Societe Generale - Capital Goods

Document Sample
Societe Generale - Capital Goods Powered By Docstoc
					                                                                                          EQUITY
                                                                                          6 September 2012




                                                                                                                                              Extract from a report



Capital Goods
China industry pulse: the pressure is on

Neutral                                China industry pulse                   In this report, we have analysed the latest quarterly results of the
                                       main Chinese industrial companies together with recent macro trends. We intend to publish
Stock selection                        this analysis on a quarterly basis going forward. The weakest end-markets were trucks,
Preferred                              wind power and general engineering activities, while growth in automation and healthcare
Schneider
Least preferred
                                       remained healthy in Q2. In the rail transportation and construction equipment industries,
Atlas Copco                            momentum improved quarter on quarter. However, for the latter, the ongoing sharp rise in
                                       receivables calls into question the sustainability of the sales performance. Low volume
                                       growth and high cost inflation means that 7 out of the 11 industries analysed have
                                       experienced margin contraction.
                                       Fragile macro environment                       The effects of government action are still yet to be felt. The
                                       latest PMI data reveal a further deterioration in industrial activity and the iron ore price
                                       points towards a harder landing. However, the real estate market appears to be showing
                                       signs of recovery and infrastructure investments may have bottomed out. Our China
                                       economist, Wei Yao, is still calling for a bumpy landing and has revised down his 2012 GDP
                                       growth forecast to 7.7%.
                                       Infrastructure investments set to rebound in Q4                                   Several local governments have
                                       announced stimuli that could reach CNY8trn spread over the next three-four years. This
                                       indicates that China has not started its investment detoxification yet. If supported by the
                                       central government, these stimuli should drive a pick-up in infrastructure investment
                                       towards the end of this year, primarily benefiting end-markets like rail transportation, road
                                       construction equipment and nuclear.
                                       Main stock picks               The macro situation in China is expected to remain fragile as the country’s
                                       two growth pillars (exports and investments) are likely to remain under pressure. Although a few
                                       stocks should benefit from a probable rebound in infrastructure investments – notably in rail
                                       transportation which is positive for Invensys, SKF and ABB – the risks to the Chinese economy
                                       are skewed to the downside until the long-awaited rebalancing is fully engineered. We remain
                                       underweight on stocks highly geared to the China macro outlook, such as Atlas Copco and
                                       Sandvik through their mining exposure, and overweight on stocks with a defensive profile or a
                                       self-help story such as Legrand, Schneider, Volvo and Siemens.
Key recommendations
Company                       Curr     Reco        Price    Target         12m      12m   P/E Comments
                                               4 Sept. 12    price    f’cast div    TSR   13e
Schneider                     Euro     Buy            49       58          1.85    22% 10.9 Focus on execution should sustain margins
Legrand                       Euro     Buy            28       32          1.00    18% 12.5 The most defensive: pricing power + low capital intensity
Atlas Copco                    SEK     Sell         146       140          5.50     0% 13.2 Mining capex downcycle should weigh down on earnings growth
Sandvik                        SEK     Sell           88       85          3.50     1% 10.7 Mining capex downcycle and high earnings cyclicality

                                              Sébastien Gruter                                Gaël de Bray                           Alasdair Leslie
                                              (33) 1 42 13 47 22                              (33) 1 42 13 84 14                     (44) 20 7762 4952
                                              sebastien.gruter@sgcib.com                      gael.de-bray@sgcib.com                 alasdair.leslie@sgcib.com

Societe Generale (“SG”) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that SG 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. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S)
CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.



                  anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                            Capital Goods




              China Industry Pulse – Overview of latest results ................................................................... 3
              A weaker than expected set of results in Q2 ......................................................................... 3
              Power Generation in China – Weak domestic market and pricing pressure ........................... 4
              T&D in China – Ongoing pricing pressure with low volume .................................................... 6
              Construction Equipment in China – Ongoing boom in receivables ......................................... 8
              Wind Power in China – Pricing pressure weighs down on margins ...................................... 10
              Rail transportation – Exports help to offset a weak domestic market ................................... 11
              Other industrial activities in China ........................................................................................ 12

              China Macro review ............................................................................................................ 16
              Latest indicators ................................................................................................................. 16
              Non performing loans on the rise ........................................................................................ 17
              Companies profitability under pressure ............................................................................... 17
              Iron ore prices reveal the weak state of industrial demand in China ..................................... 18
              Investment detoxification is still not on the agenda .............................................................. 18

              Valuation still under pressure............................................................................................... 21
              Chinese industrial stocks trading at a large discount to their European peers ...................... 21

              Stocks’ exposure to China .................................................................................................. 22
              Direct exposure ................................................................................................................... 22
              Total exposure to China – direct and indirect ...................................................................... 22




                                6 September 2012            2


anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                    Capital Goods




                                              China Industry Pulse – Overview of latest results

                                              In this section we briefly discuss the latest earnings season for the main Chinese industrial
                                              companies. These companies reported a weaker-than-expected set of numbers, with most
                                              experiencing a negative price reaction post their earnings release.

                                              Weaker than expected results in Q2
                                                  An important feature is the lack of deterioration in sales growth momentum, suggesting
                                              that Q1 was the low point in terms of industrial activity. Some industries, like rail transportation
                                              and construction equipment, showed some positive momentum quarter on quarter, although
                                              by and large there was no noticeable deterioration or improvement in sales growth
                                              momentum. The end-markets that suffered the most in the last quarter were wind power and
                                              trucks where revenues fell around 30%. General engineering activities, such as bearings and
                                              air compressors, still recorded double-digit sales declines although sales momentum was
                                              stable qoq.

                                                  Pricing pressure in power-related segments                  Another feature is the large variance in
                                              margin performance. While on average industry EBIT margin fell 130bp yoy, Q2 margin
                                              performance was largely in line with Q1. The industries that showed the weakest margin
                                              performance were Power Generation, T&D, Wind and Trucks. For the first three industries,
                                              pricing pressure was the key driver behind the weak margin performance while for trucks the
                                              weakness stemmed from the volume drop suffered in H1 (domestic heavy duty truck volume
                                              down 32% in H1).

                                                  Ongoing boom in receivables           Finally, the Q2 earnings season in China was characterised
                                              by the sharp increase in receivables recorded in industries like Power Generation, T&D and
                                              Construction Equipment. This is particularly striking for the latter; the top three Chinese
                                              players have seen their receivables in terms of number of days rise from 106 at the end of last
                                              year to 127 at the end of March and 157 at the end of June. This reveals the fragile health of
                                              Chinese industry and somewhat undermines the overall earnings quality.

Key figures by industry
                           Sample                                 Average sales growth        Sales momentum         Q2 EBIT margin vs   EBIT margin momentum
                                                                         (yoy)                      (qoq)                last year             (Q2 vsQ1)
                                                                  Improving sales growth trend

Rail Transportation        CSR/ CNR                                     +15%                                              -80bp                  =
T&D                        TBEA/ XD Electric/ Pinggao/ TWBB              +3%                                             -320bp
Healthcare                 Mindray                                      +23%                                              +40bp
Construction Eqt           XCMG/ Sany Heavy/ Zoomlion                   +13%                                             -180bp
Wind                       Sinovel/Goldwind                              -30%                                           -1,080bp
                                                                   Stable sales growth trend

Automation                 Hollisys                                     +22%                       =                     +770bp

Bearings                   Tianma/Wafangdian                             -17%                      =                     -250bp

Air Compressor             Kaishan                                       -14%                      =                     +320bp                  =
Low Voltage                Chint                                         +9%                       =                     +320bp

                                                                  Worsening sales growth trend
Power Generation           Shanghai Electric/ Dongfang/ Harbin           +3%                                             -160bp
Trucks                     Sinotruk                                      -32%                                            -470bp
Source: Company reports, SG Cross Asset Research




                                                             6 September 2012      3


                   anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                     Capital Goods




Sample of Chinese capital goods companies - Weighted Sample of Chinese capital goods companies – Weighted
average quarterly sales growth                       average EBIT margin

   60%                                                                                                16%

                                                                                                      14%
   50%

                                                                                                      12%
   40%
                                                                                                      10%
   30%
                                                                                                         8%

   20%
                                                                                                         6%

   10%                                                                                                   4%


    0%                                                                                                   2%
          Q1 10    Q2 10    Q3 10   Q4 10     Q1 11   Q2 11    Q3 11   Q4 11   Q1 12     Q2 12
                                                                                                         0%
  -10%                                                                                                        Q1 10    Q2 10      Q3 10    Q4 10    Q1 11   Q2 11    Q3 11    Q4 11     Q1 12    Q2 12

Source: SG Cross Asset Research, Company Data




                                                    Power Generation in China – Weak domestic market and
                                                    pricing pressure
Quarterly sales development – Weighted average                                                      Quarterly EBIT margin development – Weighted average

  20%                                                                                                 12%

  18%
                                                                                                      10%
  16%

  14%
                                                                                                         8%
  12%

  10%                                                                                                    6%

   8%
                                                                                                         4%
   6%

   4%
                                                                                                         2%
   2%
   0%                                                                                                    0%
          Q1      Q2   Q3   Q4      Q1   Q2    Q3     Q4   Q1     Q2    Q3     Q4   Q1     Q2                 Q1      Q2     Q3    Q4     Q1   Q2     Q3    Q4      Q1   Q2    Q3     Q4    Q1     Q2
  -2%     09      09   09   09      10   10    10     10   11     11    11     11   12     12                 09      09     09    09     10   10     10    10      11   11    11     11    12     12

Source: SG Cross Asset Research




                                                    Shanghai Electric – Sharp fall in order intake
                                                    Shanghai Electric (SEG) is the largest of the three Chinese power generation players, with
                                                    revenues from the power generation segment reaching CNY49bn (€5.4bn) in FY2011, or c.
                                                    65% of group sales. Thermal Power represented more than 60% of power generation sales last
                                                    year, while wind and nuclear accounted for around 15% and the remainder was derived from
                                                    services. Shanghai Electric Power Generation (active in the manufacture and sale of power
                                                    generation equipment and auxiliary products) is 40%-owned by Siemens. Export sales reached
                                                    CNY16bn last year, equivalent to 23% of group sales.

Shanghai Electric – Key figures
in million yuan                                            Q1 2011             Q2 2011           H1 2011           Q1 2012              Q2 2012             % chg.            H1 2012             % chg.
Sales                                                         15,585           18,135            33,720            16,240               19,980               10%              36,220                    7%
Gross profit                                                   2,793            3,445             6,237             3,145                 4,071              18%               7,216                16%
as % of sales                                                 17.9%            19.0%             18.5%             19.4%                  20.4%         +140bp                19.9%              +140bp
EBIT                                                           1,032            1,717             2,748             1,482                 1,805               5%               3,287                20%
as % of sales                                                  6.6%              9.5%             8.2%                9.1%                9.0%              -50bp              9.1%              +110bp
Source: Company Data




                                                                       6 September 2012              4


                       anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                         Capital Goods




                                  Shanghai Electric’s Q2 sales increased by 10%, an acceleration from the 4% growth achieved
                                  in Q4. The nuclear power, T&D and power plant service businesses drove the good
                                  performance in Q2. The group also stressed its successful order intake for gas turbines which
                                  reached CNY3bn in the first half and took the total orders on hand to CNY9bn. Gross margins
                                  improved by 140bp, mainly thanks to mix. The key feature of the results was however the
                                  weak order intake which fell by 80% yoy in H1 (book to bill at only 0.3x!) driven by a slow
                                  domestic market and the lack of large foreign EPC orders. Order backlog fell 9% to
                                  CNY238bn, still representing more than three years of revenues. Management warned during
                                  the analyst meeting that domestic orders were expected to remain weak in the second half
                                  and lower pricing (thermal power pricing is down 20-30% vs 2008) was likely to put downward
                                  pressure on margins.

                                  Dongfang Electric – Weak thermal market weighs on Q2 performance
                                  Dongfang Electric is a pure player in the power generation market, with total revenues of
                                  CNY42bn (€4.7bn) in 2011. The group has an estimated market share of 25% in China. In
                                  2011, 58% of sales were generated by thermal, 21% by wind and nuclear, 8% by hydro and
                                  14% by construction and services related to EPC contracts. Export sales represented 14% of
                                  group sales in 2011.
Dongfang Electric – Key figures
in million yuan                        Q1 2011       Q2 2011       H1 2011     Q1 2012   Q2 2012         % yoy chg.   H1 2012   % yoy chg.
Sales                                    8,578       11,182         19,759      9,631    10,381               -7%     20,012          1%
Gross profit                             1,739        2,388          4,126      1,925     1,991              -17%      3,916         -5%
as % of sales                           20.3%        21.4%          20.9%       20.0%    19.2%            -220bp      19.6%      -130bp
EBIT                                      854         1,408          2,262      1,025       944              -33%      1,969        -13%
as % of sales                           10.0%        12.6%          11.4%       10.6%      9.1%           -350bp       9.8%      -160bp
Source: Company Data



                                  New orders declined by 7% in H1 (book to bill of 1.1x). The fall was due to lower exports,
                                  especially to India. Export orders fell from CNY10.5bn last year to CNY2.2bn this year.
                                  Meanwhile, domestic orders were strong and rose by 50% yoy. At the end of June, the
                                  group’s backlog represented nearly 3.5 years of sales. The group’s Q2 revenues declined 7%
                                  year on year driven by weak performances in thermal (steam turbine down 53% yoy), wind
                                  and nuclear power although this was partially offset by strong performances in hydro and
                                  environmental conservation equipment. A higher share of EPC projects weighed down on
                                  gross margin in the quarter. The company seemed relatively confident regarding its mid-term
                                  prospects as it expects to grab a larger share of the emerging gas turbine market in China
                                  (through its JV with MHI) and to benefit from the restart of nuclear projects.

                                  Harbin Power – Big jump in nuclear orders
                                  Harbin Power is the third-largest power generation company in China with a market share of
                                  25% for the local installed base and 2011 revenues of CNY28.5bn (€3.2bn). Thermal Power
                                  represented more than 60% of the group sales last year, Hydro 11% and services 18%. The
                                  group derived 21% of sales from overseas operations last year.
Harbin power – Key figures
in million yuan                                                H1 2011                       H1 2012                            % yoy chg.
Sales                                                          14,615                         11,163                                -24%
Gross profit                                                    2,483                          2,422                                 -2%
as % of sales                                                  17.0%                          21.7%                               +470bp
EBIT                                                              874                              636                              -27%
as % of sales                                                   6.0%                           5.7%                                -30bp
Source: Company Data




                                                 6 September 2012        5


                  anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                           Capital Goods




                                                Harbin’s H1 orders were relatively flattish despite the weak demand in wind. Book-to-bill
                                                remained very healthy at more than 2x, mainly driven by a 12x jump in nuclear new order
                                                inflows, indicating that nuclear projects are now back on track. H1 revenues declined by 24%,
                                                in line with the sharp slowdown in thermal power plant construction in China due to lower
                                                power demand and the poor profitability of thermal plants resulting from high coal prices.
                                                Lower coal prices should help the market recover in H2 and management is confident it can
                                                deliver a better sales performance over the rest of the year.

                                                T&D in China – Ongoing pricing pressure with low volume
Quarterly sales growth development – Weighted average                                     Quarterly EBIT margin development – Weighted average

   50%                                                                                      18%

                                                                                            16%
   40%
                                                                                            14%
   30%                                                                                      12%

                                                                                            10%
   20%
                                                                                               8%
   10%
                                                                                               6%

    0%                                                                                         4%
           Q1     Q2    Q3   Q4   Q1   Q2   Q3    Q4   Q1    Q2   Q3   Q4    Q1   Q2
           09     09    09   09   10   10   10    10   11    11   11   11    12   12           2%
  -10%
                                                                                               0%
                                                                                                    Q1     Q2     Q3   Q4    Q1   Q2   Q3    Q4   Q1   Q2    Q3   Q4   Q1    Q2
  -20%                                                                                              09     09     09   09    10   10   10    10   11   11    11   11   12    12

Source: SG Cross Asset Research, Company Data




                                                TBEA – Margin collapse in Q2
                                                TBEA (Tebian Electric Apparatus) is the largest T&D player in China with annual revenues of
                                                CNY18bn in 2011 (€2bn). TBEA mainly manufactures and exports transformers, but also
                                                electric wire, cables and photovoltaic equipment. It has a leading position with SGCC and
                                                holds a 21% market share of transformer orders year to date. The group has also already built
                                                a strong overseas presence with 15% of sales generated outside China in 2011, mainly in the
                                                Middle East and Africa, but also in the US.

TBEA – Key figures
in million yuan                                        Q1 2011         Q2 2011         H1 2011           Q1 2012            Q2 2012         % chg.          H1 2012         % chg.
Sales                                                   3,731           4,470           8,201             4,239              5,594            24%            9,832            -1%
Gross profit                                                887             936         1,822               794                853            -5%            1,647            -1%
as % of sales                                          23.8%           20.9%           22.2%             18.7%              15.2%           -570bp          16.7%           -550bp
EBIT                                                        452             356           807               318                374            -6%              691            26%
as % of sales                                          12.1%             8.0%           9.8%               7.5%               6.7%          -130bp           7.0%           -280bp
Source: Company Data




                                                Q2 sales were up 24% thanks largely to the completion of several large projects. However,
                                                pricing pressure for transformers and solar PV weighed on margins. The group’s gross margin
                                                fell 570bp yoy and 350bp sequentially. Management is not expecting price pressure to ease in
                                                the second half of 2012.




                                                                  6 September 2012         6


                       anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                     Capital Goods




                                XD electric – Back to black in Q2
                                XD Electric is the second largest T&D player with sales of CNY12bn in 2011. Its main products
                                are transformers and switchgear, but the group also manufactures rectifiers, insulators and
                                capacitors. The group has had limited success so far outside China, with export revenues
                                stable at around 8% of revenues over the past three years.

XD Electric – Key figures
in million yuan                      Q1 2011       Q2 2011    H1 2011      Q1 2012   Q2 2012      % chg.   H1 2012     % chg.
Sales                                 2,106         2,978         5,084     2,032     3,347        12%      5,378        6%
Gross profit                            509           610         1,119       316        573       -6%        889       -20%
SG&A                                    412           512           924       456        505                  961
EBIT                                     97            97           195      (140)        69      -29%        (72)       nm
as % of sales                          4.6%          3.3%         3.8%      -6.9%      2.0%                 -1.3%
Source: Company Data




                                Q2 sales increased by 12%, against a 4% drop reported in Q1. Gross margins remained
                                under pressure but recovered from the lows reached in Q1. All products reported a decline in
                                gross margins but solar PV showed the greatest fall. Management expects revenues from ultra
                                high voltage products to gain momentum in H2 and sustain a gross margin recovery.

                                TWBB – High pricing pressure in wind and solar
                                Baoding Tianwei Baobian Electric (TWBB) is the third largest player in China with revenues of
                                CNY5.4bn in 2011. The group focuses mostly on transformers, which accounted for close to
                                80% of group sales in 2011. TWBB decided to diversify into renewable energies in 2008 and
                                now derives 10% of sales from wind turbines and 7% from solar PV. The company only
                                derived some 6% of its revenues from abroad last year.

TWBB – Key figures
in million yuan                      Q1 2011       Q2 2011    H1 2011      Q1 2012   Q2 2012      % chg.   H1 2012     % chg.
Sales                                 1,535         1,376         2,911       618        507       -63%     1,125       -61%
Gross profit                            250           245           495        94         37       -85%       131       -74%
as % of sales                         16.3%        17.8%          17.0%     15.2%      7.3%     -1050bp    11.6%      -540bp
EBIT                                    126           141           267        (1)       (83)     -159%       (84)     -132%
as % of sales                          8.2%        10.2%          9.2%      -0.2%    -16.4%         nm      -7.5%        nm
Source: Company Data




                                TWBB reported lacklustre Q2 results. Sales fell by 63% driven by its New Energy business
                                (Wind power equipment sets and solar PV) where revenues declined by more than 90%.
                                TWBB’s T&D also showed a weak performance with a sales decline of 34%. Weaker volume
                                and intense price competition in China pushed TWBB into a bigger loss in Q2 against Q1. The
                                EBIT loss reached CNY84m in Q2 vs almost breakeven in Q1.




                                               6 September 2012     7


                  anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                         Capital Goods




                                                Construction Equipment in China – Ongoing boom in
                                                receivables
Quarterly sales growth development – Weighted average                                   Quarterly EBIT margin development – Weighted average

  100%                                                                                    25%

    90%

    80%                                                                                   20%
    70%

    60%                                                                                   15%
    50%

    40%
                                                                                          10%
    30%

    20%
                                                                                             5%
    10%

     0%
           Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12           0%
   -10%                                                                                           Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12

Source: SG Cross Asset Research, Company Data




                                                Sany Heavy Industries – Mid-single-digit decline in domestic sales
                                                Sany Heavy Industries is the leading Chinese player in the construction equipment industry,
                                                with revenues exceeding CNY51bn in 2011. Key products include concrete machinery (54% of
                                                sales), excavators (19% of sales) and crane machinery (13% of sales). Sany Heavy is the largest
                                                player in the domestic excavator industry with nearly 15% market share. Sany is also the most
                                                developed Chinese player on the international scene with manufacturing and R&D bases in the
                                                US, Germany and India. In 2011, the company derived c. 10% of its sales from overseas.

Sany Heavy – Key figures
in million yuan                                      Q1 2011       Q2 2011           H1 2011         Q1 2012         Q2 2012         % chg.         H1 2012          % chg.
Sales                                                 13,988        16,375           30,363           14,678         17,083           4.3%          31,760            4.6%
Gross profit                                           5,243         6,333           11,577            5,640          5,620         -11.3%          11,260           -2.7%
as % of sales                                         37.5%         38.7%            38.1%            38.4%           32.9%         -580bp           35.5%          -260bp
EBIT                                                   3,540         4,323            7,863            3,699          3,572         -17.4%            7,272          -7.5%
as % of sales                                         25.3%         26.4%            25.9%            25.2%           20.9%         -550bp           22.9%          -300bp
Source: Company Data




                                                Sany Heavy revenues rose 4% in Q2, largely in line with the performance achieved in Q1.
                                                However, the Q2 sales performance includes the contribution from Putzmeister, consolidated
                                                as of April. Domestic sales fell by mid-single-digit levels, mainly driven by excavators where
                                                sales declined by 6% despite market share gains. Gross margin fell by 580bp to 32.9%, with
                                                the company citing accounting changes to justify the weak bottom line performance. Sales
                                                receivables reached 151 days at the end of Q2, against 133 days at the end of Q1 and 94
                                                days at the end of last year.

                                                Zoomlion – Strong Q2 performance but FY sales guidance cut
                                                Zoomlion is the second largest Chinese player in the construction equipment industry, with
                                                leading positions in concrete (44% of sales) and crane (35% of sales) machinery. Zoomlion
                                                revenues reached CNY46bn in 2011, just behind Sany Heavy Industry. The company derives
                                                6% of its revenues from overseas but is targeting 35% by 2015. Zoomlion is about to start
                                                production at its new manufacturing facility in Brazil and is also building a new site in India.
                                                Back in 2008, the company bought CIFA, the third largest player in the global concrete
                                                machinery industry, providing a good foothold in Europe.


                                                               6 September 2012          8


                   anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                      Capital Goods




Zoomlion – Key figures
in million yuan                       Q1 2011       Q2 2011    H1 2011      Q1 2012   Q2 2012      % chg.     H1 2012      % chg.
Sales                                 10,735        13,413     24,148       11,609    17,511        31%       29,120        21%
Gross profit                           3,384         4,474         7,858     3,726     6,186        38%        9,911        26%
as % of sales                          31.5%        33.4%          32.5%     32.1%     35.3%     +190bp        34.0%      +150bp
EBIT                                   2,643         3,283         5,925     2,770     4,713        44%        7,482        26%
as % of sales                          24.6%        24.5%          24.5%     23.9%     26.9%     +240bp        25.7%      +120bp
Source: Company Data




                                 Zoomlion achieved an impressive performance in Q2 bearing in mind the weak environment in
                                 China for the construction equipment industry. Q2 sales increased by 31%, a material
                                 acceleration from the 8% growth reported in Q1. The key performance driver was the
                                 concrete machinery segment where sales increased by more than 50%. Unlike Sany Heavy,
                                 Zoomlion managed to report better returns as EBIT margin improved by 240bp year on year.
                                 Sales receivables reached 138 days at the end of Q2, against 130 at the end of Q1 and 107 at
                                 the end of last year. Zoomlion cut its sales growth forecast to 15% from 35% for the FY
                                 despite the strong outperformance achieved in H1.

                                 XCMG – Exports more than offsetting a weak domestic market
                                 XCMG’s revenues exceeded CNY30bn in 2011, representing more than 60% of total revenues.
                                 The group’s key product is crane machinery. XCMG derives around 9% of its sales from
                                 overseas and this percentage is set to grow as the company is massively investing in new
                                 capacities abroad. The company is investing $200m capex in Brazil to sell its full product range
                                 in LatAm and the US.

XCMG – Key figures
in million yuan                       Q1 2011       Q2 2011    H1 2011      Q1 2012   Q2 2012      % chg.     H1 2012      % chg.
Sales                                  9,722         9,793     19,515        7,988     9,973        1.8%      17,961       -8.0%
Gross profit                           2,016         2,215         4,231     1,653     2,092       -5.6%       3,745      -11.5%
as % of sales                          20.7%        22.6%          21.7%     20.7%     21.0%      -160bp       20.8%       -90bp
EBIT                                   1,249         1,522         2,771       974     1,229      -19.3%       2,202      -20.5%
as % of sales                          12.8%        15.5%          14.2%     12.2%     12.3%      -320bp       12.3%      -190bp
Source: Company data




                                 Q2 sales rose 2%, a major improvement against the 18% decline reported in Q1. XCMG
                                 outperformed the underlying market in the first half thanks to market share gains in excavators
                                 and concrete machinery. Also the group benefited from successful international expansion
                                 with non-domestic revenues increasing 55% in H1 (24% of group sales) against an 18% fall
                                 for domestic sales. Gross margins declined by 160bp yoy but rose 30bp qoq. More
                                 importantly, receivables rose from 123 days at the end of last year to 195 days at the end of
                                 June (165 days at the end of March), indicating that the aggressive commercial strategy
                                 adopted by the Chinese manufacturers continued over the period.




                                                6 September 2012     9


                   anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                  Capital Goods




                                                Wind power in China – Pricing pressure weighs on margins
Quarterly sales growth development– Weighted average                                             Quarterly EBIT margin development– Weighted average

     80%                                                                                                25%

     60%                                                                                                20%

     40%                                                                                                15%

     20%                                                                                                10%

      0%                                                                                                 5%
            Q1 10   Q2 10   Q3 10   Q4 10   Q1 11   Q2 11    Q3 11    Q4 11   Q1 12   Q2 12
    -20%                                                                                                 0%
                                                                                                               Q1 10   Q2 10   Q3 10   Q4 10   Q1 11   Q2 11    Q3 11   Q4 11   Q1 12   Q2 12
    -40%                                                                                                -5%

    -60%                                                                                                -10%

    -80%                                                                                                -15%

Source: SG Cross Asset Research, Company Data




                                                Sinovel – Bigger losses in Q2
                                                Sinovel is the largest wind turbine manufacturer in China and the second largest in the world
                                                based on delivered capacity. It reported revenues of CNY10.4bn last year.
Sinovel – Key figures
in million yuan                                             Q1 2011           Q2 2011         H1 2011          Q1 2012            Q2 2012              % chg.           H1 2012            % chg.
Sales                                                        3,359              1,966          5,325             1,159              1,928             -2%                 3,087           -42.0%
Gross profit                                                   654                393          1,047                 66               151            -62%                   217           -79.3%
as % of sales                                               19.5%              20.0%          19.7%              5.7%               7.8%          -1220bp                 7.0%           -1270bp
EBIT                                                           537                205            742              (135)               (88)          -143%                  (223)         -130.0%
as % of sales                                               16.0%              10.4%          13.9%            -11.6%              -4.6%               nm                -7.2%                nm
Source: Company Data




                                                Sinovel’s sales performance recovered in Q2 with sales declining just 2% vs the 65% fall
                                                reported in Q1. The growth rate also benefited from easier comps. Export sales reached 9%
                                                of revenues in the first half vs nil the year before. As a result, the gross margin and the EBIT
                                                margin slightly improved in Q2 although the group remains loss-making.

                                                Goldwind – Confident on H2 outlook despite poor H1 performance
                                                Goldwind is the second largest wind turbine manufacturer in China and the third largest in the
                                                world based on delivered capacity. It reported revenues of CNY12.8bn last year.

Goldwind – Key figures
in million yuan                                             Q1 2011           Q2 2011         H1 2011          Q1 2012            Q2 2012              % chg.           H1 2012            % chg.
Sales                                                        1,856              3,342          5,197             1,700              1,784            -47%                 3,484            -33%
Gross profit                                                   411                695          1,106               186                295            -58%                   481            -57%
as % of sales                                               22.1%              20.8%          21.3%             10.9%              16.5%           -430bp                13.8%           -750bp
EBIT                                                           140                301            442              (100)                40            -87%                   (60)          -113%
as % of sales                                                7.6%               9.0%           8.5%             -5.9%               2.3%           -670bp                -1.7%          -1020bp
Source: Company Data




                                                Q2 sales declined by 47% yoy, after the 8% fall reported in Q1. The decline was entirely
                                                driven by 1.5MW turbines while sales of 2.5MW turbines remained largely stable. Gross
                                                margins however recovered from the low hit in Q1 thanks to a recovery in 2.5MW profitability.
                                                The Q2 gross margin came to 16.5%, down 430bp vs last year but up from 10.9% in Q1.
                                                Management seemed relatively confident about the H2 outlook as power grid bottlenecks are
                                                gradually resolved and the pricing environment appears to be stabilising.



                                                                       6 September 2012           10


                    anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                  Capital Goods




                                                Rail transportation – Exports help to offset weak domestic market
Quarterly sales growth development– Weighted average                                             Quarterly EBIT margin development– Weighted average

   90%                                                                                             8%

   80%                                                                                             7%
   70%
                                                                                                   6%
   60%
                                                                                                   5%
   50%
                                                                                                   4%
   40%

   30%                                                                                             3%

   20%                                                                                             2%
   10%
                                                                                                   1%
    0%
           Q1 10   Q2 10   Q3 10   Q4 10   Q1 11   Q2 11    Q3 11   Q4 11   Q1 12     Q2 12        0%
  -10%                                                                                                  Q1 10    Q2 10   Q3 10    Q4 10   Q1 11    Q2 11   Q3 11   Q4 11     Q1 12   Q2 12

Source: SG Cross Asset Research, Company Data




                                                CSR – Optimistic about H2 recovery
                                                CSR recorded sales of CNY80bn in 2011 (€8.9bn) and is the leader in the Chinese high-speed
                                                train segment. CSR directly controls around 40% of the high-speed train market. It
                                                manufactures the CRH2 trains (based on Kawasaki technology) while its 50/50 JV with
                                                Bombardier has about 20% of the market, supplying CHR1 trains (based on Bombardier
                                                technologies). CSR generated c. 8% of revenues abroad last year.

CSR – Key figures
in million yuan                                        Q1 2011              Q2 2011           H1 2011      Q1 2012           Q2 2012              % chg.           H1 2012            % chg.
Sales                                                      20,116           20,011            40,127        19,203               23,250             16%            42,454                6%
Gross profit                                                3,576            3,800             7,376            3,723             4,476             18%             8,199               11%
as % of sales                                              17.8%            19.0%             18.4%         19.4%                19.3%            +30bp            19.3%              +90bp
EBIT                                                        1,665            1,639             3,304            1,575             1,633              0%             3,208               -3%
as % of sales                                               8.3%              8.2%             8.2%             8.2%              7.0%            -120bp            7.6%               -60bp
Source: Company Data




                                                CSR’s Q2 revenues rose 16% yoy, a strong improvement from the 5% decline reported in the
                                                first quarter. Domestic revenues were slightly up in Q2 but the growth was mainly driven by
                                                export markets where revenues more than doubled. Despite a healthy gross margin
                                                performance, a material increase in SG&A resulted in a 120bp decline in EBIT margin. For the
                                                second half, the company is more optimistic as the Ministry of Railways confirmed its rolling
                                                stock investment target for 2012 despite the weak start to the year. At the end of June,
                                                investment in railway infrastructure and equipment were CNY149bn and CNY29bn
                                                respectively, accounting for only 35% of the FY target.

                                                CNR – Export sales more than doubled in Q2
                                                CNR’s sales totalled CNY89bn (€9.9bn) in 2011 with similar business lines to CSR. The group
                                                controls 40% of the high-speed train market to date and is the major supplier of CRH3 trains
                                                (based on Siemens Velaro technology). CNR is the industry leader in the locomotive segment,
                                                gradually gaining share over CSR in high-powered electric locomotives. CNR also has aggressive
                                                development plans for export revenues which represented 7% of group revenues last year.




                                                                    6 September 2012              11


                    anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                           Capital Goods




CNR – Key figures
in million yuan                                        Q1 2011         Q2 2011         H1 2011      Q1 2012            Q2 2012               % chg.             H1 2012           % chg.
Sales                                                  19,479          21,653          41,132        18,399            24,446                 13%               42,845              4%
Gross profit                                            2,061           3,126           5,187            2,518             3,514              12%                6,032             16%
as % of sales                                          10.6%           14.4%           12.6%         13.7%                 14.4%               0bp              14.1%            +150bp
EBIT                                                      724           1,490           2,215             989              1,564               5%                2,552             15%
as % of sales                                            3.7%            6.9%           5.4%             5.4%              6.4%              -50bp               6.0%             +60bp
Source: Company Data



                                                CNR’s Q2 revenues grew 13%, a steep improvement from the 6% decline reported in Q1.
                                                While domestic revenues were largely flat in the quarter, export sales more than doubled,
                                                especially in the subway segment where CNR has had many commercial successes over the
                                                past few years. Passenger railway showed a mid-single-digit decline in the quarter, only
                                                partially offset by a rebound in the freight segment. Gross margins remained steady in the
                                                quarter, but EBIT margin fell 50bp due to higher SG&A expenses. Based on the updated plans
                                                from the Ministry of Railway, CNR is guiding for a quick rebound in railway fixed asset
                                                investment in H2.

                                                Other industrial activities in China
                                                Bearings – Higher level of competition from international players

Quarterly sales growth development– Weighted average                                      Quarterly EBIT margin development– Weighted average

   40.0%                                                                                    18.0%

                                                                                            16.0%
   30.0%
                                                                                            14.0%
   20.0%                                                                                    12.0%

                                                                                            10.0%
   10.0%
                                                                                             8.0%
    0.0%
                                                                                             6.0%
             Q1   Q2   Q3   Q4   Q1    Q2   Q3    Q4    Q1   Q2   Q3   Q4    Q1   Q2
             09   09   09   09   10    10   10    10    11   11   11   11    12   12
  -10.0%                                                                                     4.0%

                                                                                             2.0%
  -20.0%
                                                                                             0.0%
                                                                                                    Q1    Q2     Q3   Q4    Q1     Q2   Q3    Q4      Q1   Q2    Q3    Q4   Q1    Q2
  -30.0%                                                                                            09    09     09   09    10     10   10    10      11   11    11    11   12    12

Source: SG Cross Asset Research, Company Data




                                                Wafangdian
                                                Wafangdian Bearing group is the largest domestic player with revenues of RMB3.2bn (c. 70% in
                                                bearings). It became a wholly state-owned enterprise in 1995, and it mainly operates in industrial
                                                segments. As for all SOEs, the company’s profitability is low and showed a deteriorating trend
                                                over the last few years. Despite partnerships with Koyo and SKF (which hold a 19.7% stake in the
                                                company) Wafangdian still has low international exposure. The group generated only 8% of its
                                                revenues outside China last year and has only six sales offices abroad.

Wafangdian Bearing – Key figures
in million yuan                                        Q1 2011         Q2 2011         H1 2011      Q1 2012            Q2 2012               % chg.             H1 2012           % chg.
Sales                                                     864               894         1,758             841                777             -13%                1,618             81%
Gross profit                                              108               101           208              93                 91               -9%                 184             83%
as % of sales                                          12.4%           11.3%           11.8%         11.0%                 11.8%         +50bp                  11.4%             -40bp
EBIT                                                         42             30             72              29                 20             -33%                     49           65%
as % of sales                                            4.9%            3.3%           4.1%             3.5%              2.6%              -70bp               3.0%            -110bp
Source: Company Data




                                                                  6 September 2012         12


                   anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                             Capital Goods




                                Wafangdian’s Q2 revenues fell 13%, a sharp acceleration from the 3% decline in the first
                                quarter. Despite a 50% increase in export revenues (10% of group revenues), weak domestic
                                demand materially impacted the sales performance in Q2. Gross margins remained largely
                                flat. Management blamed the tougher competitive landscape in China as foreign brands enter
                                the market, notably in sectors such as steel, machine tools, and wind power. Management
                                has set up a plan to improve efficiency and competitiveness.

                                Tianma Bearing
                                Tianma is the leader of China’s non-SOE bearings companies, with 2011 sales already on par
                                with Wafangdian, the traditional market leader. 2011 revenue reached RMB3.1bn (c. 60% in
                                bearings, of which just 5% in overseas markets. The company is mostly active in the industrial
                                end-markets with railway and wind energy being its two largest segments. According to the
                                company, the automotive segment accounts for less than 10% of group revenues.

Tianma Bearing – Key figures
in million yuan                       Q1 2011            Q2 2011       H1 2011     Q1 2012   Q2 2012          % chg.       H1 2012      % chg.
Sales                                       816             856          1,672        628       672            -22%          1,300       -22%
Gross profit                                269             249              518      176       192            -23%              367     -29%
as % of sales                          32.9%             29.1%          31.0%       27.9%    28.5%            -60bp         28.2%      -280bp
EBIT                                        170             155              325       77        98            -37%              174     -46%
as % of sales                          20.8%             18.1%          19.4%       12.2%    14.5%           -360bp         13.4%      -600bp
Source: Company Data




                                Tianma’s Q2 revenues declined by 22%, on par with the 23% fall registered in Q1. Gross
                                margin held up at 28.5% vs 29.1% last year. In terms of end markets, the slump in demand
                                for construction equipment and heavy-duty trucks drove the sales decline. The group was
                                also impacted by the weak wind and nuclear markets. Management insisted on the need to
                                move up the value chain and plans to invest CNY290m in a new state-of-the art production
                                facility.

                                Automation – Wage inflation drives need for productivity gains
                                Hollysys Automation Technologies
                                Hollysys Automation Technologies is a leading provider of automation and control
                                technologies and applications in China. It is the largest SCADA systems supplier to China's
                                subway automation market. In the last fiscal year, the US-listed group reported revenues of
                                $322m with an EBIT margin of around 15%. Non-domestic revenues represented less than
                                10% of sales last year.

Hollysys – Key figures
in million $                                 Q4 2011               FY 2011         Q4 2012        % chg.               FY 2012          % chg.
Sales                                             71.9              262.8            88.1              23%              321.7            22%
Gross profit                                      20.7               91.1            36.5              76%              126.3            39%
as % of sales                                28.8%                 34.7%            41.4%      +1260bp                 39.3%           +460bp
EBIT                                               6.3               34.4            15.0          138%                  47.9            39%
as % of sales                                  8.8%                13.1%            17.0%       +820bp                 14.9%           +180bp
Source: Company Data




                                Q4 2011-12 revenues grew by 23%, on par with the first nine months. The industrial
                                automation segment (60% of group sales) recorded growth of 25% in Q4, a deceleration
                                compared to the c.40% growth rate reported at the nine-month mark. After a very weak start
                                to the year, the rail transportation segment (30% of group sales) recovered in Q4 with
                                revenues largely flat in the last quarter. Gross margins expanded by 1260bp, somewhat


                                                   6 September 2012          13


                  anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                        Capital Goods




                                boosted by higher than usual VAT refunds in H2 2011-12. Management seemed confident for
                                the next fiscal year, which should be driven by the recovery in the nuclear and high-speed rail
                                segments; they are guiding for at least 20% sales growth.

                                Low voltage – Outperformance thanks to a broader distribution network
                                Chint
                                Chint is the largest Chinese player in the low-voltage segment, with an estimated 10% share of
                                the local market. The group had revenues of CNY8.3bn in 2011, with an EBIT margin of 13%.
                                Exports accounted for less than 10% of revenues but the group’s target is to lift this figure to
                                20% within the next five years. The group established its Noark subsidiary in 2011, targeting
                                the high-end market to compete with western manufacturers.

Chint – Key figures
in million yuan                      Q1 2011        Q2 2011       H1 2011     Q1 2012   Q2 2012          % chg.   H1 2012    % chg.
Sales                                   1,645        2,357          4,002      1,785     2,567             9%      4,353       9%
Gross profit                              369          528              897      484       684            30%      1,168      30%
as % of sales                           22.4%        22.4%         22.4%       27.1%    26.7%           +430bp    26.8%     +440bp
EBIT                                      193          315              508      249       425            35%        674      33%
as % of sales                           11.7%        13.4%         12.7%       13.9%    16.6%           +320bp    15.5%     +160bp
Source: Company Data


                                Q2 sales rose 9%, in line with the first quarter and gross margins improved 430bp vs last year.
                                Expansion of the distribution network helped Chint to outperform a relatively weak underlying
                                market.

                                Trucks – Steep fall in domestic heavy-duty truck market
                                Sinotruk
                                Sinotruk is the third-largest truck manufacturer in China and reported revenues of CNY37bn
                                last year. Sinotruk is listed and 25% owned by MAN. Among Chinese manufacturers, Sinotruk
                                was the most successful internationally with non-domestic sales representing some 15% of
                                volumes last year.

Sinotruk – Key figures
in million yuan                                               H1 2011                       H1 2012                          % chg.
Sales                                                         21,939                         14,969                           -32%
Gross profit                                                   3,545                          2,232                           -37%
as % of sales                                                 16.2%                          14.9%                          -130bp
EBIT                                                           1,495                              290                         -81%
as % of sales                                                  6.8%                           1.9%                          -490bp
Source: Company Data




                                Sinotruk reported a lacklustre performance in H1. Group sales fell 32% due to a 48% drop in
                                domestic volume, only partially offset by a 36% increase in export volumes. Consequently,
                                margins fell to 1.9% from 6.6% last year. The heavy-duty truck market in China contracted
                                32% in H1 to 372,000 units, highlighting a further slowdown in H1 compared to H2 last year.
                                The company did not provide any guidance for the full year, but based on current momentum
                                deliveries could decline by 25% in H2.




                                                6 September 2012        14


                  anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                     Capital Goods




                                Air compressors – Weak underlying market trend offset by price increase
                                Kaishan
                                Kaishan Compressor is the leading Chinese player in the compressed air industry. Its revenues
                                reached CNY2bn last year with an EBIT margin of close to 18%. It mainly produces
                                reciprocating and rotary screw air compressors.

Kaishan – Key figures
in million Yuan                      Q1 2011       Q2 2011    H1 2011      Q1 2012   Q2 2012     % chg.    H1 2012     % chg.
Sales                                   540           566         1,106       455        489      -14%        945       -15%
Gross profit                            133           137           269       128        140       2%         268        -1%
as % of sales                         24.6%        24.2%          24.4%     28.1%    28.6%      +440bp     28.4%     +400bp
EBIT                                    108           102           210        97        104       2%         201        -4%
as % of sales                         19.9%        18.1%          19.0%     21.3%    21.3%      +320bp     21.3%     +230bp
Source: Company Data




                                Kaishan’s Q2 sales declined by 14%, largely in line with the 16% fall reported in Q1.
                                Management blamed the tight liquidity environment that pushed its customers to delay
                                equipment purchases. Gross margins, however, improved in H1 driven by higher pricing and
                                cost optimisation. Management did not provide any guidance for H2.


                                Healthcare – Strong growth has continued into Q2
                                Mindray
                                Mindray was founded in 1991 and in 2011 generated total revenues of $880m with an EBIT
                                margin of 19%. Mindray sells patient-monitoring products, in-vitro diagnostics products, and
                                ultrasound systems.

Mindray – Key figures
in million $                         Q1 2011       Q2 2011    H1 2011      Q1 2012   Q2 2012     % chg.    H1 2012     % chg.
Sales                                 180.9         217.3         398.2     219.0     267.8       23%       486.8       22%
Gross profit                           99.7         123.8         223.5     120.3     153.6       24%       273.9       23%
as % of sales                         55.1%        57.0%          56.1%     54.9%    57.4%      +40bp      56.3%      +20bp
EBIT                                   33.0          47.4          80.4      36.8        55.8     18%        92.6       15%
as % of sales                         18.2%        21.8%          20.2%     16.8%    20.8%      -100bp     19.0%      -120bp
Source: Company Data




                                Mindray’s Q2 revenues rose by 23% vs 21% growth reported in Q1. Domestic sales rose 27%
                                in Q2 while international revenues were up 20%. Gross margins fell by 100bp in Q2 vs last
                                year. The company raised its earnings outlook for FY12 but left its guidance for +18% revenue
                                growth unchanged despite the strong start to the year.




                                               6 September 2012     15


                  anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    35
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         40
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               45
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          50
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     55
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            60
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 65




                                                                                                                                                                                                                                                                                                                                                                        -10%
                                                                                                                                                                                                                                                                                                                                                                               -5%
                                                                                                                                                                                                                                                                                                                                                                                                    10%
                                                                                                                                                                                                                                                                                                                                                                                                          15%
                                                                                                                                                                                                                                                                                                                                                                                                                20%
                                                                                                                                                                                                                                                                                                                                                                                                                      25%
                                                                                                                                                                                                                                                                                                                                                                                                                             30%
                                                                                                                                                                                                                                                                                                                                                                                                                                        35%




                                                                                                                                                                                                                                                                                                                                                                                              5%

                                                                                                                                                                                                                                                                                                                                                                                       0%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Jan-05




                                                                                                                                                         -100%
                                                                                                                                                                 -80%
                                                                                                                                                                        -60%
                                                                                                                                                                               -40%
                                                                                                                                                                                      -20%
                                                                                                                                                                                                        20%
                                                                                                                                                                                                               40%
                                                                                                                                                                                                                     60%
                                                                                                                                                                                                                           80%




                                                                                                                                                                                                   0%
                                                                                                                                                                                                                                                                                                                                                               Aug-03                                                                                                                                                      May-05
                                                                                                                                           Feb-10
                                                                                                                                                                                                                                                                                                                                                               Jan-04                                                                                                                                                      Sep-05
                                                                                                                                            Apr-10                                                                                                                                                                                                             Jun-04                                                                                                                                                      Jan-06
                                                                                                                                                                                                                                                                                                                                                               Nov-04                                                                                                                                                      May-06
                                                                                                                                            Jun-10
                                                                                                                                                                                                                                                                                                                                                               Apr-05                                                                                                                                                      Sep-06




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Manufacturing PMI
                                                                                                                                           Aug-10                                                                                                                                                                                                              Sep-05                                                                                                                                                      Jan-07




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         Source: SG Cross Asset Research
                                                                                                                                                                                                                                                                                                                                                               Feb-06                                                                                                                                                      May-07




                                                                                                 Source: National bureau of Statistics
                                                                                                                                                                                                                                                                                                                       Source: National bureau of Statistics
                                                                                                                                            Oct-10
                                                                                                                                                                                                                                                                                                                                                                Jul-06                                                                                                                                                     Sep-07




                                                                                                                                                                                                                                                                                       FAI growth (yoy change %)
                                                                                                                                           Dec-10                                                                                                                                                                                                                                                                                                                                                                          Jan-08
                                                                                                                                                                                                                                                                                                                                                               Dec-06
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           May-08




                                                                                                                                                                                                                             Road
                                                                                                                                           Feb-11                                                                                                                                                                                                              May-07
                                                                                                                                                                                                                                                                                                                                                               Oct-07                                                                                                                                                      Sep-08




                                                                                                                                                                                                                                                                                                                                                                                                                                                   Electricity production (yoy change)
                                                                                                                                            Apr-11                                                                                                                                                                                                                                                                                                                                                                         Jan-09
                                                                                                                                                                                                                                                                                                                                                               Mar-08
                                                                                                                                            Jun-11                                                                                                                                                                                                             Aug-08                                                                                                                                                      May-09

                                                                                                                                                                                                                                                                                                                                                               Jan-09                                                                                                                                                      Sep-09
                                                                                                                                           Aug-11
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Jan-10




                                                                                                                                                                                                                             Railway
                                                                                                                                                                                                                                                                                                                                                               Jun-09
                                                                                                                                            Oct-11                                                                                                                                                                                                                                                                                                                                                                         May-10
                                                                                                                                                                                                                                                                                                                                                               Nov-09
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Sep-10
                                                                                                                                           Dec-11                                                                                                                                                                                                              Apr-10
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Jan-11
                                                                                                                                                                                                                                                                                                                                                               Sep-10
                                                                                                                                           Feb-12                                                                                                                                                                                                                                                                                                                                                                          May-11
                                                                                                                                                                                                                                                                                                                                                               Feb-11
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Sep-11
                                                                                                                                            Apr-12                                                                                                                                                                                                              Jul-11
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Jan-12
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            Latest indicators




                                                                                                                                                                                                                                                                                                                                                               Dec-11
                                                                                                                                            Jun-12                                                                                                                                                                                                                                                                                                                                                                         May-12
                                                                                                                                                                                                                                                                                                                                                               May-12




                                                                              6 September 2012
                                                                              16
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    10%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               15%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          20%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 25%




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    0%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          5%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                China macro review




                                                                                                                                                                                                                                                          firms




                                                                                                                                                  -40%
                                                                                                                                                                 -20%
                                                                                                                                                                                             20%
                                                                                                                                                                                                         40%
                                                                                                                                                                                                                     60%
                                                                                                                                                                                                                                          80%
                                                                                                                                                                                                                                                                                                                                                                                 10%
                                                                                                                                                                                                                                                                                                                                                                                            20%
                                                                                                                                                                                                                                                                                                                                                                                                   30%
                                                                                                                                                                                                                                                                                                                                                                                                          40%
                                                                                                                                                                                                                                                                                                                                                                                                                50%
                                                                                                                                                                                                                                                                                                                                                                                                                       60%
                                                                                                                                                                                                                                                                                                                                                                                                                               70%




                                                                                                                                                                               0%
                                                                                                                                                                                                                                                                                                                                                                          0%
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Jan-05
                                                                                                                                         Jan-04                                                                                                                                                                                                                 Feb-08                                                                                                                                                     May-05
                                                                                                                                         May-04
                                                                                                                                                                                                                                                                                                                                                               May-08                                                                                                                                                      Sep-05
                                                                                                                                         Sep-04
                                                                                                                                         Jan-05                                                                                                                                                                                                                 Aug-08                                                                                                                                                     Jan-06
                                                                                                                                         May-05                                                                                                                                                                                                                                                                                                                                                                            May-06
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     Capital Goods




                                                                                                                                                                                                                                                                                                                                                                Nov-08
                                                                                                                                         Sep-05                                                                                                                                                                                                                                                                                                                                                                            Sep-06



                                                                                                                                                                                                                                                                                                                                                                                                                                   Total
                                                                                                                                         Jan-06                                                                                                                                                                                                                 Feb-09                                                                                                                                                     Jan-07
                                                                                                                                         May-06                                                                                                                                                                                                                May-09                                                                                                                                                      May-07
                                                                                                                                         Sep-06




                                                                                                                                                                                                                             Total export
                                                                                                                                                                                                                                                                                                                                                                Aug-09                                                                                                                                                     Sep-07
                                                                                                                                                                                                                                                                                                                                                                                                                                                   FAI growth (yoy change %)


                                                                                                                                         Jan-07
                                                                                                                                         May-07                                                                                                                                                                                                                                                                                                                                                                            Jan-08
                                                                                                                                                                                                                                                                                                                                                                Nov-09
                                                                                                                                         Sep-07                                                                                                                                                                                                                                                                                                                                                                            May-08
                                                                                                                                                                                                                                                                                                                                                                Feb-10
                                                                                                                                         Jan-08                                                                                                                                                                                                                                                                                                                                                                            Sep-08
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       Industrial production (yoy change)




                                                                                                                                         May-08                                                                                                                                                                                                                May-10                                                                                                                                                      Jan-09
                                                                                                                                                                                                                                                                                                                                                                                                                                   Manufacturing




                                                                                                                                         Sep-08                                                                                                                                                                                                                                                                                                                                                                            May-09
                                                                                                                                                                                                                                                                                                                                                                Aug-10
                                                                                                                                         Jan-09
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Sep-09
                                                                                                                                         May-09                                                                                                                                                                                                                 Nov-10
                                                                                                                                         Sep-09                                                                                                                                                                                                                                                                                                                                                                            Jan-10
                                                                                                                                                                                                                                                                                                                                                                Feb-11
                                                                                                                                         Jan-10                                                                                                                                                                                                                                                                                                                                                                            May-10
                                                                                                                                         May-10                                                                                                                                                                                                                May-11                                                                                                                                                      Sep-10




anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                                                         Sep-10                                                                                                                                                                                                                 Aug-11                                                                                                                                                     Jan-11
                                                                                                                                                                                                                                                                                                                                                                                                                                   Real estate




                                                                                                                                                                                                                             Export - Non Chinese firms
                                                                                                                                         Jan-11                                                                                                                                                                                                                                                                                                                                                                            May-11
                                                                                                                                                                                                                                                                                                                                                                Nov-11
                                                                                                                                         May-11
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Sep-11
                                                                                                                                         Sep-11                                                                                                                                                                                                                 Feb-12
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           Jan-12
                                                                                                                                         Jan-12
                                                                                                                                                                                                                                                                                                                                                               May-12
                                                                                                                                         May-12                                                                                                                                                                                                                                                                                                                                                                            May-12




                                                                                                                                                                                                                                                          % yoy change in total exports and exports from non-Chinese
                                                                                                         Capital Goods




                            Non-performing loans on the rise
Wei Yao                     According to the China Banking Regulatory Commission (CBRC), total NPLs at China's
(852) 2166 5437
wei.yao@sgcib.com           commercial banks reached CNY456.4bn at end-Q2, up 4.2% qoq and up 11.9% (or
                            CNY48.6bn) from the trough in Q3 11. The NPL ratio was unchanged at 0.9%, due to a similar
                            pace of loan growth. However, special-mention loans that are doubtful but still performing
                            increased to CNY1.5trn, while the total loan loss reserves set aside were CNY1.3trn.

                            Some regions are doing much worse. The Zhejiang province probably boasts the group of
                            enterprises with the highest risk appetite and the most active underground banking in China.
                            Since Q3 11, the underground system has been imploding due to the severe liquidity crunch
                            and the deceleration in growth. The NPL ratio of the Zhejiang province as a whole jumped by
                            1ppt in H1 11 to 1.34%. The city of Wenzhou saw its banking NPL ratio rising to 2.85% as of
                            end-July. Only one year ago, it boasted the lowest NPL of 0.37% among all cities in China.

                            A bottom-up search returns an even more worrying picture. The number of stories on
                            companies in default or with severe cash flow problems has surged since early Q2. Apart from
                            a couple of property developers, several sectors, including steel trading, shipbuilding, and
                            solar panel manufacturing, seem to be running off the cliff all together. The economic
                            slowdown does not seem to be the only cause, and, in many cases, is not even the major one.
                            The common mistakes include involvement in speculative activities (e.g. property speculation
                            or commodity trading), massive capacity expansion (e.g. shipbuilding and solar panel
                            manufacturing), outsized commitments to complicated webs of mutual loan guarantees, and
                            high exposure to underground banking (e.g. many SMEs in Zhejiang).

                            Company profitability under pressure
                            Our economists believe China is entering a structural upcycle in NPL due to excess capacity
                            in a number of industries. This overcapacity should gradually lead to consolidation or
                            bankruptcy in these industries that have been the most affected by the weak demand
                            environment since the start of the year. The following chart shows these industries which have
                            seen the greatest profit fall to the end of May.


                            Yoy change in profits by industry (May YTD)
                                                                                                                                                            COM. & ELECTRONIC
                                                                                                          SMELTED FERROUS




                                                                                                                                                                                                    SPECIAL PURPOSE
                                            TRANSPORTATION




                                                                                                                             CHEMICAL FIBERS
                                                                IRON SMELTING




                                                                                                                                                                                                       EQUIPMENT
                                                                                          STEEL MAKING




                                                                                                                                                                                                                      ELECTRICAL &
                                                                                                               METALS




                                                                                                                                                                                                                                      COAL MINING
                                                                                                                                                                                                                       MACHINERY
                                                                                                                                                CHEMICAL




                                                                                                                                                                                 TEXTILE
                                                                                 WATER




                                                                                                                                                                                                                                                     PAPER
                                                                                                                                                                                            Total




                                 0%
                               -10%                                                                                                                                                                 -2%               -2%            -1%            -1%
                                                                                                                                                                                           -4%
                               -20%                                                                                                                                             -9%
                               -30%                                                                                                                        -18%
                                                                                                                                               -23%
                               -40%
                               -50%
                               -60%                                                                      -51%               -50%
                               -70%
                               -80%                                             -69%     -67%
                               -90%                            -77%
                              -100%       -86%

                            Source: SG Cross Asset Research, National Bureau of Statistics




                                                             6 September 2012                            17


              anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                               Capital Goods




                                              Iron ore prices reveal the weak state of industrial demand in
                                              China
                                              Iron ore prices fell below $100 per ton, a record low since December 2009. Bearing in mind
                                              that the marginal cost of production in China is often estimated at around $120 per ton, this
                                              kind of fall, if long-lasting, sends a warning signal on the state of Chinese industry. Since the
                                              iron ore price is less affected by speculation than other heavily exchanged traded
                                              commodities, it is a good barometer to assess the health of Chinese industry. The sharp
                                              decline over the past three months shows that the effects of government actions (higher
                                              liquidity, accelerated investment program, etc.) have not yet been felt.


Metal Bulletin Iron Ore Index ($ per ton)                                     Rebar HRB335 12mm Shanghai CH/MT - DS MID PRICE

  190                                                                           5,000
  180                                                                           4,800
  170                                                                           4,600
  160                                                                           4,400
  150                                                                           4,200
  140                                                                           4,000
  130                                                                           3,800
  120                                                                           3,600
  110                                                                           3,400
  100                                                                           3,200
   90                                                                           3,000
        Mar-12




                                                                                                                                                                         Mar-12

                                                                                                                                                                                  Mar-12
        Mar-12
        Aug-11




        Dec-11
        Dec-11
        Dec-11




        Aug-12
        Aug-12




                                                                                        Aug-11




                                                                                                                                     Dec-11

                                                                                                                                              Dec-11




                                                                                                                                                                                                                                                 Aug-12
         Jul-12
         Jul-12




                                                                                                                                                                                                                               Jul-12

                                                                                                                                                                                                                                        Jul-12
        Oct-11




        Apr-12




                                                                                                          Oct-11

                                                                                                                   Oct-11




                                                                                                                                                                                           Apr-12
        Oct-11




        Apr-12
        Jan-12




        Jun-12

        Jun-12




                                                                                                                                                       Jan-12
        Jan-12




        Jun-12




                                                                                                                                                                                                                      Jun-12
        May-12
        May-12




                                                                                                                                                                                                    May-12

                                                                                                                                                                                                             May-12
        Feb-12




                                                                                                                                                                Feb-12
        Feb-12
        Sep-11
        Sep-11



        Nov-11




                                                                                                 Sep-11




                                                                                                                            Nov-11
        Nov-11




Source: SG Cross Asset Research, Datastream




                                              Investment detoxification is still not on the agenda
                                              Railway – Infrastructure investment increased
                                              China announced a third expansion in railway spending, underlining that the selective stimulus
                                              program continues to grow. Spending on railroads and bridges is now planned to run to
                                              CNY496bn in 2012, up from the previous plan of CNY406bn. The increase means that this
                                              part of the railway budget is now greater than in 2011, when it was CNY461bn. In other words,
                                              China’s stimulus program continues to grow, suggesting that the pace of underlying growth
                                              remains soft. However, even after this latest increase, the 2012 figure is well below the
                                              CNY700bn budget in 2010, confirming that this year’s stimulus is far smaller than the one at
                                              the height of the Great Recession in 2008-09.

                                              It is worthwhile to note that spending on railways and bridges is only part of the railway
                                              budget, which also includes investment in rolling stock. In terms of the overall budget, the
                                              2012 volume should now be slightly above the 2011 spend of CNY591bn, although the
                                              increase is slight given the 2012 budget is now CNY606bn (up CNY90bn from the original
                                              plan).

                                              Local governments are pushing for large investments
                                              Several local governments have announced plans to boost investments and revive growth.
                                              These plans have not yet been approved by the central government and thus have not been
                                              implemented so far. It is also important to note that a large chunk of these plans does not
                                              involve new money but rather an acceleration of the implementation of the twelfth five-year
                                              plan.


                                                           6 September 2012    18


                    anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                        Capital Goods




                                                    On 16 July, Ningbo, a city in the eastern Zhejiang Province, announced 26 new measures to
                                                   prop up growth, including tax breaks, investment expansion, and technological innovation.

                                                    On 23 July, Nanjing, the capital city of Jiangsu in east China, introduced new measures to
                                                   expand consumption, covering areas in investment, property, culture, entertainment, and
                                                   others.

                                                      Also on 23 July, the local government of Guizhou Province said it was ready to formalise a
                                                   package of development programs, worth CNY3trn, and released it in August.

                                                      On 25 July, Changsha in the Hunan Province announced that the government would invest
                                                   up to CNY729bn in 195 major projects in 2012, to "revive potential market demand".

                                                      On 15 August, Wuhan announced a CNY233bn plan to upgrade industry and its
                                                   transportation system.

                                                      Guangdong province announced on 20 August a CNY1trn plan for construction projects.

                                                    Chongquing, on 21 August, unveiled a CNY1.5trn plan centred on seven strategic
                                                   industries.

                                                      Tianjin announced plans to invest CNY1.5trn in 10 industries.

                                                   Taking all these plans together, we calculate that total stimuli could reach CNY8trn and that
                                                   compares with the November 2008 stimulus which reached CNY4.5trn. As we said earlier,
                                                   these plans are neither approved nor financed, so we need to treat this amount with some
                                                   caution. The 2008 stimulus was initiated by the central government and spread over two
                                                   years, while these measures stem from local governments who are already struggling to
                                                   finance past projects. However, these kinds of announcements reveal that China has not yet
                                                   started its investment detoxification, at least from a local government perspective.

                                                   Real estate – A bear market rally or real recovery?
                                                   Over the last few months, we have seen some positive news coming from the Chinese real
                                                   estate market, suggesting that the worst is now behind us. Soufun reported that home prices
                                                   increased 1% month-on-month in June with the major cities leading in terms of gains. Official
                                                   statistics showed a similar picture with less than 30% of cities reporting declining real estate
                                                   prices in July compared to around half a month earlier.


Floor space sold and started (% change yoy)                                            % of cities showing yoy price decline

 120%                           Floor space sold                 Floor space started    90%                                                         New built                                 Second hand

          % y oy                                                                        80%
 100%     3 mov ing av erage                                                            70%
  80%                                                                                   60%

                                                                                        50%
  60%
                                                                                        40%
  40%
                                                                                        30%

  20%                                                                                   20%

                                                                                        10%
   0%
         Jul-98

         Jul-99

         Jul-00




         Jul-03

         Jul-04

         Jul-05

         Jul-06

         Jul-07

         Jul-08




         Jul-12
         Jul-01

         Jul-02




         Jul-09

         Jul-10

         Jul-11
        Jan-99

        Jan-00




        Jan-04

        Jan-05

        Jan-06

        Jan-07

        Jan-08

        Jan-09




        Jan-12
        Jan-01

        Jan-02

        Jan-03




        Jan-10

        Jan-11




                                                                                         0%
                                                                                                                Mar-11




                                                                                                                                                                                                                             Mar-12
                                                                                                                                                              Aug-11




                                                                                                                                                                                                  Dec-11
                                                                                                                                                     Jul-11




                                                                                                                                                                                                                                                                 Jul-12
                                                                                                                         Apr-11




                                                                                                                                                                                Oct-11




                                                                                                                                                                                                                                      Apr-12
                                                                                              Jan-11




                                                                                                                                                                                                           Jan-12




                                                                                                                                                                                                                                                        Jun-12
                                                                                                                                           Jun-11




                                                                                                                                                                                                                                               May-12
                                                                                                                                  May-11
                                                                                                       Feb-11




                                                                                                                                                                                                                    Feb-12
                                                                                                                                                                       Sep-11


                                                                                                                                                                                         Nov-11




 -20%

 -40%

Source: SG Cross Asset Research, National Bureau of Statistics




                                                                  6 September 2012     19


                     anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                                  Capital Goods




              Is it a genuine market recovery or just a bear market rally ahead of a renewed downward
              trend? We would tend to lean towards the latter option for several reasons:

                 The price decline has not been sufficient in real terms to attract new buyers;

                 The supply pipeline remains huge and is likely to put further pressure on supply/demand
              balance in the new housing market;

                 The government cannot let house prices appreciate for social reasons, and central
              government has no intention of removing property restrictions.


              Supply pipeline of new property remains huge


                  7.0
                                 Space floor under construction (12M rolling basis) / space floor completed (12M
                                                                  rolling basis)
                  6.5
                  6.0
                  5.5
                  5.0
                  4.5
                  4.0
                  3.5
                  3.0
                  2.5
                  2.0
                                 Jan-98


                                                   Jan-99


                                                                     Jan-00


                                                                                       Jan-01


                                                                                                         Jan-02


                                                                                                                           Jan-03




                                                                                                                                                                                                                                                                           Jan-11


                                                                                                                                                                                                                                                                                             Jan-12
                                                                                                                                             Jan-04


                                                                                                                                                               Jan-05


                                                                                                                                                                                 Jan-06


                                                                                                                                                                                                   Jan-07


                                                                                                                                                                                                                     Jan-08


                                                                                                                                                                                                                                       Jan-09


                                                                                                                                                                                                                                                         Jan-10
                        Jul-97


                                          Jul-98


                                                            Jul-99


                                                                              Jul-00


                                                                                                Jul-01


                                                                                                                  Jul-02


                                                                                                                                    Jul-03




                                                                                                                                                                                                                                                                                    Jul-11


                                                                                                                                                                                                                                                                                                      Jul-12
                                                                                                                                                      Jul-04


                                                                                                                                                                        Jul-05


                                                                                                                                                                                          Jul-06


                                                                                                                                                                                                            Jul-07


                                                                                                                                                                                                                              Jul-08


                                                                                                                                                                                                                                                Jul-09


                                                                                                                                                                                                                                                                  Jul-10
              Source: SG Cross Asset Research, National Bureau of Statistics




                                              6 September 2012                                                20


anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                                                                                                                    Capital Goods




                                                                                                      Valuation still under pressure

                                                                                                      Chinese industrial stocks trading at a large discount to their
                                                                                                      European peers
                                                                                                      The Chinese industrial companies have experienced a steep de-rating since 1 March. The
                                                                                                      forward 12M P/E of China’s MSCI capital goods index is down 15% from the annual peak
                                                                                                      reached in March. The Machinery and Electricals indices have de-rated by almost 25% in the
                                                                                                      meantime.

                                                                                                      Despite the assumption of better long-term growth prospects, China’s MSCI capital goods
                                                                                                      index is trading at a 35% discount to its European counterpart, the deepest discount since
                                                                                                      2007. Chinese machinery stocks are trading at an even steeper 40% discount to the European
                                                                                                      index while for Electricals, the current discount stands at c.25%.


12M FWD P/E – MSCI cap goods China vs Europe                                                                                                                                                        MSCI cap goods China vs Europe premium/discount

                                                                                  China                                 Europe                                                                      120%
  30
                                                                                                                                                                                                    100%

                                                                                                                                                                                                     80%
  25
                                                                                                                                                                                                     60%

  20                                                                                                                                                                                                 40%

                                                                                                                                                                                                     20%
  15
                                                                                                                                                                                                      0%

                                                                                                                                                                                                    -20%
  10
                                                                                                                                                                                                    -40%

   5                                                                                                                                                                                                -60%
                                                                                                                                                                                                                                                    Mar-08




                                                                                                                                                                                                                                                                                                        Mar-09




                                                                                                                                                                                                                                                                                                                                                            Mar-10




                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Mar-12
                                                                                                                                                                                                                                                                                                                                                                                                                Mar-11
                                                                                                                                                                                                                          Sep-07
                                                                                                                                                                                                                                       Dec-07




                                                                                                                                                                                                                                                                              Sep-08
                                                                                                                                                                                                                                                                                           Dec-08




                                                                                                                                                                                                                                                                                                                                  Sep-09
                                                                                                                                                                                                                                                                                                                                               Dec-09




                                                                                                                                                                                                                                                                                                                                                                                                   Dec-10
                                                                                                                                                                                                                                                                                                                                                                                      Sep-10




                                                                                                                                                                                                                                                                                                                                                                                                                                          Sep-11
                                                                                                                                                                                                                                                                                                                                                                                                                                                       Dec-11
                                                                                                                                                                                  Mar-12
                                  Mar-08




                                                                      Mar-09




                                                                                                          Mar-10




                                                                                                                                              Mar-11
                Sep-07
                         Dec-07




                                                    Sep-08
                                                             Dec-08




                                                                                        Sep-09
                                                                                                 Dec-09




                                                                                                                            Sep-10
                                                                                                                                     Dec-10




                                                                                                                                                                Sep-11
                                                                                                                                                                         Dec-11




                                                                                                                                                                                                                                                                                                                                                                         Jun-10




                                                                                                                                                                                                                                                                                                                                                                                                                             Jun-11




                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 Jun-12
                                                                                                                                                                                                              Jun-07




                                                                                                                                                                                                                                                                 Jun-08




                                                                                                                                                                                                                                                                                                                     Jun-09
       Jun-07




                                           Jun-08




                                                                               Jun-09




                                                                                                                   Jun-10




                                                                                                                                                       Jun-11




                                                                                                                                                                                           Jun-12




Source: SG Cross Asset Research, Datastream




12M FWD P/E – MSCI machinery China vs Europe                                                                                                                                                        12M FWD P/E – MSCI Electrical equipment China vs Europe

                                                                                  China                                 Europe                                                                                                                                                                                      China                                                 Europe
  28                                                                                                                                                                                                 30


  23                                                                                                                                                                                                 25


  18                                                                                                                                                                                                 20


  13                                                                                                                                                                                                 15


   8                                                                                                                                                                                                 10


   3                                                                                                                                                                                                  5
                                                                                                                                                                                  Mar-12




                                                                                                                                                                                                                                                                                                                                                                                                                                                                Mar-12
                                  Mar-08




                                                                      Mar-09




                                                                                                          Mar-10




                                                                                                                                              Mar-11




                                                                                                                                                                                                                                                Mar-08




                                                                                                                                                                                                                                                                                                    Mar-09




                                                                                                                                                                                                                                                                                                                                                        Mar-10




                                                                                                                                                                                                                                                                                                                                                                                                            Mar-11
                Sep-07
                         Dec-07




                                                                                                                                                                                                                       Sep-07
                                                                                                                                                                                                                                   Dec-07
                                                    Sep-08
                                                             Dec-08




                                                                                        Sep-09
                                                                                                 Dec-09




                                                                                                                            Sep-10
                                                                                                                                     Dec-10




                                                                                                                                                                Sep-11
                                                                                                                                                                         Dec-11




                                                                                                                                                                                                                                                                          Sep-08
                                                                                                                                                                                                                                                                                       Dec-08




                                                                                                                                                                                                                                                                                                                              Sep-09
                                                                                                                                                                                                                                                                                                                                           Dec-09




                                                                                                                                                                                                                                                                                                                                                                                  Sep-10
                                                                                                                                                                                                                                                                                                                                                                                               Dec-10




                                                                                                                                                                                                                                                                                                                                                                                                                                      Sep-11
                                                                                                                                                                                                                                                                                                                                                                                                                                                   Dec-11
       Jun-07




                                           Jun-08




                                                                               Jun-09




                                                                                                                   Jun-10




                                                                                                                                                       Jun-11




                                                                                                                                                                                           Jun-12




                                                                                                                                                                                                           Jun-07




                                                                                                                                                                                                                                                             Jun-08




                                                                                                                                                                                                                                                                                                                 Jun-09




                                                                                                                                                                                                                                                                                                                                                                     Jun-10




                                                                                                                                                                                                                                                                                                                                                                                                                         Jun-11




                                                                                                                                                                                                                                                                                                                                                                                                                                                                             Jun-12




Source: SG Cross Asset Research, Datastream




                                                                                                                                                 6 September 2012                                   21


                                           anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                                                                 Capital Goods




                                          Company exposure to China

                                          Direct exposure
Direct exposure to China and estimated breakdown by end-markets
                           Construction   Infrastructure          Manufacturing                   Mining / Oil & Gas                       Utilities                 Healthcare                     Consumer % of sales in China
ABB                                1%                3%                                   3%                          1%                       5%                                                                                     13%
Schneider                          4%                2%                                   5%                                                   2%                                                                                     13%
SKF                                1%                4%                                   5%                                                   2%                                                                                     12%
Atlas Copco                        1%                3%                                   5%                          3%                                                                                                              12%
Vallourec                                                                                                             5%                       5%                                                                                     10%
Philips                            2%                1%                                   1%                                                                                     2%                             4%                     9%
Assa Abloy                         9%                                                                                                                                                                                                  9%
Siemens                                              2%                                   4%                                                   2%                                1%                                                    9%
Volvo                              3%                5%                                                                                                                                                                                8%
Sandvik                            1%                1%                                   2%                          2%                       1%                                                                                      7%
Nexans (pf)                        1%                1%                                   1%                                                   3%                                                                                      5%
Alstom                                               2%                                                                                        4%                                                                                      5%
Legrand                            4%                                                                                                                                                                                                  4%
Source: SG Cross Asset Research




                                          Total exposure to China – direct and indirect
                                          Estimated direct and indirect exposure to China

                                                   % of sales in China                    % of sales indirectly driven by China (business)                           % of sales indirectly driven by China (geography)


                                            45%
                                            40%
                                            35%
                                            30%
                                            25%
                                            20%
                                            15%
                                            10%
                                              5%
                                              0%
                                                                                                                                                                                                       Inv ensy s
                                                                                                                                                            Volv o




                                                                                                                                                                                                                           Sandv ik
                                                                                                                            Scania




                                                                                                                                                                        Nexans




                                                                                                                                                                                                                     ABB




                                                                                                                                                                                                                                      Atlas Copco
                                                                                                                                                                                  SKF
                                                                                               Alstom




                                                                                                                  Siemens
                                                                                                        Smiths




                                                                                                                                     MAN




                                                                                                                                                                                        Vallourec
                                                                                                                                                Schneider
                                                        Legrand




                                                                                Philips
                                                                   Assa Abloy




                                          Source: SG Cross Asset Research




                                                                  6 September 2012                               22


                   anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                           Capital Goods




                                                                APPENDIX
COMPANIES MENTIONED
ABB (ABBN.VX, Hold)
Alstom (ALSO.PA, Hold)
Assa Abloy (ASSAb.ST, Hold)
Atlas Copco (ATCOa.ST, Sell)
Bombardier (BBDb.TO, Hold)
Hydro (NHY.OL, No Reco)
Invensys (ISYS.L, Hold)
Legrand (LEGD.PA, Buy)
MAN (MANG.DE, Hold)
Nexans (NEXS.PA, Buy)
Next (NXT.L, Sell)
Philips (PHG.AS, Buy)
Sandvik (SAND.ST, Sell)
Schneider (SCHN.PA, Buy)
Siemens (SIEGn.DE, Buy)
SKF (SKFb.ST, Buy)
Vallourec (VLLP.PA, Hold)
Volvo (VOLVb.ST, Buy)
Wind (WIND_SG, No Reco )


ANALYST CERTIFICATION
The following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately reflect his or
her or their personal views about any and all of the subject securities or issuers and (ii) no part of his or her or their compensation was, is, or
will be related, directly or indirectly, to the specific recommendations or views expressed in this report: Sébastien Gruter, Gaël de Bray,
Alasdair Leslie




SG EQUITY RESEARCH RATINGS on a 12 months period (in effect
as of March 14, 2012)                                                     Equity rating and dispersion relationship

                                                                           250         47%
                                                                                                                                   Updated on 03/09/12
BUY: absolute total shareholder return forecast of 15% or more
over a 12 month period.                                                    200                               37%
HOLD: absolute total shareholder return forecast between           0%
and +15% over a 12 month period.
                                                                           150
SELL: absolute total shareholder return forecast below 0% over a                                50%
12 month period.
                                                                           100                                      43%              16%

Total shareholder return means forecast share price appreciation
plus all forecast cash dividend income, including income from               50                                                              37%
special dividends, paid during the 12 month period. Ratings are
determined by the ranges described above at the time of the
                                                                             0
initiation of coverage or a change in rating (subject to limited                            Buy                  Hold                    Sell
management discretion). At other times, ratings may fall outside of                          Companies Covered    Cos. w/ Banking Relationship
these ranges because of market price movements and/or other
short term volatility or trading patterns. Such interim deviations        Source: SG Cross Asset Research

from specified ranges will be permitted but will become subject to
review by research management.


Sector Weighting Definition on a 12 months period:
The sector weightings are assigned by the SG Equity Research
Strategist and are distinct and separate from SG research analyst
ratings. They are based on the relevant MSCI.
OVERWEIGHT: sector expected to outperform the relevant broad
market benchmark over the next 12 months.
NEUTRAL: sector expected to perform in-line with the relevant
broad market benchmark over the next 12 months.



                                                    6 September 2012       23


                anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                         Capital Goods




UNDERWEIGHT: sector expected to underperform the relevant
broad market benchmark over the next 12 months




SG EQUITY RESEARCH RATINGS on a 12 months period (in effect
through March 13, 2012)


BUY: expected upside of 10% or more over a 12 month period.
HOLD: expected return between -10% and +10% over a 12 month
period.
SELL: expected downside of -10% or worse over a 12 month
period.


Sector Weighting Definition on a 12 months period:
The sector weightings are assigned by the SG Equity Research
Strategist and are distinct and separate from SG research analyst
ratings. They are based on the relevant MSCI.
OVERWEIGHT: sector expected to outperform the relevant broad
market benchmark over the next 12 months.
NEUTRAL: sector expected to perform in-line with the relevant
broad market benchmark over the next 12 months.
UNDERWEIGHT: sector expected to underperform the relevant
broad market benchmark over the next 12 months.
Ratings and/or price targets are determined by the ranges
described above at the time of the initiation of coverage or a
change in rating or price target (subject to limited management
discretion). At other times, the price targets may fall outside of
these ranges because of market price movements and/or other
short term volatility or trading patterns. Such interim deviations
from specified ranges will be permitted but will become subject to
review by research management.




MSCI DISCLAIMER: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without
prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or
used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire
risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the
information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular
purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any
third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan
Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may be
provided by or approved in advance by MSCI.


IMPORTANT DISCLOSURES
ABB              SG acted as co manager in ABB Finance's high grade bond issue.
ABB              SG acted as co-manager in ABB's bond issue (2.625% 26/03/19 EUR).
Alstom           SG acted as joint bookrunner in Alstom's senior bond issue (3.875% 02/03/16 EUR).
Bombardier       SG acted as co-manager in Bombardier's high Yield bond issue
Legrand          SG acted as sole bookrunner in the disposal of Wendel & KKR's stakes into Legrand.
Nexans           SG acted as joint bookrunner in Nexans' convertible bond issue.
Philips          SG acted as co manager in Philips' senior high grade bond issue. .
Schneider        SG acted as joint bookrunner in Schneider's bond issue (Eur500mm long 7yr).
Siemens          SG is acting as joint bookrunner in Siemens Financieringsmaatschappij NV's bond issue. (Maturities : 10 Sep 14 and
                 10 Mar 20)
Vallourec        SG acted as joint bookrunner in Vallourec's bond issue (Maturity: 14/02/2017).
Wind             SG acted as passive joint bookrunner for Wind's high yield bond issue (mirror the existing EUR 7.375% and USD
                 7.25% Senior Secured Notes (non-fungible mirror notes).

Director: A senior employee, executive officer or director of SG and/ or its affiliates is a director and/or officer of Alstom.
SG and its affiliates beneficially own 1% or more of any class of common equity of Philips, Siemens.
SG or its affiliates act as market maker or liquidity provider in the equities securities of ABB, Alstom, Atlas Copco, MAN, Philips, Schneider,
Siemens, Vallourec, Volvo.


                                                   6 September 2012      24


               anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                           Capital Goods




SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from ABB, Alstom,
Bombardier, Invensys, MAN, Nexans, Sandvik, Siemens.
SG or its affiliates had an investment banking client relationship during the past 12 months with ABB, Alstom, Bombardier, Legrand, Nexans,
Philips, Schneider, Vallourec, Wind.
SG or its affiliates have received compensation for investment banking services in the past 12 months from ABB, Alstom, Bombardier,
Legrand, Nexans, Philips, Schneider, Siemens, Vallourec, Wind.
SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of ABB, Alstom, Bombardier, Nexans, Philips,
Schneider, Siemens, Vallourec, Wind.
SGAS had a non-investment banking non-securities services client relationship during the past 12 months with ABB, Bombardier, Philips,
SKF, Schneider, Siemens, Vallourec, Volvo.
SGAS received compensation for products and services other than investment banking services in the past 12 months from ABB,
Bombardier, Philips, SKF, Schneider, Siemens, Vallourec, Volvo.
SGCIB received compensation for products and services other than investment banking services in the past 12 months from ABB, Alstom,
Assa Abloy, Bombardier, Invensys, Legrand, MAN, Nexans, Philips, Sandvik, Schneider, Siemens, Vallourec, Volvo.




FOR DISCLOSURES PERTAINING TO COMPENDIUM REPORTS OR RECOMMENDATIONS OR ESTIMATES MADE ON SECURITIES
OTHER THAN THE PRIMARY SUBJECT OF THIS RESEARCH REPORT, PLEASE VISIT OUR GLOBAL RESEARCH DISCLOSURE
WEBSITE AT http://www.sgresearch.com/compliance.rha or call +1 (212).278.6000 in the U.S.


The analyst(s) responsible for preparing this report receive compensation that is based on various factors including SG’s total revenues, a
portion of which are generated by investment banking activities.

Non-U.S. Analyst Disclosure: The name(s) of any non-U.S. analysts who contributed to this report and their SG legal entity are listed below.
U.S. analysts are employed by SG Americas Securities LLC. The non-U.S. analysts are not registered/qualified with FINRA, may not be
associated persons of SGAS and may not be subject to the FINRA restrictions on communications with a subject company, public
appearances and trading securities held in the research analyst(s)’ account(s): Sébastien Gruter Société Générale Paris, Gaël de Bray Société
Générale Paris, Alasdair Leslie Société Générale London


IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any
securities and has been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or
completeness. Material contained in this report satisfies the regulatory provisions concerning independent investment research as defined in
MiFID. SG does, from time to time, deal, trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the
securities, or derivatives thereof, of persons, firms or entities mentioned in this document and may be represented on the board of such
persons, firms or entities. SG does, from time to time, act as a principal trader in equities or debt securities that may be referred to in this
report and may hold equity or debt securities positions. Employees of SG, or individuals connected to them, may from time to time have a
position in or hold any of the investments or related investments mentioned in this document. SG is under no obligation to disclose or take
account of this document when advising or dealing with or on behalf of customers. The views of SG reflected in this document may change
without notice. In addition, SG may issue other reports that are inconsistent with, and reach different conclusions from, the information
presented in this report and is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.
To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information
contained herein. This research document is not intended for use by or targeted to retail customers. Should a retail customer obtain a copy of
this report he/she should not base his/her investment decisions solely on the basis of this document and must seek independent financial
advice.

The financial instrument discussed in this report may not be suitable for all investors and investors must make their own informed decisions
and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
The value of securities and financial instruments is subject to currency exchange rate fluctuation that may have a positive or negative effect on
the price of such securities or financial instruments, and investors in securities such as ADRs effectively assume this risk. SG does not provide
any tax advice. Past performance is not necessarily a guide to future performance.              Estimates of future performance are based on
assumptions that may not be realized. Investments in general, and derivatives in particular, involve numerous risks, including, among others,
market, counterparty default and liquidity risk. Trading in options involves additional risks and is not suitable for all investors. An option may
become worthless by its expiration date, as it is a depreciating asset. Option ownership could result in significant loss or gain, especially for
options of unhedged positions. Prior to buying or selling an option, investors must review the "Characteristics and Risks of Standardized
Options" at http://www.optionsclearing.com/publications/risks/riskchap.1.jsp.

Notice to French Investors: This publication is issued in France by or through Société Générale ("SG") which is authorised and supervised
by the Autorité de Contrôle Prudentiel and regulated by the Autorite des Marches Financiers.
Notice to U.K. Investors: This publication is issued in the United Kingdom by or through Société Générale ("SG"), London Branch . Société
Générale is a French credit institution (bank) authorised and supervised by the Autorité de Contrôle Prudentiel (the French Prudential Control
Authority). Société Générale is subject to limited regulation by the Financial Services Authority (“FSA”) in the U.K. Details of the extent of SG's
regulation by the FSA are available from SG on request. The information and any advice contained herein is directed only at, and made
available only to, professional clients and eligible counterparties (as defined in the FSA rules) and should not be relied upon by any other
person or party.
Notice to Polish Investors: this document has been issued in Poland by Societe Generale S.A. Oddzial w Polsce (“the Branch”) with its
registered office in Warsaw (Poland) at 111 Marszałkowska St. The Branch is supervised by the Polish Financial Supervision Authority and the
French ”Autorité de Contrôle Prudentiel”. This report is addressed to financial institutions only, as defined in the Act on trading in financial
instruments. The Branch certifies that this document has been elaborated with due dilligence and care.


                                                    6 September 2012       25


                anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower
                                                                            Capital Goods




Notice to U.S. Investors: For purposes of SEC Rule 15a-6, SG Americas Securities LLC (“SGAS”) takes responsibility for this research report.
This report is intended for institutional investors only. Any U.S. person wishing to discuss this report or effect transactions in any security
discussed herein should do so with or through SGAS, a broker-dealer registered with the SEC and a member of FINRA, with its registered
address at 1221 Avenue of the Americas, New York, NY 10020. (212)-278-6000.
Notice to Canadian Investors: This document is for information purposes only and is intended for use by Permitted Clients, as defined under
National Instrument 31-103, Accredited Investors, as defined under National Instrument 45-106, Accredited Counterparties as defined under
the Derivatives Act (Québec) and "Qualified Parties" as defined under the ASC, BCSC, SFSC and NBSC Orders
Notice to Singapore Investors: This document is provided in Singapore by or through Société Générale ("SG"), Singapore Branch and is
provided only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act,
Cap. 289. Recipients of this document are to contact Société Générale, Singapore Branch in respect of any matters arising from, or in
connection with, the document. If you are an accredited investor or expert investor, please be informed that in SG's dealings with you, SG is
relying on the following exemptions to the Financial Advisers Act, Cap. 110 (“FAA”): (1) the exemption in Regulation 33 of the Financial
Advisers Regulations (“FAR”), which exempts SG from complying with Section 25 of the FAA on disclosure of product information to clients;
(2) the exemption set out in Regulation 34 of the FAR, which exempts SG from complying with Section 27 of the FAA on recommendations;
and (3) the exemption set out in Regulation 35 of the FAR, which exempts SG from complying with Section 36 of the FAA on disclosure of
certain interests in securities.
Notice to Hong Kong Investors: This report is distributed in Hong Kong by Société Générale, Hong Kong Branch which is licensed by the
Securities and Futures Commission of Hong Kong under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
("SFO"). This document does not constitute a solicitation or an offer of securities or an invitation to the public within the meaning of the SFO.
This report is to be circulated only to "professional investors" as defined in the SFO.
Notice to Japanese Investors: This publication is distributed in Japan by Societe Generale Securities (North Pacific) Ltd., Tokyo Branch,
which is regulated by the Financial Services Agency of Japan. This document is intended only for the Specified Investors, as defined by the
Financial Instruments and Exchange Law in Japan and only for those people to whom it is sent directly by Societe Generale Securities (North
Pacific) Ltd., Tokyo Branch, and under no circumstances should it be forwarded to any third party. The products mentioned in this report may
not be eligible for sale in Japan and they may not be suitable for all types of investors.
Notice to Australian Investors: This document is issued in Australia by Société Générale (ABN 71 092 516 286) ("SG"). SG is regulated by
APRA and ASIC and holds an AFSL no. 236651 issued under the Corporations Act 2001 (Cth) ("Act"). The information contained in this
document is only directed to recipients who are wholesale clients as defined under the Act.

http://www.sgcib.com. Copyright: The Société Générale Group 2012. All rights reserved.
This publication may not be reproduced or redistributed in whole in part without the prior consent of SG or its affiliates.




                                                    6 September 2012       26


                anonymous@anonymous.com FIRST LAST 09/06/12 01:35:05 PM Hong Kong Highpower

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:50
posted:10/9/2012
language:English
pages:26