China. We also see investments in these areas surging. In infrastructure, fast-growing sectors include urban railway system construction, power industry investments (including investments in new energy and power grids), and utility management. Property investment growth is estimated to slow down in 2011, but will likely be supported by basic housing demand from small and medium-size cities and local governments� economy housing plans. Mining investment growth is estimated to accelerate, with the world economy heating up and industry consolidation in China.
25 January 2011
China Construction Machinery Sector 8
Figure 21: China will likely accelerate its urbanisation
0102030405060708090
1950 1960 1970 1980 1990 2000 2010E 2020E 2030E
Urbanization rate (%)
World China USA
Europe Japan Republic of Korea
Russian Federation India Africa
Source: Company data, Credit Suisse estimates
Figure 22: Inland China FAI accounted for 64% in 2010E�
Figure 23: �growth was stronger than that in east China
0102030405060708090
100
1990 1993 1996 1999 2002 2005 2008
East China Central China West China
(%)
0102030405060708090
100
1990 1993 1996 1999 2002 2005 2008
East China Central China West China
(%)
0
5
10
15
20
25
30
35
40
1997 1999 2001 2003 2005 2007 2009
East China Central China West China
(%)
0
5
10
15
20
25
30
35
40
1997 1999 2001 2003 2005 2007 2009
East China Central China West China
(%)
Source: CEIC Source: CEIC
25 January 2011
China Construction Machinery Sector 9
Figure 24: Local governments� regional development plans Region Plan Details Bejing, Tianjin, Hebei
Jingjinyi city group development plan
To build an important city group in north China, Beijing plans to develop it as a service and financial centre; Tianjin to be the most important harbour city and economic centre; Heibei to build important raw materials and modern agriculture base in the area; to set up three different directions of development for the entire area and finally have a great influential economic area in north China
Tianjin Binhai new district development plan
Deepen technology innovation and improve the ability of companies to innovate; give great support to technology innovation and let R&D reach 3% of GDP in 2010; to build an international-level research transformation base; speed up high-tech park construction and strengthen cooperation with the Beijing Zhongguancun high-tech park
Shandong The yellow river delta efficient ecological economy district development plan
Complete infrastructure and build the most important modern agriculture park, logistics area and tech innovation district in the province; to cooperate with the Binhai new district, develop a chemical, electricity power, harbour industry and modern logistic area, completing the traffic system and developing an ecological cycle economy as a model
Shanghai To build a global financial and shipping centre
Stimulate Shanghai's modern service and manufacturing industries, to improve the ratio of the services industry in Shanghai, and the efficiency of capital employment; to build an influential international financial centre with sound rules and regulations before 2020 and a shipping centre before 2020
Jiangsu, Zhejiang The Yangtze river delta district plan
To build a globally competitive leading city group, Asia-Pacific's important door and the world's important service centre and advanced manufacturing centre
Fujian The west of Taiwan Straits economic area
To cooperate with Taiwan economically and to become an important base for eastern coastal advanced manufacturing; to become a tourist centre for nature and culture; strive to develop electronic information, equipment manufacturing, and the petrol and chemical industries; speed up adoption of high tech, to be a more efficient and low resource-using industry, to become a national leading industry base and a pioneer in terms of cooperation with Taiwan
Guangdong The delta area of the Zhujiang river
To build 100 innovation platforms for national laboratory and project centre; R&D expenses to reach 2.5% of GDP and will have 280,000 researchers by 2012; to have a 3,000 mile highway in the area, 1,100 miles of urban transportation, port throughput to reach 900 mn t, container throughput ability to reach 47 mn containers and airport throughput to reach 80 mn passengers by 2012; to have 2,200 miles of urban transportation, port throughput to reach 1.4 bn t, container throughput to reach 72 mn containers and airport throughput to reach 150 mn passengers by 2020; to reach GDP of Rmb4 tn by 2012, GDP per capita of Rmb80,000 (US$11,500) and an urbanisation rate of about 81.0%; the service industry to reach 53% of total area; to reach GDP of Rmb7.25 tn by 2020, GDP per capita of Rmb135,000 (US$19,400) and urbanisation of about 85.0%; the services industry to reach 60% of total area
Hainan International tour island To build the most important tourist base in south China; to complete east circle railway at the end of 2010, and west circle railway at the end of 2015; speed up highway road construction to complete the traffic system of the whole island To reach 31.6 mn person-time per day in 2012, tourist income to reach Rmb31.4 bn To reach 47.6 mn person-time per day in 2015, tourist income to reach Rmb54 bn To reach 76.8 mn person-time per day in 2020, tourist income to reach Rmb124 bn
Huibei and Hunan Chang-Zu-Tan cities group two oriented society development plan
To develop an environment and resources protecting society, using cycle economy system to get sustainable growth in area; to complete the ecological system to protect the resources of the area; to get rapid development in advanced manufacturing and high-tech industries; to maintain the services industry as more than 50% of the whole economy and reach urbanisation of 70% in 2011
Jiangxi Poyang Lake ecological economy plan
To develop electronic, new resource, bio-tech, and raw material industry bases in the area; to strengthen road, railway and airport development and make the transportation system complete; GDP per capita to reach Rmb45,000 and Rmb 80,000 in 2015 and 2020, respectively; urbanisation rate to reach 50% and 60% in 2015 and 2020, respectively
Anhui Wan River area industry plan
To develop an integrated modern transportation system; speed up railway and infrastructure construction to meet the needs of further development; GDP to reach Rmb1.35 tn, urbanisation to reach 55% in 2015; R&D expenses to reach 2.2% of total GDP in 2015
Liaoning Coastal economic area development plan
To make Dalian the centre to drive up the entire area�s economy and industry; further develop advanced manufacturing, such as transportation, telecommunication and equipment-making industries; GDP per capita to reach Rmb50,000 and urbanisation to reach 65% in 2012
Jilin Tumen River area cooperate develop plan
As a door and platform for economic cooperation for north-east Asia, Tumen River is the new development point in north-east China. It will provide help to infrastructure construction such as transportation, water conservancy, energy, and information service. It aims to strengthen the cooperation with north-east Asian countries outside and interact with other areas in inner China, especially north-east China. Taking Yanji, Longjing and Tumen as the centre of the area, to make fair progress in competitive advantage and general strength.
25 January 2011
China Construction Machinery Sector 10
Figure 24: Local governments� regional development plans (continued) Region Plan Details Guangxi Beibu Gulf economic
zone development plan To complete entire road network, especially on national highway network projects; speed up the development of a convenient road to port; take Nanning as the transportation centre and get great traffic coverage in the related area; focus on the metallurgy, petrochemical and high-tech industries to develop the economy; to reach 60% urbanisation rate in 2020 and R&D expenses to reach 4% of total GDP
Gansu, Shaanxi Guanzhong-Tianshui economic zone plan
To develop an inland economic strategy zone, to be an important base for advanced manufacturing; GDP to reach Rmb660 bn and Rmb1.64 tn in 2012 and 2020, respectively; GDP per capita to reach Rmb22,500 and Rmb53,000 in 2012 and 2020, respectively; urbanisation rate to reach 50% and 60% in 2012 and 2020, respectively
Sichuan Chengdu, Chongqing economic zone plan
To develop an advanced economic zone surrounding Chengdu and Chongqing as two centres in the area; to develop a nationwide important equipment manufacturing base for motors, national aviation and spaceflight; to reach 6.5% of national GDP, with urbanisation reaching 52% in 2015 and 60% in 2020; GDP per capita to reach Rmb47,000 in 2020
Chongqing Two river new district plan
The only dual functional (airport and harbour) tax saving area and the transportation hub of south-east China; to turn it into a gateway to Europe (as stated in the nation-wide strategy) and to be the centre of the next ten years� national west development plan; GDP to reach Rmb160 bn, Rmb320 bn and Rmb640 bn in 2012, 2015 and 2020, respectively
Source: Company data, Credit Suisse estimates
Infrastructure investments supported by government policies
Our channel checks show market demand in 2010 would move from coastal China to inland China, and from tier 1-2 cities to smaller cities and counties, driven mainly by infrastructure investments. We think this is driven by the China government�s encouragement for developing middle and west China. During the Western Development Working Conference held in July 2010, both Mr Hu Jintao and Mr Wen Jiabao gave important speeches. According to the speeches, western development is considered one of the key objectives to building a well-to-do society in China and has a priority status in China�s regional development strategy. In the next ten years, the government stated that it will aggressively promote western development. The areas of development will include people�s livelihood, environmental protection, construction of a transportation and information system and water conservancy. According to the National Development and Reform Commission (NDRC), 23 new projects will be started in west China in 2010, with total investments estimated at Rmb682.2 bn, or 10% of infrastructure investments in 2010.
In August 2010, the NDRC released �Opinions on implementing programmes for promoting the rise of central China�, which require the governments of six provinces in central China to finish detailed plans for their provinces by end-December 2010. It also requires the related departments of the State Council to hand in detailed opinions on the implementation of such a programme. This programme sets a clear development target for central China for the next 5-10 years. Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan are the six provinces that will be supported by this programme.
Golden period of urban railway construction is coming
As of end-September 2010, China had only 1,086 km of urban railway services. However, local governments have shown great enthusiasm for building on this system. The Chinese government has granted approval to 28 cities to have their own urban railway system (a total of 50 cities have the capability and requirement to construct urban railway systems). Based on approved projects, total length of urban railway is estimated to see a 30% CAGR to 4,012 km by 2015, and further see an 11% CAGR to 6,776 km by 2020. So, during the next ten years, nearly 5,690 km of new railway lines are expected to be built, indicating total investments of Rmb2.85 tn.
Railway and highway investments have large growth potential
We also expect the China government to continue expanding the coverage of highway and railroad networks in China. Compared to some other developed and developing countries, the coverage of highway and railroad networks in China is relatively low and has huge
25 January 2011
China Construction Machinery Sector 11
growth potential. We believe all such construction projects will contribute significantly to continued growth in China�s construction machinery industry.
Figure 25: : Railway length/total land area of major countries
Figure 26: China�s railway investment and YoY growth
1,202
725 680
456
247 21590 53 51
0
200
400
600
800
1,000
1,200
1,400
Germ
any
Japa
n
Unite
d Ki
ngdo
m
Fran
ce
Unite
d St
ates
India
China
Russ
ia
Cana
da
(km/10,000 km2)
0100
200300
400
500600
700800
1996 1998 2000 2002 2004 2006 2008
-20-1001020304050607080
Railway investment YoY growth
(RMB bn) (%)
0100
200300
400
500600
700800
1996 1998 2000 2002 2004 2006 2008
-20-1001020304050607080
Railway investment YoY growth
(RMB bn) (%)
Note: The data for China, Japan and India is for 2009; for England, France, Germany and Italy it is for 2008; for the U.S. it is for 2007 and for Russia, 2006. Sources: PRC Department of Railway, the Central Intelligence Agency of the United States, The World Fact Book
Source: PRC Department of Railway
Figure 27: Highway length/total land area of major countries
Figure 28: China�s highway investment and YoY growth
2.66
1.85
1.060.71
0.40 0.320.11 0.06
3.30
0
1
1
2
2
3
3
4
Japa
n
Unite
d Ki
ngdo
m
Germ
any
Sout
h Ko
rea
Unite
d St
ates
China India
Cana
da
Russ
ia
(km/10,000 km2)
0
200
400
600
800
1,000
1,200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0
5
10
15
20
25
30
35
Highway investment YoY growth
(bn) (%)
0
200
400
600
800
1,000
1,200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0
5
10
15
20
25
30
35
Highway investment YoY growth
(bn) (%)
Note: The statistics for China and India are for 2009; for Canada, Russia, Germany and Korea for 2008; for the US for 2007 and for Japan and the United Kingdom for 2006. Sources: PRC Department of Transportation, the Central Intelligence Agency of the United States, The World Fact Book
Source: PRC Department of Transportation
New energy development
According to the Development Planning Department of the National Energy Bureau, China will speed up construction of hydro power plants and nuclear power plants, and will develop wind power, solar energy and bio-energy in an orderly fashion during 2011-15E. According to the National Energy Bureau, total installed capacity of hydro power, nuclear power and wind power will reach 250GW, 39GW and 110GW by 2015, at a CAGR of 4%, 28% and 28%, respectively. Among different forms of alternative energy being considered, nuclear power will have the highest growth. Total installed capacity of nuclear power would
25 January 2011
China Construction Machinery Sector 12
go to 86GW by 2020 and 200GW by 2030, indicating Rmb600 bn in investments in nuclear power during 2011-20E. On the other hand, according to the Economic Forecast Department of the State Information Centre, a new development plan on renewable energy will be made public soon with total investments of Rmb5 tn for 2011-20E.
Figure 29: Nuclear capacity estimated to increase by at least 850% by 2020
0
20
40
60
80
100
120
140
160
2009 2010 2011 2012 2013 2014 2020
CAGR of 23% given capacity of 86GW by governm ent plan
CAGR of 28% given capac ity of 135GW forecasted by World Nuclear Associaion
135
86
Total nuclear capacity (GW)
Source: CEC, Credit Suisse estimates
To build smart grid system by 2020
China has two national power grid companies: (1) CSG (China Southern Power Grid) that owns the grids of six provinces in south China, and (2) SGCC (State Grid Corporation of China) that operates grids in all the other provinces. According to SGCC�s long-term plan, it targets to invest Rmb4 tn during 2011-20E to build ultra-high-voltage (UHV) lines and improve grid intelligence. Compared with Rmb1.5 tn investments during 2006-10E, grid investments in 2011-15E are estimated to grow 33% to Rmb2 tn, assuming even investments in the 12th and 13th Five-Year Plans. Moreover, a significant portion of the construction of UHV lines is targeted to be completed by 2015, including seven UHV AC lines and 11 UHV DC lines, with total estimated investments of Rmb270 bn. This implies total investments during 2011-15 may be more than Rmb2 tn.
Figure 30: SGCC�s UHV AC lines plan for 2011-15E Total investments DistanceVoltage grade Transmission lines (Rmb bn) (km)±1000kV AC Ximeng, Inner Mongolia-Nanjing, Jiangsu 27.72 1,653±1000kV AC Zhangbei, Hebei-Nanchang, Jiangxi 29.71 1,772±1000kV AC North Shaanxi-Changsha, Hunan 28.51 1,700±1000kV AC West Inner Mongolia-Weifang, Shandong 21.98 1,311±1000kV AC Middle Shanxi-Xuzhou, Jiangsu 13.08 780±1000kV AC Yaan, Sichuan-South Anhui 33.54 2,000±1000kV AC Double circle in Yangzi River Delta, Huainan-Nanjing-Taizhou-Suzhou-Shanghai-North
Zhejiang-South Anhui-Huainan 26.83 1,600
Total 181.36 10,816
Source: SGCC, Credit Suisse estimates
25 January 2011
China Construction Machinery Sector 13
Figure 31: Power grid investments estimated to rise
-
50100150
200250
300
350400
450
2004 2005 2006 2007 2008 2009 2010 2011E
(Rmb bn)
-20
-10
0
10
20
30
40
50
Power grid investment YoY growth
(%)
-
50100150
200250
300
350400
450
2004 2005 2006 2007 2008 2009 2010 2011E
(Rmb bn)
-20
-10
0
10
20
30
40
50
Power grid investment YoY growth
(%)
Source: SGCC, National Bureau of Statistics of China, Credit Suisse estimates
Expected money supply tightening has limited impact We expect China to raise interest rates further to control CPI inflation this year, which should have a negative impact on construction machinery customers� purchase costs. As construction machinery manufacturers sell equipment through credit sales, instalment payments, financial guarantees and finance lease services, we believe higher interest rates will delay demand to some extent, due to increase in purchase costs for customers. Fortunately, based on history and our checks with distributors, a small interest rate hike should not impact market demand significantly, as long as equipment demand from downstream is strong.
On the other hand, the government estimates new banking loans this year will fall 10% YoY, which is acceptable and should not impact local governments� investment plans significantly, in our view. But if the central government tightens money supply further during the year, infrastructure investments could be impacted. Further, tightening on property continues. Investments in property could be lower than expected, should more macro-tightening polices are introduced in the near future.
25 January 2011
China Construction Machinery Sector 14
Top picks Product preference in 2011 In 2011, we prefer players with high exposure to excavators, concrete machines and cranes. Our channel checks show market demand for construction machines in 2011 should come mainly from: (1) infrastructure projects in inland China and middle-to-small cities and towns, including railway, highway, public facilities and BDAs (business development areas); (2) urban railway construction and overhead road construction in tier 1-3 cites; (3) construction projects for wind farms, nuclear power plants, hydro power plants, ports and shipyards, (4) residential houses in tier 2 and smaller cities, and towns; and (5) expansion and new construction of petrochemical plants. Based on the projects above, industry experts (distributors and manufacturers) expect sales growth of concrete machines, crawler cranes and excavators to be stronger than that of other equipment. We estimate 20-30% YoY sales growth for concrete machines, 40% for crawler cranes, 25-30% for excavators, 20-25% for truck-mounted cranes, 15% for wheel loaders and 20% for bulldozers.
Concrete machines, especially concrete mixing equipment, should benefit from infrastructure investments in inland China. It should also benefit from further promotion of government policies: �Notice forbidding the mixing of concrete on urban job sites� and �Regulation on Bulk Cement�. In the past few years, these two polices were well promoted by tier 1 cities, and China concrete consumption ratio to total cement went up to 30% from 20%. We believe this ratio has huge potential upside in China, with the spread of ready-mixed concrete use, compared to 70-90% in developed countries.
We expect demand for cranes to slow down in 2011, but remain solid. In the next few years, a stable domestic demand for cranes is likely to come from high-speed railway, wind farms (onshore and offshore), nuclear power plants, city infrastructure construction projects (including urban railway systems, overhead roads and bridges, and other general public infrastructure) with further urbanisation, and capacity expansion in the petrochemical and energy industries. Market demand trends indicate more large-size truck-mounted cranes are likely to be used in the next few years, with more construction projects. Crawler cranes have seen weak demand since 2008, hurt by the financial crisis, as local companies switched their product models to small-size cranes for domestic demand after global demand for large-size cranes shrank. Fortunately, local market demand for large-size crawler cranes is expected to increase in the near future, with the upcoming construction of nuclear power plants, construction of energy-saving and emission reduction projects of steel plants, and upgrades in the MW level of wind farms�all of which are expected to speed up industry revenue growth.
Excavator is still partially substituting demand for wheel loaders. Local brands are gaining market shares from foreign brands. In the past years, we saw significant market share gains by local brands, indicating their products� good performance-to-price ratios. Comments from Japanese brands such as Komatsu and Hitachi indicate an industry view that Chinese brands now have the capability to gain market share from Korean brands (who used to have a 50% market share in China several years ago). We expect the excavator market size to double in five years, and local brands� market share to rise to 50% eventually from 30% in 2009. The leading players such as Sany, Liugong and Lonking should benefit, in our view.
Concrete machines, crawler cranes and excavators should see better growth
Forbidding concrete mixing on job sites in smaller cities should increase related equipment demand
Local excavator brands are gaining market share quickly
Sany A: Our top pick The construction machinery sector achieved a strong sales performance in 2010. Almost all the major players reported stronger than expected sales on some major equipment. On the other hand, manufacturers have turned more bullish on sector growth outlook and their own equipment sales in 2011. We revise up our earnings forecasts for major players.
Figure 33: Target price and earnings forecast changes CS Target TP Up/dn EPS change (%) Company Ticker Rating Local Price change (%) (%) 2010 2011 2012 Sany 600031 CH O 19.06 25.59 12 34 4 6 4 Liugong 000528 CH O 32.61 45.87 7 41 0 7 7 Shantui 000680 CH O 16.01 21.90 13 37 1 2 2 Lonking Holdings 3339 HK O 4.45 5.66 25 27 17 26 22 Anhui Heli 600761 CH N 14.78 18.42 0 25 7 5 5
Source: Company data, Credit Suisse estimates
Among the major players, we prefer Sany Heavy Industry, as: (1) it has the highest exposure to high-growth products; (2) it should continue gaining market share in the excavator and truck-mounted crane markets; (3) on a five-year view, the company is ahead of its competitors on overseas expansion strategy. It has two production bases � one in India and another in Brazil. It would be a conservative choice, should the worst case happen, i.e., FAI loses its power to drive China�s economic growth during 2011-12.
Figure 35: Sector valuation metrics Market CS +/- Last cap EPS (LC) P/E (x) P/B (x) EV/EBITDA ROE (%) Ticker Company rating TP (%) price (US$ mn) 10E 11E 12E 10E 11E 12E 10E 11E 10E 11E 10E 11E600031.SS Sany Heavy Industry O 25.59 34 19.06 14,620 1.11 1.50 1.73 17.18 12.74 11.00 6.46 4.40 12.50 8.75 50 41000528.SZ Liugong O 45.87 41 32.61 3,212 2.38 2.79 3.20 13.69 11.68 10.19 3.93 3.22 10.73 8.62 33 30000680.SZ Shantui O 21.90 37 16.01 1,842 1.06 1.43 1.70 15.10 11.20 9.41 1.69 1.45 11.13 7.54 12 14600761.SS Anhui Heli N 18.42 25 14.78 799 0.89 1.09 1.25 16.56 13.59 11.80 2.17 1.94 8.90 7.29 14 153339.HK Lonking O 5.66 27 4.45 2,506 0.31 0.34 0.36 12.24 10.98 10.42 3.40 2.82 9.91 8.50 30 27Average 14.95 12.04 10.56 3.53 2.77 10.63 8.14 28 26CAT Caterpillar Inc. O 110 19 92.75 58,869 4.20 6.75 8.05 22.09 13.73 11.52 5.92 4.62 10.62 7.27 0 0DE Deere & Co. O 91 2 89.26 37,731 4.65 5.75 6.84 19.18 15.52 13.06 6.24 4.64 9.93 8.39 31 24TEX Terex Corporation O 44 41 31.19 3,372 (1.79) 0.80 2.35 (17.31) 38.89 13.20 2.33 2.20 121.71 13.21 -13 6VOLVb.ST Volvo U 84 -25 111.60 152,954 5.13 7.74 9.85 21.77 14.43 11.33 3.09 2.73 8.50 6.69 14 19SAND.ST Sandvik U 110 -13 125.90 149,354 5.82 8.13 9.83 21.62 15.49 12.81 4.28 3.63 11.17 8.69 20 23ATCOa.ST Atlas Copco N 155 -1 156.50 129,551 8.24 9.80 11.00 19.00 15.98 14.23 5.98 4.80 8.53 7.13 31 30Average 14.39 19.01 12.69 4.64 3.77 28.41 8.56 14 17Source: Company data, Credit Suisse estimates
25 January 2011
China Construction Machinery Sector 17
Asia Pacific / ChinaConstruction & Farm Machinery
Sany Heavy Industry (600031.SS / 600031 CH)
The strong will be strong ■ 2010 earnings preview: Net profit in 2010E may beat consensus and our
estimates based on its major equipment sales volumes. Sany�s excavator sales volumes surged 131% YoY to 14,154 units in 2010, from estimated 12,000 units. Revenue growth of concrete machines could be higher than expected, too, given stable growth in 4Q10. Accordingly, we revise up our earnings forecast for 2010-12E by 4- 6%.
■ Earnings growth upside from market share gain: Sany has the highest exposure to high-growth equipment in 2011. Its strong capability on R&D and marketing should continue to help it to expand market share in the excavator and crane markets. While concrete machines, which should contribute 44% of total revenue, should see a healthy growth. By applying a discount to the company�s guidance, we expect Sany to see a 38% income growth in 2011E.
■ Catalysts: The company just raised its excavator sales guidelines for 11E to 30,000 units, vs. 25,000 units. But the market still doesn�t fully concur with the company�s guidance on product revenue growth and industry demand growth, in our view. With the coming hot season in March, we expect more earnings upgrades and valuation reratings.
■ Valuation: By raising earnings forecast and rolling over our DCF model to 2011, our target price rises to Rmb25.59, implying 16x 2011E P/E. We maintain an OUTPERFORM on Sany.
The price relative chart measures performance against the MSCI China Free index which closed at 66.77 on 24/01/11 On 24/01/11 the spot exchange rate was Rmb6.59/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates.
*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Slowing down ■ 2010 profit preview: In 2010, Lonking sold 40,139 loaders (up 60% YoY),
4,045 excavators (up 100% YoY), 9,873 forklifts (up 79% YoY) and 2,612 rollers (up 93% YoY), better than expected. Its market share in the loader market rose to 18.5% from 17.6% in 2009, and became the no. 1 in China. Accordingly, we raise our earnings forecasts for 2010-12E by 17-26%.
■ Profit growth should slow down: As a leading loader manufacturer, loader growth still largely determines the company�s earnings growth, although its excavator sales could be strong in the near future. We estimate the company�s earnings growth at 20% in 2011E, which is much less interesting than others�.
■ Catalysts: Due to concerns about FAI growth slowdown, we had earlier expected loader sales growth to be weak in 2011E. However, the company raised its loader revenue growth guidance from 15% to 20% recently. And feedback from manufacturers is more positive than before. If the real demand for loader is stronger than market expectations, it would trigger Lonking�s stock price performance.
■ Valuation: By raising our earnings forecast and rolling over our DCF model to 2011, our target price rises to HK$5.66, implying 11x 2011E P/E. As we still expect some catalysts, we maintain our OUTPERFORM rating.
The price relative chart measures performance against the MSCI China Free index which closed at 66.77 on 24/01/11 On 24/01/11 the spot exchange rate was HK$7.77/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates.
*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Overseas acquisition positive in the long run ■ 2010 profit preview: In 2010, Liugong sold 38,968 loaders (+34% YoY),
missing our estimates by 3%. While its excavator sales were much better, its sales volumes rose 87% YoY to 5,595 units. Truck-mounted crane sales volumes grew 70% YoY to 2,210 units, above expectations as well. Thus, we raise our earnings forecasts for 2011-12E by 6.5% on higher sales assumptions for excavators and loaders.
■ Acquisition of overseas assets: Liugong targets to acquire 100% of the construction machinery business of Huta Stalowa Wola S.A (HSW) and 100% of its subsidiary, Dressta, in 2011. The target assets include bulldozers, wheel loaders and backhoe loaders. We think this acquisition should help Liugong improve its R&D capability on loaders and bulldozers. It should also help the company enter the Europe market quickly, as HSW is a leading loader manufacturer in Poland. The details of the transaction have not yet been finalised.
■ Catalysts: In our view, the upcoming acquisition should have some positive support, if the consideration is reasonable and the target company should raise Liugong�s profit after acquisition. Better-than-expected sales of Liugong�s major products should also trigger its stock price performance.
■ Valuation: By raising earnings forecasts and rolling over our DCF model to 2011, our target price rises to Rmb45.87, implying 15x 2011E P/E. As we still expect some catalysts, we maintain our OUTPERFORM rating.
The price relative chart measures performance against the MSCI China Free index which closed at 66.77 on 24/01/11 On 24/01/11 the spot exchange rate was Rmb6.59/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates.
*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Shantui Construction Machinery (000680.SZ / 000680 CH)
New engine added ■ 2010 profit preview: Shantui saw its bulldozer market share expand further
in 2010 to 62% from 57% in 2009. The company sold 8,686 bulldozers, up 79% YoY, missing our estimates by 3%. But, its concrete machine business had revenue contribution of Rmb300 mn in 2010. We raise our earnings forecast for 2010-12 slightly by 1-2%.
■ Concrete machine should be a new engine: Shantui launched its concrete machine products in 2010, which achieved better-than expected revenue of Rmb300 mn. As there are two leaders in the concrete machine market, with a total of 90% market share, Shantui targets to be the no. 3. We expect the new product to contribute Rmb5 bn in revenue in future, or 36% of estimated sales in 2011.
■ Catalysts: Shantui raised its revenue growth guidance for bulldozers to 20-25% from 10-15%. Its revenue from concrete machines could beat estimates again this year.
■ Valuation: By raising our earnings forecast and rolling over our DCF model to 2011, our target price rises to Rmb21.9, implying 15x 2011E P/E. By launching concrete machines, Shantui�s product mix has become more balanced. We maintain our OUTPERFORM rating.
The price relative chart measures performance against the MSCI China Free index which closed at 66.77 on 24/01/11 On 24/01/11 the spot exchange rate was Rmb6.59/US$1
Valuation looks cheap but lacks catalysts ■ 2010 preview: Benefiting from the economic recovery, we expect Heli�s
forklift sales volumes to grow 75% YoY in 2010, versus 55% estimated earlier. However, margins could be weaker than expected, given increasing steel cost pressure and weak pricing power. Accordingly, we slightly raise our earnings forecast for 2010-12 by 5-7%.
■ Industry demand should be healthy: In the next few years, demand for forklifts is expected to be healthy, as: (1) the logistics industry should grow steadily on factory relocation; and (2) and more forklifts will be needed to replace manual labour due to rising labour costs.
■ Catalysts: In our view, the stock derated and factored in the potential risk of losing market shares to new entrants such as Liugong and Lonking. However, with an expected 30% growth in forklifts and margins shrinking, earnings growth in 2011E should be soft. We see low pricing momentum ahead.
■ Valuation: We set our new target price at Rmb18.42, implying 16x 2011E P/E Although the current stock price looks cheap, we see few price triggers, unless forklift demand beats estimates again. We maintain our NEUTRAL rating.
The price relative chart measures performance against the MSCI China Free index which closed at 66.77 on 24/01/11 On 24/01/11 the spot exchange rate was Rmb6.59/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates.
*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Disclosure Appendix Important Global Disclosures I, Victoria Li, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.
25 January 2011
China Construction Machinery Sector 37
3-Year Price, Target Price and Rating Change History Chart for 600761.SS 600761.SS Closing
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts� stock ratings are defined as follows: Outperform (O): The stock�s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock�s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock�s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock�s absolute total return potential to its current share price and (2) the relative attractiveness of a stock�s total return potential within an analyst�s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock�s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock�s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts� perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts� perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts� coverage universe weightings are distinct from analysts� stock ratings and are based on the expected performance of an analyst�s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
25 January 2011
China Construction Machinery Sector 39
Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst�s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse�s distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Outperform/Buy* 45% (61% banking clients) Neutral/Hold* 41% (59% banking clients) Underperform/Sell* 11% (53% banking clients) Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse�s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (600761.SS) Method: We choose discounted cash flow (DCF) as our valuation method to derived Anhui Heli's RMB18.42 target price because 1) China's construction machinery sector is in a growth phase and it's not appropriate to compare it with global peers that are in mature phases; 2) Heli is an industry leader and not fit for comparison with local followers; 3) all of the local leaders focus on one or two different products and it's difficult to compare them with each other; 4) only the DCF model can factor in more than three years' earnings growth based on players' long-term plans to enrich their product mix. Based on our DCF model (a weighted average cost of capital (WACC) of 11% and a terminal growth rate of 1.5%), our target price is set at Rmb18.42, indicating 16x Price/Earnings (P/E) and 10x enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) on 2011E. Risks: Risks to our RMB18.42 target price for Anhui Heli include: 1) industry demand might be weaker than we expected and reduce Heli's earnings; 2) steel prices might rebound sharply and erode net profit. Our model indicates that for every 1% change in steel prices, Heli's income would change reversely by 1%; 3) renminbi appreciation above our assumption is negative to Heli as it has a big export proportion in total revenue. Based on our model, every 1% appreciation in the renminbi would reduce Heli's net profit by 1% in 2010E. Price Target: (12 months) for (000528.SZ) Method: In setting our RMD45.87 target price for Guangxi Liugong Machinery, we choose discounted cash flow (DCF) as the major valuation method, because 1) China's construction machinery sector is in a growth phase, and it's not appropriate to compare them with global peers, which are at mature phases; 2) Liugong is an industry leader and not fit for comparison with local followers; 3) all the local leaders are focusing on one or two different products and it's difficult to compare with each other; 4) only a DCF model could factor in more than three years' earnings growth based on players' long-term plans to enrich their product mix. Based on our DCF model (a weighted average cost of capital (WACC) of 10.5%, and a terminal growth rate of 2%), we set our target price for Guangxi Liugong Machinery at Rmb45.87, indicating 15x price to earnings ratio (P/E) and 13x enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) on 2011E. Risks: Risks on our RMB45.87 target price for Guangxi Liugong Machinery include: 1) global and domestic economy slow down might hurt the sector deeper than estimated and reduce Liugong's earnings; 2)Steel prices might rebound sharply and hurt margins, as steel accounts for 40% of COGS. Our model indicates that for every 1% change in steel prices, Liugong's income would change reversely by 2.9% and 2.6% respectively in 2008-09E; 3) RMB appreciation above our assumption would be negative to earnings. Based on our model, for every 1% RMB appreciation, Liugong's net profit wouldl be eroded by 0.6% in 2010E. Price Target: (12 months) for (3339.HK) Method: Our HK$5.66 target price for Lonking is based on discounted cash flow (DCF). We choose DCF as our valuation method because 1) China's construction machinery sector is in a growth phase and it's not appropriate to compare it with global peers, which are in a mature phase; 2) CIM is an industrial leader and not fit to compare with local followers; 3) all local leaders are focusing on one or two different products and it's difficult to compare with each other; 4) only a DCF model could factor in more than three years' earnings growth based on players' long-term plans on enriching their product mix. Our DCF model uses a weight average cost of capital of 10.8% and a terminal growth rate of 2%. Risks: Risks to our HK$5.66 target price for Lonking are 1) quality is becoming more important than prices for loader suppliers to improve their market positions, due to increasing industry centralisation. If the company fails to improve technology and narrow its quality gap with competitors, its long-term growth might be risky; 2) global and domestic economy slow down might hurt demand deeper than estimated; 3) steel prices might rebound sharply and erode net profit. Our model indicates that for every 1% change in steel prices, Lonking's net profit would change reversely by around 1.2% in 2009-10E; 4) faster-than-expected RMB appreciation would be negative to earnings. Based on our model, for every 1% RMB appreciation, net profit would be eroded by 0.7-1.0% in 2009-10E. Price Target: (12 months) for (600031.SS) Method: In deriving our Rmb25.59 target price for Sany Heavy Industry, we choose discounted cash flow (DCF) as the valuation method, because 1) China's construction machinery sector is in a growth phase, and we believe it is not appropriate to use relative valuation to compare it with global
25 January 2011
China Construction Machinery Sector 40
peers, which are in hte mature phase; 2) Sany is an industry leader and not a good fit for comparison with local followers; 3) all the leaders are focusing on one or two different products and it's difficult to compare with each other; 4) only the DCF model can factor in more than three years' earnings growth based on players' long-term plans to enrich their product mix. Based on our DCF model (weighted average cost of capital (WACC):11.5% terminal growth: 2%), target price is set at Rmb25.59, indicating a 16 x price/earnings (P/E) and a 10x enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA) on 2011E. Risks: Risks on our Rmb25.59 target price for Sany Heavy Industry include: 1) demand for concrete machines is highly sensitive to changes in China's property investment which might not recover in this yar; 2) steel price might rebound sharply and erode net profit. Our model indicates that for every 1% change on steel prices, Sany's income would change reversely by 0.2%; 4) Above assumes RMB appreciation might be another negative factor to Sany in 2010, when hte export amount becomes large enough. For every 1% appreciation of the RMB, Sany's profit would decline by 0.1% in 2010. Price Target: (12 months) for (000680.SZ) Method: We choose discounted cash flow (DCF) to value Shantui Construction Machinery and derive a RMB21.9 target price, because 1) China's construction machinery sector is in a growth phase and it's not appropriate to compare it with global peers that are at mature phases; 2) Shantui is an industrial leader and not appropriate for comparing with local followers; 3) all the local leaders are focussing on one or two individual products and it's difficult to compare with each other; 4) only the DCF model can factor in more than three years' earnings growth based on player's long-term plan on enriching their product mix. Based on our DCF model (weighted average cost of capital (WACC):10.7%, terminal growth:2%), target price is set at Rmb21.9, indicating 15x price/earnings multiple and a 12x EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) on 2011E. Risks: Risks on to our RMB21.9 target price for Shantui Construction Machinery include: 1) bulldozers are a kind of earth-moving machine with much smaller market demand compared with loaders. In the next few years, if industry growth is softer than we expected, Shantui's growth would slowed down; 2) the market is highly controlled to four local players. Although Shantui has an absolulte advantage in its products and market positions, it might be difficult to catch more market share from other competitors and make Shantui's income be lower than we expected; 3) faster-than-expected RMB appreciation is negative to Shantui as its big export proportion to total revenue. Based on our model, every 1% appreciation on RMB would reduce Shantui's net profit by 1.1% in 2010E. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names. The subject company (600031.SS) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (600031.SS) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (000528.SZ, 3339.HK, 600031.SS) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (600761.SS, 000528.SZ, 3339.HK, 600031.SS, 000680.SZ) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: ATCOa.ST, SAND.ST, VOLVb.ST. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. � Victoria Li, non-U.S. analyst, is a research analyst employed by Credit Suisse (Hong Kong) Limited Shanghai Representative Office. Where this research report is about a non-Taiwanese company, written by a Taiwan-based analyst, it is not a recommendation to buy or sell securities For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.
25 January 2011Asia Pacific / China
Equity Research
CN0052.doc
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG, the Swiss bank, or its subsidiaries or its affiliates (�CS�) to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients as its customers by virtue of their receiving the report. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. CS does not offer advice on the tax consequences of investment and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. CS believes the information and opinions in the Disclosure Appendix of this report are accurate and complete. Information and opinions presented in the other sections of the report were obtained or derived from sources CS believes are reliable, but CS makes no representations as to their accuracy or completeness. Additional information is available upon request. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, a trading call regarding this security. Trading calls are short term trading opportunities based on market events and catalysts, while stock ratings reflect investment recommendations based on expected total return over a 12-month period as defined in the disclosure section. Because trading calls and stock ratings reflect different assumptions and analytical methods, trading calls may differ directionally from the stock rating. In addition, CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. CS is involved in many businesses that relate to companies mentioned in this report. These businesses include specialized trading, risk arbitrage, market making, and other proprietary trading. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR�s, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment, in such circumstances you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS�s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or CS�s website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority (�FSA�). This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States by Credit Suisse Securities (USA) LLC ; in Switzerland by Credit Suisse AG; in Canada by Credit Suisse Securities (Canada), Inc.; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instrument Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association; elsewhere in Asia/Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited , Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn. Bhd., to whom they should direct any queries on +603 2723 2020. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this report was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has neither reviewed nor approved this report and/or any of the statements made herein. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Copyright 2011 CREDIT SUISSE AG and/or its affiliates. All rights reserved.