Table of contents
Our key investment ideas: Buy Lonking on punitive valuation 3
Industry outlook: Light at the end of the tunnel - bottom fishing opportunities appear 7
We continue to use Director’s Cut to derive our 12-month target prices 15
Lonking (3339.HK; Buy, CL): Punitive valuation; cash flow concerns overdone 18
Shantui (000680.SZ, Sell): Uncertainties over Shantui-Komatsu 26
Changsha Zoomlion (A) (000157.SZ, Neutral): Lower TP and lack of sector-relative shine 30
The prices in the body of this report are based on the market close of August 30, 2011, unless otherwise mentioned.
The author wishes to thank David Jin for his valuable contributions to the report.

Construction machinery stocks
Lonking Holdings (3339.HK, Buy, Conviction List)
We upgrade Lonking from Sell to Buy and add the stock to Conviction List because we firstly see a mean-reversion opportunity as: (1) it is
currently trading at 5.1X 2012E P/E, by far the lowest among our coverage group and very close to historical trough; and (2) it has the widest
valuation discount in recent years to close peers Liugong and Xiagong. The two main reasons for our previous rating downgrade were: (1)
high gearing and negative operating cash flows; and (2) margin erosion risks (see Report More pain to come: Sell loaders (Lonking), Buy
concrete machinery (Zoomlion (A), published on May 27,2011). We believe these two concerns are removed now as the company is exiting
from captive finance and we expect it to continue to free up cash from its Rmb3.3bn finance receivables balance and improve net debt/equity
from 69% in 2010 to 28% in 2011. Moreover, Lonking has maintained high gross margin in 1H2011 (1ppt increase yoy) and also lower the
operating expense ratio from 6.9%/9.9% in 1H/2H2010 to 6.2% in 1H2011. We roll over the basis for our Director’s Cut valuation
methodology from 2011 estimates to 2012 estimates, and as a result our 12-m target price for Lonking increases from
HK$3.70 to HK$3.80 despite a lower sector valratio. Our new target price implies 25% potential upside. Key downside risks
are: (1) slower-than-expected demand recovery for loaders and excavators; (2) weaker margins for loaders as well as excavators in 2H; and
(3) market share losses in loader/excavator markets.
Sany Heavy (600031.SS, Buy)
We maintain our Buy rating for Sany Heavy. We roll over the basis for our 12-m Director’s Cut valuation methodology
from 2011 estimates to 2012 estimates, and thus our 12-m target price increases from Rmb17.9 to Rmb18.7 despite
a lower valratio, implying 16% potential upside. Sany Heavy’s 1H2011 results are above our estimate, with revenue
growing at 79% yoy and net income growing at 105% yoy. Gross margin also increased by 0.5 ppt yoy in H1 ,
together with 1.3 ppt decrease in operating expense ratio. We fine tune our volume and margin assumptions and as a
result revise our EPS estimates from Rmb 1.08/1.40/1.92 to Rmb 1.20/1.48/1.89 for year 2011E/12E/13E, which are -
2%/-7%/-4% vs. Bloomberg/Wind consensus. We like the stock for its: (1) industry leadership with sustainable Q1
CROCI; (2) market share-winning momentum in the excavator and truck crane market; (3) efficient control of
operating expenses. We see future catalysts including strong monthly excavator/truck crane volumes and further
improvement in GM and operating expense ratio. Key downside risks are: (1) steeper-than-expected slowdown in
concrete machinery demand; and (2) slower-than-expected excavator/crane demand recovery.
Changsha Zoomlion: (000157.SZ, Neutral; 1157.HK, Buy)
We maintain our Buy rating for Zoomlion (H). We change 12-m Director’s Cut-based target price to HK$15.8 from HK$20.8 because of lower
sector valratio, implying 23% potential upside. We believe: (1) the company’s new businesses (including tower cranes, environmental
equipment, and excavators) can sustain solid growth on further market share gains; and (2) with over Rmb22.7bn in cash on its balance
sheet (based on 1H2011 reports), Zoomlion is the most cash-rich company in the sector, which puts it in a unique position to continue to offer
vendor financing while its competitors are likely to scale back under tight credit conditions (some have already scaled back). We revise our
2011E/12E/13E EPS estimates for Zoomlion by 12%/10%/16% to Rmb 0.94/1.19/1.47 from Rmb 0.84/1.08/1.27 on higher volume and margin
assumptions. We downgrade Zoomlion (A) from Buy to Neutral – with 9% potential upside to our new 12-month TP of Rmb 11.6, as we think
the stock’s current valuation appears less attractive relative to the sector than previously.