19 November 2012 Americas/United States Equity Research Electrical Equipment / Multi-Industry-3 / Construction & Farm Machinery / Engineering & Construction

CS Industrials China Trip Research Analysts Julian Mitchell 212 325 6668 [email protected] Jamie Cook, CFA 212 538 6098 [email protected] Shinji Kuroda 81 3 4550 9994 [email protected] Yang Y. Song 852 2101 6550 [email protected] Andre Kukhnin CFA 44 20 7888 0350 [email protected] Simon Toennessen 44 20 7883 6893 [email protected] Andrew Buscaglia 212 325 5870 [email protected] Yunchao Zhao 81 3 4550 9000 [email protected] Charles Clarke 212 538 7095 [email protected] Jonathan Shaffer 212 325 1259 [email protected] Linda Yuan 212 325 6675 [email protected] Max Yates 44 20 7883 8501 [email protected]

COMMENT

Growth bottoming out; Positive outlook for Automation and Infrastructure demand We visited c25 companies in China over Nov 12-16. ■ Growth outlook: What surprised us was the breadth of the stabilization in demand, and evidence of acceleration in a number of areas. Notable inflection points include: (i) Infrastructure activity is seeing a clear reacceleration in terms of Rail infrastructure, Subways, and Highways; (ii) private sector real estate activity is slowly recovering in some provinces such as Guangdong, and residential demand is strong even in Tier 1 cities; (iii) short-cycle industrial demand is recovering (PLCs, drives, tissue-paper machinery, inverters, fire safety products); (iv) inventories are falling in truck / light vehicle markets; (v) utilization of construction machinery appears to have bottomed out and is expected to pick up sequentially. On the negative side, the pick-up in growth is likely to remain fairly subdued in many markets through 2013, in particular mining equipment. ■ What else surprised us? (i) One encouraging point vs our 2011 trip was that corporates no longer expect a massive government stimulus, which should be helpful for the longer-term stability of the industrial economy; (ii) we were impressed by the more tempered market share ambitions of local manufacturers (positive for pricing in 2013). ■ Which markets offer decent growth / little local competition? We highlight: (i) discrete automation (rapid wage growth; automation penetration is very low in consumer markets); (ii) commercial aerospace (domestic traffic growth is resilient, low-cost carrier model has yet to emerge); (iii) healthcare / food and beverage (locals have made minimal share gains); (iv) energyefficiency products such as HVAC, building automation. ■ Preferred stocks: US EE/MI: ROK (its accelerating top-line, evidence the structural themes we discussed in our August report are playing out, clear market share gains driven by mid-end product / distribution) and UTX (CCS short-cycle orders are picking up; elevator demand remains solid). US Machinery: CAT and CMI remain our top picks with both benefiting from any recovery in China, which has been a headwind on each stock, as well as exposure to depressed US markets which are poised for recovery. Europe: Siemens (strong automation positioning) and Atlas Copco (CT and IT should see demand recover). Japan: Yaskawa Electric (growth potential of the robots business in automation, and exposure in inverters to infrastructure related areas such as cranes and elevators). China: Lonking (exposure to government directed infrastructure spending).

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS

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19 November 2012

Key Exhibits Exhibit 1: Participating Companies / Organizations Company / Organization Caterpillar Century 21 China Automation Group China Communications Construction Co. China Railway Group Cummins FLSmidth Foton Motor Company General Electric Goldwind Hollysys Automation Honeywell Illinois Tool Works (Safety & Motion) NDRC Komatsu Metso NTN Rockwell Automation Sany Heavy Industries Shanghai Electric SPX Corp

Key Products

Read-through

Construction and mining machinery

JOYG, TEX, Komatsu, Sany, Lonking, Liugong

Real estate services

NM

Control systems for petrochemical, rail

ROK, EMR, ABB, Schneider, Siemens

Highway construction, port machinery

CRG, CRCC, Liebherr

Rail infrastructure construction, highway construction, real estate

CRCC, CCCC

Engines, componets, distributed power, turbochargers

CAT, Komatsu, DCI, Liugong, Hyundai, Doosan

Cements, minerals processing

CNBM, Sinoma, Metso, Atlas Copco, CAT

Trucks, buses, passenger vehicles

Daimler, MAN, Scania, Volvo, CMI

Thermal power gen, Oil & Gas, Energy management

Alstom , Siemens, SPX Corp

Wind turbines

GE, Vestas, Gamesa

Automation (DCS, PLC), train control, signaling

ROK, EMR, HON, GE

Process and building controls, Aero, Auto, Chemicals

GE, EMR, UTX, BWA

Auto components, fasteners

TRW, Textron

Transportation Technology Development

NM

Construction and mining machinery, machine tools

CAT, Terex, Joy Global, Atlas Copco, Volvo, Sandvik, Metso

Pulp and paper machinery, mining machinery, process automation

Andritz, Atlas Copco, CAT, Sandvik

Bearings

SKF, NSK, JTEKT, Timken

PLCs, process automation, drives

Siemens, Schneider, Mitsubishi Electric, Omron, Emerson

Excavators, cranes, concrete machinery

CAT, JOYG, Komatsu, Lonking, Liugong, Zoomlion

Power generation and grid equipment, elevators, machine tools

GE, MHI, Siemens, UTX, Kone, Schindler

Pumps, valves, heat exchangers

EMR, ABB, Siemens, GEA, Alfa Laval

HVAC equipment, chillers, fire and security products, building automation

JCI, Siemens, Ingersoll-Rand, Siemens, Tyco, Schneider, Midea, Gree

Yaskawa

Invertors, servomotors, drives, robots

Rockwell Automation, Siemens, Fanuc, Emerson, Kuka, ABB, Schneider

Zoomlion

Concrete pumps and mixers, cranes, excavators

CAT, JOYG, TEX, Komatsu, Sany, Lonking, Liugong

United Technologies (CCS)

Source: Credit Suisse Research

Exhibit 2: Commentary and China Growth Rates By End Market End Market Automation (discrete / factory) Automation (process / DCS) Automotive Bearings Commercial aerospace Construction equipment

Commentary

2012E Growth

2013E Growth

Recent pick-up in activity, and robot demand is resilient

2%

12%

Mixed petrochemical trends; pick-up likely in 1H13

5%

7%

Inventories have fallen from 3 to 1 month; single-digit growth outlook

2%

4%

Rail, Auto and possibly wind turbines to drive acceleration in 2013

-2%

7%

Airport infrastructure builds, resilient domestic traffic and future rise of LCCs to drive growth

7%

8%

-30%

5%

Resilient demand through 2012; expected to persist next year

7%

8%

Acceleration evident through the year in Fire Products; up double-digit at present

7%

8%

Some large orders softness, but China demand is resilient given health & safety concerns

5%

7%

Healthcare Equipment

Double-digit declines YTD, but declines are narrowing and 2013 could be up

12%

12%

Highway Spend

Double-digit declines YTD, but declines are narrowing and 2013 could be up

-10%

5%

Choppy order intake through 2012; may pick up from spring 2013

-5%

5%

Weak demand with little sign yet of a pick-up

-20%

8%

Very weak demand particularly in coal; no sign of recovery yet

-30%

-15%

Elevators Fire & Security Food & Beverage

HVAC Machine Tools Mining equipment Oil & Gas

Utilisation is picking up slightly m-o-m, with a flattish / single-digit growth outlook after spring 2013

Energy independence ambitions, shale gas efforts driving double-digit growth

10%

11%

Power gen equipment (Nuclear)

Some recovery likely in 2013 after two weak years

5%

10%

Power gen equipment (Thermal)

Double-digit growth likely in gas turbines; flattish in coal

5%

5%

Power gen equipment (Renewables)

Wind activity is picking up in Q4 as grid connections and wind farm utilisation are up

-30%

5%

Pulp & Paper Machinery

Large orders subdued but shorter-cycle tissue paper machinery seeing clear pick-up

0%

5%

Printing Machinery

Double-digit declines; no sign of a recovery yet

-20%

3%

Rail Infrastructure

Clear acceleration in projects in both mainline and subway networks

5%

20%

Real Estate Trucks

Strong demand in cities despite gov't controls; evidence of recovery in Guangdong

0%

5%

Inventories are down to 1-2 months from 3 months; single-digit growth in 2013 after weak 2012

-20%

5%

Source: Credit Suisse Research

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Exhibit 3: US Industrials % of Sales by Region US EE/MI

North Am

EMEA

100% 74% 42% 51% 44% 43% 47% 54% 63% 46% 41% 67% 55% 50% 66% 48% 39% 55%

10% 28% 17% 27% 31% 26% 30% 17% 29% 37% 17% 21% 21% 18% 27% 26% 12%

North Am

EMEA

ADT Cooper Industries Danaher Dover Emerson Gardner Denver General Electric Honeywell Ingersoll Rand Kennametal Luxfer Rexnord Rockwell Automation SPX Corporation Textron Tyco United Technologies Valmont Industries US EE/MI AGCO Corp Allison Transmission Caterpillar Cummins Deere Eaton Corp Illinois Tool Works Oshkosh Corp Paccar Parker Hannifin Terex

20% 85% 35% 47% 59% 50% 48% 85% 45% 59% 33%

54% 7% 25% 17% 20% 25% 31% 9% 31% 27% 28%

Asia 4% 12% 19% 23% 17% 16% 11% 15% 12% 13% 11% 15% 18% 9% 20% 20% 14% Asia 6% 25% 22% 9% 13% 16% 11% 19%

LatAm / Other

Total

China

13% 18% 13% 5% 9% 10% 5% 5% 13% 9% 4% 8% 11% 7% 5% 15% 18%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

4% 7% 9% 13% 8% 9% 5% 6% 6% 4% 5% 6% 6% 2% 2% 5% 6%

LatAm / Other

Total

China

26% 2% 15% 14% 12% 12% 5% 6% 24% 3% 20%

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

1% 5% 5% 10% 1% 5% 4% NM NM 6% 8%

Source: Company data, Credit Suisse estimates

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Detailed Write-Up of Company Meetings in China Caterpillar Dealer: Lawrence Poh (CEO, Lee Shing Hong Machinery) ■ Size and shape of the business: Lee Shing Hong Machinery is one of the four largest Caterpillar dealers in China focused on the eastern region. Sales are split 55% machinery, 30% engines, and 15% product support. Market share is approaching the low double digits and has more than doubled over the past several years. The top players generally have 12-13% market share. ■ Current demand trends and outlook: The worst appears to be over in the construction market and the trough should be Q3’12. Q4’12 sales are likely better than Q3 (flat y/y), driven by major infrastructure projects in Asia. In fact, there have been some strong orders even in the past several days. In Q1’13, should see low single digit y/y with growth continuing from large projects. It’s difficult to predict government stimulus, but with the recent change in leadership, construction could see some sort of benefit next year as well, although it’s difficult to tell how much. ■ Inventory and lead times: In general, inventory is currently 2-3 months. The US and Japan are much better than the locals at managing inventory. Excavator inventories are also several months. CAT is not using pricing as a means to clear inventory. Utilization is currently at ~50%. ■ Local competition: CAT equipment is sold at 30% premium. The market leader right now in China is Sany. Local players (including Sany) benefit from government subsidies (tax breaks) which is an advantage. However, CAT can still compete for a number of reasons: they have more value add impact, more focused on customers’ long term growth as evident by quality of product (which lasts longer), and has key downstream maintenance abilities which customers appreciate. ■ Pricing: CAT’s premium pricing is roughly 30% higher than competition, although CAT’s products will likely last five years longer than competition, so actually not more expensive if you think about it that way. CAT is not using pricing as a means for clearing inventory right now, so that is not an issue. For financing, CAT asks for 25% down payment and interest rates are 7-8% for construction machinery currently. ■ Long term growth: CAT is focused on how to win on all levels (low end and high end products). Volvo has a lower brand but Komatsu and Hitachi do not, so that is an advantage. CAT is highest quality manufacturer and the clear leader when it comes to experience – the competition has to be in the market for 10-15 years before they can reach CAT’s standards. Ag equipment is a strong prospect going forward as machines need to be more efficient. Cities are encroaching on farm land and farmers need to make the most of their space. Good opportunity for DE.

Century 21: Harry Lu (Vice Chairman & President), Kevin Wei (CFO) ■ Size and shape of the business: Century 21 is a Chinese real estate company which has operated for the last 12 years. The company experienced a difficult 2011, with depressed volume levels. However, during the first nine months of this year volumes have recovered yet are still approximately 1/3 below the peak levels in top tier cities seen in 2009. Century 21 generates most of its revenues from housing sales rather than rentals. ■ Current demand trends: Although China has seen a huge ramp up in housing starts over the last few years, Century 21 believes that this trend will continue at least over the next five years owing to urbanisation trends and the development of tier 2 and tier 3

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cities. The construction activity within tier one cities such as Beijing has slowed down following a big construction wave over the last years. In some areas there has been a significant ramp up in new builds where Century 21 expects a lot of space to remain unused. ■ Pricing: In most areas Century 21 operates rental prices have gone up double digit each year. In the short term Century 21 believe the pricing environment will remain stable, yet in the medium to long term, housing prices will increase. ■ Financing: The financing process has significantly improved this year. While it took 45 months last year for consumers to receive loans in order to purchase properties, the process seems to be much quicker in 2012. At present half of the housing purchases in China are on average financed via a loan (the other half is paid in cash). ■ Government regulation: The Chinese government currently allows only two homes purchases per person, which hampers the volume growth for real estate companies. In Beijing around 600k people apply for a license to purchase houses each year, of which c200k tend to succeed.

China Automation Group: David Cui (CFO) ■ Size and shape of the business: CAG focuses on two main end-markets petrochemical, and rail. Within petrochemical (around 50% of sales today, having been 90% of the business prior to 2007), CAG provides plant control and safety systems, coal-chemical processing, and it is seeking to expand its position substantially in control valves. Within Rail, CAG is one of the largest domestic suppliers of signalling systems, as well as rail interlocking systems and train control. Key customers are mostly domestic SOEs, such as Petrochina, CNOOC and the MoR. ■ Key demand trends: Within petrochemical, CAG is seeing a flattish backlog, and longer-term growth is expected to be more subdued than was seen historically, with growth likely to run at +10-12%. Coal-chemical markets are expected to see aboveaverage growth rates, and comprise c40-50% of current petrochemical orders for CAG, against a 10-20% share historically. Within Rail, although the company has seen numerous reports of increasing government spending, it has not actually witnessed this coming through in its order book yet, and expects this to happen sometime in 2013. The company has seen very rapid growth in Rail in recent years, with sales growing from RMB0.4bn to RMB2.0bn over 2007-2011. ■ Competitive landscape: Control valves is an area where the company is targeting substantial growth, even though it already claims a #1 domestic market share here. Most competitors are foreign, such as EMR, CCC, and HIMA. CAG believes it has 3% share in a highly-fragmented market, and is a top 6 player overall. It views the total addressable market as being worth RMB14bn annually today, but offering +20% growth rates; it targets sales of RMB1bn in 3 years, against RMB0.4bn today. Pricing does not appear to be a major factor in these markets in winning business. Within Rail, there are only a handful of certified players, and most of these are local, suggesting stable competitive dynamics.

China Communications Construction Company: Yu Jingjing, (Director of Investor Relations) ■ Demand outlook: For 9M12, CCCC’s new orders grew 10.7% YoY, within which BT/BOT projects, overseas projects and infrastructure design segments saw the strongest growth of 70.9%, 54.2% and 22.9% respectively, offset by road and bridge construction (40.6% decline YoY) and dredging (5% decline YoY). CCCC is targeting 10% YoY order growth for the full year. The Company expects orders from railway and

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highways to improve in the fourth quarter, offset by weakening trend in overseas and BT/BOT orders. ■ Margins: CCCC’s gross margin improved by 0.5ppt in 9M12 compared to the same period last year due to the revenue mix shifting away from lower margined highway and railway projects. As revenues from these sectors increase, further improvement in gross margin will be limited. ■ Highway: In terms of expressway development, CCCC believes most opportunities are in the west region of China. For east China, certain upgrades and expansions of highways remain to be done. CCCC estimate total expressway investment in China will be approximately RMb1.1trn per year, with between Rmb400 to 500bn spent on highway construction per annum. ■ Port cranes: CCCC has 75% global market share in port cranes through its 46% owned subsidiary ZPMC, followed by Liebherr with 8% market share. ■ Exports: CCCC targets 30% of revenue from overseas markets in 2015, compared to less than 20% today. CCCC’s margin in overseas markets is ~2% higher than those in the domestic market. ■ Cash flow: CCCC’s cash flow improved visibly in the second half 2012, helped by the normal seasonal trend in addition to the Chinese government’s monetary easing. The Company plans to spend Rmb10bn capex outlay in BT projects in 2012, increasing to ~Rmb12bn in 2013. For BOT projects, CCCC has raised Rmb50bn in financing for 2012.

China Railway Group: Yu Zan (Senior Accountant) ■ Demand outlook: During 9M12, new orders for CRG were RMB450.61bn, representing an increase of 26% over the same period last year. Of this, RMB315.39bn was from the infrastructure business (including railway construction of RMB45.14bn, 12.3% YoY; highway construction of RMB57.36bn, -18.4% YoY; municipal works of RMB212.9bn, +46.9% YoY), representing an increase of 18.2% YoY; RMB7.61bn was from the survey, design and consulting services business, which declined 4.4% YoY; and RMB12.16bn was from the engineering equipment and component manufacturing business, representing a decrease of 6.4% over the same period last year. ■ Rail / Metro: CRG believes 2013 railway infrastructure investment will be no lower than that of 2012. The Company thinks RMB50-60bn per month of railway infrastructure capex is a comfortable pace for the construction companies, which translates to annual investment of RMB600-720bn. CRG stated that currently the 12th Five Year Plan for railway infrastructure investment is RMB2.3trn (reduced from RMB2.8trn at the beginning of 2012 due to tightening macro environment and internal issues at MoR). However the RMB2.3trn figure is not sufficient for China to reach the targeted 120,000 km of operating railways by YE2015, and the company is expecting the target to be revised up again to RMB2.8trn. CRG estimates the metro market is worth RMB100-200bn in 2012, increasing to RMB200-300bn in 2013. ■ Cashflow: Throughout the year, CRG has seen a steady improvement in the timeliness of payments from the MoR (Ministry of Rail). CRG stressed that it will only construct using its own balance sheet, and it expects the cash flow from operations to improve. ■ Margins: In terms of margin, CRG is not expecting an improvement in gross margin, but believes scale and cost savings should help its operating margin.

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Cummins Beijing Foton & Cummins Engine Co: Michael McTaggart (Business Analysis and Planning Leader – China & Russia) and Des Conlon (Plant Manager) ■ China market overview: For excavators, CMI mainly sells to Zoomlion, Hyundai, and Sany (do not currently sell to CAT). Engine sales are 1/3 to the power market, 1/3 to the truck market, and about 10% to construction. Pricing right now has not been an issue. The vast majority of the market is one truck, one trailer – don’t see a lot of big fleets buying. The 12L engine and above is 2-3% of the market in China. As emissions changes become more prevalent, customers will likely use higher power engines and CMI should grow as a result. Trucks typically carry larger loads in China using 9L and 10L engines where similar weight classes would use a 12L. ■ Inventory update: On inventory, CMI would not give details, but said the company is “in line” with the general market. Seeing some pressure in certain places, but inventory is generally not a major issue. Demand is roughly in line with what the market is doing as well. Production is running below demand and guidance for the market is down 26% this year – don't see further impact that would be below that. There’s likely 2 months inventory on China HD engines – in line with industry. Only have 3 day lead times from Foton engines, so not much visibility there. CMI has very flexible production and uses automation (Siemens and ABB) so it can ramp up and down very quickly ■ Sales and Productivity: Approximately 70% of sales is exported (mainly to Russia and Brazil). CMI measures productivity in which “best in class” is 1 engine per person per day. CMI is running at ~1 currently. ■ Competitive landscape: Weichai is the biggest competitor in their engine size; but also see some competition from other local players. CMI’s market share is ~10% for MD and HD in China. In LD, CMI has low engine market share as there is a lot more competition in that market. MD demand is stronger than HD right now (as construction uses more MD engines). HD in China is roughly a 9.7L engine (unlike the NA classification which is much large) and general growth is 20 hp per year. ■ Material costs: CMI has a six month average deal with suppliers for raw materials (which is likely a tailwind going forward). Over time, margins have the ability do better than the US as HD engines become more prevalent (emissions driven) and costs continue to come down. In general, costs are about 20% higher than they could be on the MD side of production especially – so there are ways to bring that down and CMI likely will over time.

FLSmidth: Anders Bech (Head of China) ■

Size and shape of the business: FLSmidth has a 3-10% market share in China depending on the business segment, which the company believes has remained stable over the last five years. The company's employee base has grown from 100 in 2006 to currently 540 (out of 15,000 globally, 400 in 2011). Its Beijing production facility has the capacity to expand threefold if needed.

■

Current demand trends: China is the world's largest cement market, accounting for 56% of global cement consumption, with more than 1,500 production lines and total cement production close to 3bn tonnes. FLS expects to grow in line with the cement market at GDP+ 2-3%. In a currently quite sluggish market environment its Minerals business has not seen a slowdown over the recent quarters and a strong book to bill suggests growth levels should stay elevated in the near future.

■

Excess capacity: Owing to utilisation levels below 70% at present (80%+ needed) FLS believes significant consolidation is needed to remove the excess capacity of c1bn tonnes. The company has seen plant closures over the recent months which resulted in an increase in cement prices.

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■

Competition: The company's main competitors in China are Polysius Krupp and Sinoma. FLS believes many Chinese competitors struggle with their service offering outside China and therefore experience limited success internationally. The protection of IP via patent registration is key as the replication of technology is the main reason why Chinese companies enter into partnerships.

■

Strategy: FLS always sells at a premium to its Chinese competitors, owing to a higher quality product offering. As a result of the higher quality the company does not target a dual market strategy in order to avoid the dilution of its quality brand. The reduction of energy efficiency is a big topic in China pushed by the government and hence every producer has to become more energy efficient. The company flags that India currently has 80% of the most efficient cement plants globally, yet due to political uncertainty growth in India will remain subdued at low single digit (FLS has 4000 employees in India). More efficient global sourcing will continue to be important going forward, as the company targets 75% from competitive-cost countries from currently 40%.

Foton Motor Company: Huanglei Ren (M&A and Investment Banking Division) ■ Size and shape of business: Foton saw overall sales flat q/q and a decline of 20% y/y last quarter. In the first half of next year, Foton expects the decline to narrow. There is still a lot of uncertainty over emissions changes right now. Since the changes have been delayed multiple times already, there is concern of another delay. Foton expects to sell 600k vehicles this year (sold 640k last year). For MD-HD, Foton has 11% share (Dongfeng is #1 with 20%). LD share is 23-24%. Bus share is 4%. Focus now is on the “5+3+1 initiative” – “5” countries (India, Indonesia, Mexico, Brazil and Russia) with capacity of 100k vehicles per year; “3” developed economies (NA, EU, Japan/South Korea); “1” – Foton aims to be the number one player in China. Foton has a 50/50 JV with Cummins, a 50/50 JV with Daimler, and a JV with Weichai for MD and HD engines. ■ Current demand trends: Foton thinks the HD and MD market likely bottom here with sales down 30% already. Next year, emissions changes will likely help demand (prebuy ahead of Euro IV). On orders, it’s just a matter of when they come back (not if) and likely depends on government policy (i.e. new construction projects, etc). Expect growth to be less than 10% y/y. Government initiatives in Western China and other developing cities will continue to be a driver. Because of the growing construction market, MD trucks are doing better, which should continue next year. ■ Cummins JV: Last year, Foton sold 50k motors and this year expect to sell 80-90k; in 2013 expect 150k. It’s very easy for Foton to bring capacity up to 400k when Euro IV comes out. Foton’s gross margin is limited at 10-11% - CMI needs to further integrate their own parts (gear boxes, etc). For gear boxes, Foton looks to work with American/Japanese producers. Foton has the technical capabilities to produce vehicles with new energy (electric, hybrid, battery) which is an advantage for them. Most segments in LD (passenger, etc) are mainly hybrid. ■ Further Cummins discussion: In the domestic market, upgrading emissions is going to be a large driver for CMI – as MD and HD are both growing, while LD is declining. Engine producers of LD are not as strong as CMI quality-wise right now. Foton uses Weichai for HD engines where they have strong penetration and good service which is more convenient. CMI engines for HD are expensive and they have very few maintenance centers right now – which could affect customer utilization. The HD segment is very specialized and Weichai can do more right now. ■ Daimler JV: The JV made sense on both sides - Daimler is targeting the premium market (which Foton wants to penetrate) and Foton targets the medium and premium markets (Daimler looks to penetrate medium). Sold 200k vehicles through the Daimler JV. Can leverage overseas market channels of Daimler for exporting business. Price is

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RMB 340-350k per vehicle (average price is RMB 220-230k). For the Daimler JV, capacity is 120k (max can be 200k). ■ Pricing and Costs: Daimler and CMI pricing are roughly the same. Weichai is cheaper by RMB 20k. In general, the engine accounts for a third of total cost of the truck. Foton saw a decline in raw material costs with steel especially down and non-ferrous metals too. Gross margin will likely improve going forward with no major increase in raw materials. In July 2011, wages increased RMB 200 per month (+10%). ■ Inventory update: In March, inventory was 2 months but Foton has reduced to 45 days, so they are in good shape. Looking forward, Foton expects to increase inventory because of emissions changes and likely build ahead of that. Foton’s view is it is unlikely the emissions change gets pushed out again. There are issues because gas used in Euro III can’t be used for Euro IV, although the market will have to accept it. ■ Factory automation discussion: Right now, use limited automation right now for Foton. The company thinks it will be unlikely that automation incerases near term. Industry-wise, automation levels are low and domestic producers are churning out mass market for premium trucks. Implementing automation systems is high cost up front and therefore is not a focus right now. Also, there are government initiatives for employment improvement that exist which provides less incentive to use automation.

General Electric: Ming Tu (CFO, China) ■ Size and shape of the business: GE has sales in China of $5.8bn in Industrial, of which $0.9bn accrues from non-controlled JVs, and it accrues another $0.8bn in sales in GE Capital. The company has 17,600 employees in China, and 28 JVs. ■ Key demand trends: GE's sales growth is +20% YTD, with the large backlog insulating the company from the short-cycle demand slowdown. The recent growth rates represent a meaningful acceleration from prior growth rates; GE's sales CAGR since 2006 was 12%. The company targets sales growth rates of 2X GDP going forward. In total, GE sees a sales opportunity of $90bn over the 12th 5 Year Plan. ■ Energy - large opportunity in IGTs: Energy sales in 2011 were $2bn (up from $0.9bn in 2006), and the company sees a $100bn opportunity in the medium-term. In gas turbines, GE has a 50% share of the installed base, having supplied 180 IGTs. GE sees a $7bn opportunity in IGTs, and a $2bn opportunity in turbo machinery / compressors; the company expects annual gas-fired power generation capacity additions of 5-13GW annually in the medium-term. GE sees a good opportunity for gas-fired power plants going forward given: (i) the rise of LNG transportation globally will normalize the very high gas prices in China; (ii) gas-fired power generation yields significantly lower emissions than coal-fired power generation; (iii) the government has shown in the past its willingness to regulate electricity markets in order to drive certain electricity sources, such as hydro, and solar power. The competitive landscape remains fairly benign, given the 3 local-foreign JVs dominate the market; GE's ally is Harbin Electric. Going forward, GE expects to win 30-50% domestic IGT market share. ■ XD Electric deal due to close: GE invested $0.5bn in XD Electric as part of its global partnership, and expects to win significant market share against incumbents such as Siemens and ABB given: (i) XD's strong product portfolio / technology in products such as transformers, gas insulated switchgear, breakers; (ii) GE's high reputation with utilities given its large installed base in IGTs; (iii) GE's ability to drive services / solutions offerings, complementing XD's traditional focus on products / hardware. GE expects to compete globally, focusing initially on markets such as the Americas and the Middle East. ■ Aviation: Sales were $1.2bn in 2011, and GE sees a $28bn medium-term opportunity. The civil aerospace market outlook is solid, with the airport count set to rise from 175 to

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231 over 2010-2015. Of the 4,484 installed aircraft engine base, GE, in combination with its CFM partner, has 64% market share. Of the 2,188 engines due to be delivered, GE / CFM has a 70% market share. The COMAC C919, which is due for its test flight in 2014, is the aircraft on which GE has its highest content, due partly to its avionics offering. The company has historically lagged in this area, but now has 1,000 engineers focused on product development, as part of its AVIC JV. Unlike the Harbin JV in IGTs, this JV has a global remit, and is expected to compete on major commercial aircraft launches outside China. ■ Healthcare: Sales were $1.4bn in 2011, and GE sees a $28bn opportunity mediumterm. GE has 6,400 employees in China, and an installed base of 28,000 medical devices. The domestic pricing environment is fairly benign, given the lack of penetration of local players outside the X-ray segment, with the exception of Mindray. GE is focusing on developing a range of products (CT, MR, ultrasound) specifically for the Chinese market.

Goldwind: Kathryn Tsibulsky (Head of Investor Relations) ■ Size and shape of the business: Goldwind is one of the top (domestic) wind turbine manufacturers in China. The company also develops wind farms through its JV. Following the largest amount of shipments historically to the US and currently only two 3MW turbines in the backlog, Goldwind expects the momentum towards the US to improve in 2013, with some prospects for a recovery in 2014. In addition, the company sees good opportunities in Latin America and Africa (it recently bid in Morocco). ■ Current demand levels: China currently has 62GW installed capacity yet only 44GW (70%) is connected to the grid. In order to achieve more government support the company believes utilisation levels need to move closer to 90%. Customers often struggled to get financing, which has depressed grid connections. That said, the outlook is positive. Goldwind believes the consumption of wind power has significantly improved this year and as part of the five year plan, China wants to expand its installed base to 100GW (5GW from offshore) by 2015 and 200GW (30GW from offshore) by 2020. Given expectations of c15-16GW installation this year (against 19GW in 2010, 17.6GW in 2011) the medium term target seems reachable. Following lower order and sales growth in the prior quarter, Goldwind has seen a pick-up in order and sales momentum in Q4. ■ Large vs small turbines: The company is developing turbines which can operate in a slower wind environment (via increased blade diameter) due to more electricity demand from those areas. The market for wind turbines with less than 1MW has significantly dropped as turbines with 1.5-2.5MW currently account for 90% of the market. Goldwind is internally even discussing the potential for a 10MW turbine. ■ Pricing / rare earths: Currently seeing a stable pricing environment at 3800 RMB/kw following the low point in the ASP in the middle of last year (3615 RMB/kw). Goldwind tends to purchase rare earth elements in long term agreements of around one year. Rare earth elements as a proportion of the COGS have increased from 5% in 2010, to 6% in 2011, to c7-8% this year (although the latter is partly due to higher gross margins as costs have been reduced elsewhere). The company expects a gross margin improvement from the current 16.5% level. ■ Subsidies: Although the government has drafted a paper outlining that all provinces need to buy a certain amount of renewable energy going forward, Goldwind believes there is still not enough government support, leaving the wind energy with a significant disadvantage versus cheaper coal. Compared to other renewable energy sources wind also receives less support than the currently struggling solar industry. ■ Competition: International competitors GE, Vestas and Gamesa have a market share each of c3-4% in China. Goldwind and Enercon have an 80% market share in direct

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drive turbines globally, yet believe Siemens will increase share going forward. Apart from Guodian all other domestic producers have seen very low volumes in the first nine months. Goldwind has a solid financial position and would like to see industry consolidation (30% excess capacity) on the back of the slow market environment, and hence it would not mind if the market remains slow, forcing more consolidation. Overall the company believes the top 6-8 vendors will succeed in China. The company appears to be more interested in organic growth, rather than M&A.

Hollysys Automation: Jennifer Zhang (Investor Relations Director) ■ Size and shape of the business: HOLI is targeting sales in the FY13 of $385-410m, and it employs 3,500 people globally. 60% of sales accrue from Industrial Automation, with almost all of this coming from process control / DCS systems, with Rail and subway automation comprising most of the remainder. The vast majority of sales come from China / HK; HOLI claims an 11-12% market share domestically in process automation, and is one of only a few suppliers who is an approved provider of rail signalling and subway SCADA systems. ■ Key current demand trends: HOLI has enjoyed a 28% sales CAGR in the past 5 years (sales reached $322m in FY12), but the current fiscal year is seeing weakness in infrastructure markets, and the book-to-bill in IA was below 1 in the Sept Q. The company is forecasting a re-acceleration in IA orders, and still believes it can grow sales by 15-20% in IA in this fiscal year as y-o-y comparisons are easier in subsequent quarters. Within Rail, HOLI is seeing an accelerated tendering activity for new projects, and expects to win 1-2 major projects by year-end, with more to follow in the CY1H13. In nuclear power (where the company is the only local player that is winning business for power plant controls), an acceleration in 2013 is also expected. ■ Strong position in DCS: The company claims a #3 /#4 market share domestically in process automation (HOLI developed China's first domestically-produced DCS), competing with companies such as ABB, EMR, Siemens, and Supcon among local players. Customers include both SOEs (CNPC, Datang) as well as MNCs (BASF, Bosch), and in nuclear it has a JV with China's largest nuclear power station operator (China Guangdong, or CGNPC). HOLI believes that ABB is losing market share, as are Honeywell and Yokogawa, but Emerson continues to perform very strongly, particularly in recent thermal power plant awards. Within PLCs, HOLI has a very small position, and is struggling to compete in a market which is dominated by MNCs. Pricing does not appear to be a major weapon in either the DCS or the PLC market. ■ But PLC offers more growth potential: The DCS market is estimated as being worth RMB10-15bn / year, but the PLC market is seen as being substantially larger. In terms of growth rates, the DCS market is now expected to grow by 5-10% annually, against double-digit growth in PLCs. A key reason for the stronger PLC growth outlook is that it offers an opportunity for factory managers to offset rising wage inflation with machines, and hence improve plant productivity.

Honeywell: Stephen Shang (President of Honeywell China) ■ Size and shape of the business: Honeywell accrues over $2bn of sales in China, with >13,000 employees. The company expects to see double-digit sales growth in the medium-term, spurred by the company's 'East for East' strategy (which now accounts for 20% of HON sales in China), as well as the high exposure of its products to the increased push for energy efficiency. The China operations are among the most efficient that HON has globally - of the 3 'Silver' Honeywell Operating System sites in Aerospace for instance, 2 are located in China. We were also very impressed by our tour of the customer experience facility, which opened in May 2012, and which showcases interactively HON's very diverse product offering.

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■ Key demand trends: Growth has slowed from +20% in Q112, to +6% in Q3. Longcycle demand in markets such as commercial aerospace, UOP, and building automation remains solid, offsetting softness in short-cycle markets such as fluorines (within PMT), off-highway turbochargers, export and IT-related markets. ■ ACS: This business is at the cornerstone of the 'East for East' strategy, with up to 50% of sales in the long-term potentially accruing from it. Increased government efforts to reduce the emissions throughout the economy (15% reductions are targeted annually in government buildings now, and the CCP has also targeted 100 'green cities' in the medium-term) represent a huge opportunity for ACS, in areas such as building controls, lighting (Honeywell partners with Citizen on LEDs), and smart grid (Honeywell is working with State Grid). The pipeline of new projects entering 2013 looks very positive. On the negative side, products being sold into IT hardware customers have seen softness since early 2012. ■ Aerospace: Indicators such as domestic traffic growth (+8-12%) remain strong, with a robust outlook for new airports, and additions to commercial aircraft fleets. BG&A is also seeing decent growth, albeit off a very low base. Honeywell is 'very comfortable' with 3rd party assumptions on China's aerospace demand, noting that most of these forecasts exclude any growth from the low cost carrier model, which should represent a substantial opportunity given that over 500m people in China are not yet part of the commercial aerospace market. Strategically, HON is setting up 3 JVs, focusing on APUs, flight controls, and wheels & brakes. Honeywell views the Chinese civil aerospace market as being at the start of the 2nd phase of its development, involving substantial JVs and alliances with foreign companies for technology transfer (the first phase was simply about importing products), with the 3rd phase likely to see the Chinese bidding globally against the incumbent airframe / component suppliers. ■ PMT: This segment is seeing diverse business trends; petrochemical demand remains strong in UOP, as China continues to upgrade its domestic energy infrastructure, but there has been a slowdown in refinery demand. Fluorine pricing has been very weak, down 30% off the mid-2011 highs, but this has started to flatten out in recent months; volume demand here has been ok. ■ Transportation: HON is opening a new plant in Wuhan, which will more than double its production capacity within China. The new plant is expected to start production in 2014.

ITW Automotive Safety & Motion Components: Edward Wang (VP and General Manager China Auto Components) ■ Size and shape of business: ITW currently sells across 50 different entities and 8 major product lines in China. The three largest divisions are welding, decorative services and automotive. ■ Automotive market: The ROW market is very large with 38.5M vehicles right now ITW is looking to drill down and focus on this market. Growth from 2010-2015 is expected to total 10.6M vehicles, or 66% ROW growth. China growth is expected at 8.9% and by 2016 China will pass Europe in sales. ITW is growing more than the market through increasing content per vehicle. The market growth rate is less than 8% while ITW is growing at 30%. ■ China market discussion: ITW is expanding in China because of the size of the product. Labor is not a big portion of the cost (less than 10%). Labor cost growth in 2012 is about 9.2%. Capex spend could range from RMB 100-300k. As safety standards increase, the market likely shifts to higher quality product, like ITW. Chinese OEMs are willing to use technologies from foreign OEM’s for better quality.

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■ Market outlook: In 2012, margins are expected to reach the 20% range (above corporate avg of 16%). Demand is still strong overall and ITW expects to achieve targets. China has been getting softer, but the government will likely find a way to maintain growth next year.

■ Acquisitions: Have tried, but acquisitions do not fit ITW’s operations. Only trying to focus on private entities right now– don’t want to deal with the China government. ■ Content per vehicle: Varies by product. A fastener is $5 to $10 of content per vehicle content in China; in the US it’s about $50. For each car you need ~200 fasteners. ■ Local competition: International competitors include Nifco and TRW. ITW’s strategy is to localize the 80 parts and focus on traditional customers. Chinese companies’ strategy has been focused on specific OEMs where they have historical ties. For certain players, quality perception is not the same. When there is volume, ITW has the advantage though. ITW is able to command a premium on certain products as well given better quality. Local players can re-engineer simple products (fasteners) but not the advanced ones. For advanced products, it’s often too risky to use a local player (lower quality).. ■ Product discussion: Powertrain products have major potential going forward. ITW has a lot of business in this field in China (volume is huge). Draw form should see selfsufficiency in manufacturing capability by the end of 2013. Release and head rest also have high market potential. Nexus is a profitable business, but limited market. ■ Manufacturing strategy: ITW has best in class production and use of modern equipment which an advantage of ITW’s overall size. Position for ITW is key as customers have to rely heavily on equipment in this business. ITW’s suppliers ask them to replace equipment every three years to ensure quality.

Komatsu (China) Ltd.: Mr. Nobuyuki Shimamoto (Director, Vice President) ■ Utilization level: Current utilization levels for construction machinery based on KOMTRAX data is around 150h/month in China, similar to levels over the summer, and operating hours since August have declined at a mid-single digit rate, after being down at a double digit rate (10-15)% YoY until July. Mining machinery (30-40t class for coal) is still showing large negative YoY declines in terms of operating hours. KOMTRAX data is based on the average operating hours of all the machines (100K units) that Komatsu has delivered to clients. ■ Mining machinery: It is hard to predict the timing of demand recovery in Mining machinery. However, any European economic recovery would provide a potential benefit for the China market, driving up exports of China to Europe, utilization of plants, and electrical demand. Coal accounts for 30% of the company’s mining sales. Real demand has not risen though for electricity in China for most of 2012. ■ Short term outlook: China construction machinery markets always show a sales surge in March (after Chinese New Year), but the spring 2012 demand was very disappointing, driving up inventories. Komatsu views the March 2013 selling season fairly conservatively, and expect the sales volume will increase only slightly, with some upside potential if the government leadership changes bring new stimulus policies. Komatsu’s production capacity is around 40K units/year, and it can raise the production rate rapidly according to the demand change. ■ Clients’ payment status: The delays of payments from customers are not at unusual levels; even before the China market slowdown, 20-30% of customers (over 90% of whom are very small operations involving one or two individuals) delayed their payments by about one month. Recently, 30% of customers are delaying payments for 2-3 months, with some clients delaying payments for 4 months. After this time,

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Komatsu will collect the machine from the customer. Delays of payments are particularly large in Mining machinery. Railway related clients have seen some financial improvements. ■ Pricing: In 30-40t class Mining machinery, Komatsu does not see any collapse in pricing. Actually, Komatsu has raised prices slightly (by 1-2%). However, among smaller construction machinery (10-20t) some manufacturers have high inventory levels and hence are cutting prices, and offering more favorable payment terms to customers - Komatsu however has not changed its financing terms (which typically involve a 20% down payment, and collection of the balance over 2-3 years). ■ Inventory: In construction machinery, the current inventory level in China is 2-3 months, against 1-1.5 months when the market was growing. ■ Local players: Local manufacturers have gained market share in the China construction machinery market, from 30% two years ago, up to 50% now, helped by the stimulus of 2008. ■ Current sales strategy: Komatsu focuses on regular customers and does not aggressively sell machinery to new customers, applying strict credit screening for new ones. Even in the current tough situation, Komatsu keeps raising its sales price, which may cause some customers to buy machine parts from imitation parts suppliers.

Metso: Nalle Stenman (Head of Finance and Admin, China) ■

Size and shape of the business: With more than 10% of its total workforce and €€780m in sales (2011), China is the most important market for Metso globally. While Metso still imports a lot of products from Scandinavia to China, the company has started to export internationally from its Chinese manufacturing base. Metso's current product split in China is: 50% pulp & paper, 40% mining & construction and 10% automation. Wage inflation is currently around +10% compared to 10%+ over the recent years.

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Current demand trends: The company has noticed a clear improvement in order momentum (tissue paper machines) over the last month as overall business confidence has moved to the highest levels in the past 12 months. Following years of GDP+ growth supported by strong service growth of +20% (services are 30% of sales in China, against a 50% global average), the company expects its pulp & paper business to continue to exceed GDP growth, but with higher volatility. For the South East Asian region in particular Metso has a bright outlook for its pulp business while in China it sees strong potential for its Power business on the back of the move towards ‘green energy’. Metso pinpoints the total paper capacity at 100m tonnes per year in China.

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Competition: In China, Metso has a 40% market share in pulp & paper with its main competitors being Andritz and Voith. In the Power market the company has a market share of less than 10%. While movement in the competitive environment currently shows Chinese players climbing up the value chain from smaller to medium sized machines, Metso believes local competition will not be capable to produce larger paper machines within the current decade. Metso does not aim to follow a dual market strategy going forward by additionally selling a low cost product, yet it has started to produce medium sized machines.

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NDRC: Guo Wen Long (Director General of Research Center of Transportation Technology Development)

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Rail bottlenecks: In the past five years, China's railway length grew at a 5% CAGR, the slowest rate compared to the growth rate of other transportation infrastructure (15% and 10% for aviation and expressways respectively). As a result, rail passenger and freight traffic growth has been sub- optimal, and the railway network remains a bottleneck for China's economic development. For example, only 30% of the freight car demand is currently satisfied by today's railway system.

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Focus shifting to freight lines: In the next two to three years, China's railway investment focus will continue to be the high speed (HSR) railway build-out, but the MoR’s strategic focus will start to shift to cargo lines. Mr Guo estimated that by year end 2012/13/14, completed HSR will reach 9,000km, 13,000km and 16,000km respectively, which means by YE2014 most of the four horizontal and four vertical HSR network will be completed and the target for the 12th Five Year Plan will be completed a year ahead of time. In order to reach this goal, Mr Guo believes the HSR infrastructure investment needs to be between RMB400-450bn and RMB500–600bn for 2012/13, adding approximately RMB100bn for investment in conventional railways; total railway infrastructure investment would be RMB500-550bn and RMB600-700bn for 2012/13 respectively.

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Freight capacity to be freed up: When the four vertical and four horizontal high speed railway network was designed, one of its key function is to free up freight capacity on the existing conventional railways by moving portions of the passenger traffic to the high speed railways. According to the NDRC's estimate, a single line of railway could increase freight capacity on the parallel conventional line by 20%, and 25 to 30% when the HSR network is fully established, with tariff affordability being the main constraint limiting the increase of freight transportation capacity on the exiting conventional railways. In terms of freight transportation by highway versus railway, Mr. Guo believes railway is the more economical option if the transportation distance is longer than 500km; in China, most freight transportation below 1000km is by highway, which is partially the reason for China’s high logistics cost (which are 2X higher than in developed countries).

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Softer rail investment outlook from 2015: After 2014, the MoR’s investment focus will shift to freight such as electrification, double tracking, expansion and the speed up of freight lines, and as a result total investment in railway will see a decline in 2015 and onwards. MoR has started pre-project development for coal channels, with most lines scheduled to start construction before year end 2013, with completion after three years’ construction.

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Highways: In terms of highway construction, Mr Guo believes the 7918 highway network will be mostly completed by year end 2014, but the NDRC is likely to plan on another 20,000km of highway to be built from 2015 to 2020.

NTN: Tetsuya Kondo (Senior Executive Officer of NTN Corporation)

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Size and shape of the business: NTN has 12 sales bases (3 offices, 8 branches, 1 technical center) and 11 production bases (9 in China and 2 in Taiwan). NTN has 3 main businesses, which are automotive bearings, industrial bearings, and aftermarket. For automotive bearings, the company produces 600K units per month and aims to increase it to 1mn units. More than 90% of automotive bearings are produced in China and the rest are imported from Japan. For industrial bearings, the company currently imports more than 90% of the products from Japan. FY11 sales in China were JPY30bn, and more than 70% went to automotive customers. Sales for FY2012 would

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be around JPY3.3bn. NTN will focus on expanding its industrial and aftermarket businesses because of their higher profitability levels.

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Current order demand: Regarding industrial products, the company sees some recovery in the railway area. Construction machinery related demand has been steady in the last 2-3 months and could see some increase in 2013. Wind turbine related demand is volatile. For automotive products, NTN see some Japanese auto makers such as Nissan and Honda are operating one shift. Nissan seems likely to get back to two shifts next March. Honda is already back to two shifts for some models but still mainly operates one shift. On the other hand, Hyundai seems to operate at full capacity. Longer-term, NTN thinks that the China bearing market will grow by 7-8%, in line with GDP growth.

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Utilization: For automotive bearings, the utilization rate is 75-80%. In industrial products, NTN is running at full capacity.

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China bearings market: The China bearings market size is worth around JPY1.2tn (2011). Market size trend (in JPY100mn): 2009: 9,050 (Local: 6,750, Import: 2,300); 2010: 10,450 (Local: 7,750, Import: 2,700); 2011: 11,800 (Local: 8,600, Import: 3,200); 2013e: 14,300 (Local: 10,500, Import: 3,800). More than 50% of the market is automotive related. International manufacturers are focused on the mid-high end market. In the mid-high end market, NTN's current market share is below 5% and it aims to reach 8-9% in the next few years.

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Customers in China: Regarding automotive bearings, more than 90% of customers are overseas-based. In industrial bearings, NTN provides products for wind turbines, railway (mainly high-speed railway), and construction machinery. The company has imported industrial products from Japan but plans to produce those products in Nanjing NTN from this year. Customers for construction machinery include Komatsu, Nabtesco, HCM, SANY etc.

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Labor costs: Labor costs in China have been growing by double digits every year. This year, the labor cost of NTN China increased by 20% YoY. However, labor cost accounts for less than 10% (7% for this FY) of total costs, so it is at a manageable level.

Rockwell Automation: Tom O'Reilly (Managing Director, Greater China) ■ Size and shape of the business: The automation products market in Asia is worth $24bn, out of a global market of $80bn; it is now the largest automation market globally, ahead of Europe. ROK's sales in Asia Pacific were $0.9bn in FY12, and the company has 3800-3900 employees in the region. 70% of ROK sales in Asia accrue from emerging markets. ■ Chinese market: ROK accrues $0.4bn in sales from China, which is its largest market within Asia, followed by Australia; India, S Korea and South East Asia each comprise a similar share of sales. The Chinese automation market is worth $10bn, with 70% of sales accruing from Heavy Industry, 15% from Transportation, and 5-10% each from Consumer and Other markets; ROK itself has a higher exposure to Transportation within China, at around 20% of its sales. Within China, services & solutions represent 30% of ROK sales, which is above-average relative to their share of ROK sales in developed markets. ■ Key demand trends: ROK's China sales have shown a steadily improving trend since the CYQ411, when its sales fell y-o-y; organic sales growth was +11% in CYQ312. For FY13, the company expects to see double-digit growth, after single-digit growth in FY12, with a weighting towards stronger growth in the 2H13. This compares with recent annual growth rates of +25-30%, prior to 2012. Q1 13 should see decent sales

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growth y-o-y, although sequentially, the March Q is likely to represent the weakest quarter of the year, due to Chinese New Year; for the fiscal Q1, ROK appears to be seeing normal seasonality (sales tend to fall q-o-q). In the medium-term, ROK expects services & solutions to fall as a share of sales in the region, given the strong growth dynamics in consumer markets; this should be positive for operating margins. ■ End-markets: (i) Heavy industry - there is very little activity going on in the metals markets, particularly in steel; for instance of the 3 major projects approved in the spring in steel, only 1 is proceeding now. Mining activity somehow remains ok, while cement is 'dead', offset by strong demand in Oil & Gas; (ii) Consumer and Food & beverage demand remains very strong; (iii) Automotive: single digit growth is likely going forwards, given the huge growth in the automotive market which has already taken place in recent years. Automation levels in the consumer / food & beverage markets remain very low in China, but this is 'changing dramatically', and this market represents the biggest end-market opportunity for ROK in the next 5+ years. ■ Market share gains: ROK's market share in China is 4%, against 8% globally. However, the company appears to be making substantial headway on market share; the PLC and electric drives markets were down at a double-digit rate in the CY1H12 in China for instance, against overall ROK organic growth being up in the low-mid single digits. Local competition remains very muted in the discrete automation market, although locals are having some success in process automation. The strongest Asian player which is emerging is Delta Electronics, of Taiwan. ROK expects the foreign players to increasingly consolidate the mid-end of the automation market in China. ■ Distribution strategy is key: A key reason for ROK's share gains is the increasing efficacy of its distribution strategy. The company uses an exclusive 'direct' distribution strategy, as opposed to a general, non-exclusive 'saturation' approach. Aside from the market share wins, its success here can also be seen in competitor strategies Schneider Electric for example in 2011 suddenly cut 200 of its 600 distributors, and appears to be aligning its strategy more with ROK's. There appears to be substantial scope for future gains from distribution, as ROK is several years away (around 30% of the distribution in China is seen as being at a good level) from having a complete distribution approach; in China the ratio of external distributor salespeople to internal salespeople is 3:1 (against 1:1 four years ago), against 8:1 in markets such as the US. ■ Increasing emphasis on the mid-end of the market: In China, the high end of the automation market represents 20-25% of the total, against 40% / 30-35% at the mid and low end respectively. This compares with ROK's sales split at 50% / 30% / 20% respectively. The company sees the mid-end segment as not only the largest portion of the market, but also the fastest-growing segment. The company has had a weak position here historically, but is now looking to rectify this, with a 3% share gain in the past 12 months, taking its share up to 10%. Siemens is the dominant player at the midend, but it has been losing share in recent years. ■ Process gains continue: ROK started to make a big push into process automation in China 3-4 years ago, and is now starting to reap some of the benefits. For instance, it has managed to win approved supplier status at CNOOC for the DCS and safety control systems for offshore rigs, alongside ABB and Emerson, and it has won 5 such offshore rig contracts in 2012.

SANY Heavy Industries: Zhang Yaoyang (Minister of Investor Relations) ■ More focus on profits / cashflow: Sany management stressed that market share is no longer a priority to them. Receivable collection and cash flow is now the Company’s focus. ■ Utilization slightly up: Utilization has improved to an average 60% across different machinery types, from the low level of 50%. Other manufacturers are mostly pointing to

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flattish MoM utilization hours, and are not witnessing material improvement in the recent months. ■ Inventory: Inventory is around 2 weeks for both excavator and concrete machinery. Normally the company would ramp up production at year end in preparation for March/April peak sales, but it will be more conservative this year given the still murky market outlook. ■ Customer payments are fine: The Company’s write off ratio as a percentage of total receivables has declined to 0.04% from 0.5% on average in previous years. ■ Return to growth in Q2: Sany is expecting sales to return to YoY growth in 2Q13, as (1) construction machinery market would have declined consecutively for 2 years by then, which is enough time to digest excess inventory at dealers and excess machineries purchased by customers; (2) infrastructure projects recently approved by the NDRC should start receiving funding by then. ■ Easier financing: In 2012, Sany is giving an extra 2 percentage point of margin as financial support to concrete machinery dealers. The company will evaluate market conditions next year to determine whether this practice should be continued.

Shanghai Electric: Arthur Leung (Investor Relations) ■ Sluggish power equipment outlook: The Company’s overall tone on China’s power generation equipment market is bearish. Shanghai Electric is guiding flat top line in 2013 compared with 2012 and 1-2% net profit YoY growth. Shanghai Electric does not see significant order improvement from IPPs in the fourth quarter as the demand for thermal power is still anaemic. ■ Little recovery in Industrial: In terms of the industrial segment, the Company posted 13%and 8% YoY decline in machine tools and motor revenues during the third quarter, and is not seeing any signs of demand recovery. ■ Strong Elevator demand: The Company’s elevator revenue grew by 10% YoY in the third quarter. Management expects the strength to continue into year end. Gross margin for elevators used in the social housing projects are 17%, which is 3% lower than the average. ■ Decent IGT outlook: Relative to coal plants, Shanghai Electric is more optimistic on the gas turbine market. Currently its gas turbine gross margin is between 7 to 8% due to low localization ratio. Shanghai Electric can manufacture the non-core components which account for 70% of the gas turbine, but it still relies on imports from Siemens for most of the gas turbine’s core components. By improving the localization rate, the Company targets around 20% gross margin for gas turbines in the long run. ■ Mix tailwind for power: In 2013, the gross margin for thermal equipment could be helped by a change in product mix, since less ultra super-critical and super critical coal plants will be built going forward due to the completion of small coal plant retirements.

Sinosure Credit Guarantee & Investment Co: David Han (President)

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Size and shape of the business: Sinosure Credit Guaranty and Investment provides small and medium sized enterprises with loan guarantees. The company differentiates between three types of customer: a) large companies, b) customers operating in one industry (coke producer) which accounts for the lion’s share of business; and c) small companies. Sinosure also offers a consulting service where the company supports customers in their communication skills and financial capabilities at times when clients are often occupied with their own operation. Sinosure sees this consultancy business

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as quite an attractive market given there is significantly less underlying risk versus the guarantee business.

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Current demand levels: Sinosure currently has RMB300mn in registered capital which the company expects to increase going forward. The environment continues to remain quite difficult for SME's to successfully get loans owing to the requirements from banks. While some financial institutions have started opening up specific departments for SME's, this practice appears to be mostly confined to the large banks. The leverage on this business can be quite significant and can account to 10x the equity amount. Given the financial risk involved the company has to be very selective with their customers to avoid high delinquency rates. Sinosure does not place huge trust on the portfolio companies’ financial reports, but more on the character of business owners. Going forward Sinosure believes the petrochemical market will be one of the most attractive end markets.

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Government involvement: The Chinese government is promoting SME lending via the support of private placements. Sinosure itself has set up a private placement business in 10 Chinese cities in order to encourage SME lending. Interest rates for private placement grew from between 7 to 9% in summer 2012, to 12 – 13% recently, as trust products offered at 10% interest plus collateral are very difficult for private placement to compete with. The company has even set up a guarantee business in conjunction with the government (split 70:30 in favor of Sinosure) where the government does not receive any interest payments, and in addition provides an economic expert as a general manager.

SPX Corporation: Brian Wood (CFO, Flow Tech Asia Pacific) ■ Size and shape of the business: SPW's Flow Tech business represents 53% of pro forma sales for the company, with 27% of Flow sales accruing from Asia. Key products include pumps, valves, separators and mixers. Within Asia, Flow accrues 32% of sales from Power & Energy, 41% from Dairy, Food & Beverage, and 27% from Industrial. Within Asia, 42% of sales accrue from China, 21% from Japan / S Korea, and 11% from Australia / New Zealand. Local customers in the region represent 80% of Flow sales. ■ Key demand trends: The backlog for Flow in Asia was $239m at the end of Q312, against $247m in Q411, and $138m a year earlier (although this was prior to the ClydeUnion deal). Orders have been weaker in recent quarters, although stripping out large orders, base orders have been ok, with no major change in trends on a sequential basis. In terms of end-markets, mining in Australia has had a soft couple of quarters, with delays in large projects evident. Food & beverage demand remains solid. Large orders now appear to have stabilized. In China, consumer tastes continue to shift towards dairy, cheese and yogurt, creating a very favorable longer-term demand backdrop. ■ Systems strategy is paying off: The acquisitions that SPW has undertaken in the Food & Beverage market in recent years (Gerstenberg, Anhydro, Murdoch, e&e, Seital) appear to be bearing fruit, with a number of recent awards for F&B systems. These include 8 yogurt plant orders in China, infant powder projects in Indonesia, and cheese / margarine plants in Australia. For a recent Shanghai Bright Dairy project worth $40m, SPW is supplying pumps, valves, mixers, heat transfer, dispersion and separation; the project is due to be completed in spring 2013.

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United Technologies: Ross Shuster (President – CCS Asia) ■ Size and shape of the business: The Climate, Controls & Security segment at UTX had pro forma 2011 sales of $18.9bn, and 66,000 employees. In China, CCS has 13 factories (7 in HVAC, 6 in Fire & Security), 9,600 employees and 10 minority JVs. CCS has a global R&D center in Shanghai, which opened in 2006; key recent products launched include large water-cooled chillers. ■ Key demand trends: Markets have slowed significantly since December 2011, as construction starts tend to have a 6-month lag relative to GDP, which started to weaken in mid-2011. The commercial HVAC market was down 11% in the 1H12, and orders remain very choppy and uneven on a month-to-month basis. However, there are a couple of encouraging points (i) the pipeline for larger orders is recovering, partly due to the improving outlook for government infrastructure projects, particularly in areas such as subway lines; (ii) short-cycle demand is showing an improvement, with Fire product sales growing mid-teens y-o-y in Q312, against mid-single-digit growth in Q2, and low-single-digit growth in Q1; (iii) based on the recent macro stabilization, CCS expects that large HVAC demand may recover by Q213 - in the 2H12, the market is down, but less than in the 1H12. Longer-term, the rise of W China, an increased government focus on energy efficiency, and increasing after-market content (aftermarket is 15% of China HVAC sales, against 10% a few years ago) represent key demand drivers. ■ Winning market share: CCS is winning share, with commercial HVAC revenues up in the 1H12, taking 200bps of share from one of its major global competitors. Despite the slowing orders since last year, sales are also expected to be up in commercial HVAC in the 2H12. The HVAC market (note CCS does not sell into residential HVAC in China) is fairly consolidated, but Security is very fragmented, with many products being fairly commoditized (locks, cameras). CCS appears to be winning share due to (i) its integrated offering of HVAC and F&S is seeing significant sales synergies in China (much more so than in market such as the US, where the F&S functions are run by electrical engineers, and HVAC is run by mechanical engineers, for instance); (ii) the multi-brand / multi-partner strategy: brands such as Fuerda and Carrier in Climate Systems, Kidde, Marioff, GST in Fire Systems, and Chubb in Security Systems; major partners include Haier, Edri, Midea and YueAn. ■ The emergence of W China - with a caveat: CCS has one plant in inland China, in Chengdu, for HVAC. However, manufacturing costs remain high, and supply chains are still under-developed. Even today, 5 years after the Chengdu plant opened, it is 8% more expensive to manufacture in Chengdu than in the plants in E China; labor costs are cheaper, but these represent only 2-3% of production costs. In terms of sales, W China represents 20% of CCS sales in China, with particular strength in Fire, where sales are growing 2X faster than in E China (in HVAC, W China sales are growing 3X faster compared with E China).

Yaskawa: Masanori Imafuku (Vice President for Yaskawa China) ■ Order trends: In the 1H11, because the Earthquake occurred in Japan, customers' over-stocked on inventories, which caused a sales hike, and a tough 2H11. In 2012, activity has normalized, and is better than last year. Recent monthly orders show some recovery, shifting above the company's expectation. In robots, all business except for Auto related shows a good performance; because of the political conflict between Japan-China, some Auto makers have cut CAPEX, which caused weak Auto related robot demand. In inverters, current orders show improvement, especially in infrastructure areas such as railway and subway. In servomotors, orders were at a high level thanks to smart-phone related demand in 1H, although 2H orders are lower.

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■ Except for the political issue, Yaskawa does not see any negative trends in orders. The company thinks some large size inverter orders may be delayed until the next quarter or so. Yaskawa expects the new government is likely to provide some stimulus package to stabilize the economy and it sees some good order trends in railway and subway area. Yaskawa thinks further declines in orders are unlikely. ■ Influence of Japan-China related conflict: More than 95% of Yaskawa's customers in China are local based. Yaskawa has built a good relationship with clients in China for many years so it does not see any direct negative impact from the political issue between the two countries, even though there is some indirect impact for Auto related robot business. When Mr. Xi Jinping visited Japan in 2009, Yaskawa was the only company he visited. ■ Position in the China market: In the China inverter market, Yaskawa has a top rank in terms of quality. Siemens and ABB also provide high quality products, but their prices are higher than that of Yaskawa. Japanese makers such as Mitsubishi Electric and Fuji Electric are also competitors in this area but Yaskawa has an advantage in quality. Yaskawa's OP margin of this business in China is more than 10%. Peers such as Siemens have a much larger salesforce however than Yaskawa, so its relatively high fixed costs mean that their OP margin is not necessarily higher than Yaskawa's. In the China servomotor market, Japanese suppliers such as Panasonic and Mitsubishi Electric are competitors but Yaskawa does not see them as a threat. They see Taiwanbased Delta as a key threat, given its low-cost business model. The Chinese competitors’ technology is much lower than that of Japanese and European companies, so their threat is limited. ■ Short term outlook: Yaskawa thinks the business which has the most upside potential in the next 12 months is inverters, particularly for cranes used in ports, heavy industry, and housing; government plans to increase social housing will drive crane demand and elevator demand. Yaskawa would like to strengthen its robot business not only for Auto related industries, but also in the Handling sector (robots for parts handling and logistics, rather than merely welding). Yaskawa plans to build a new plant in Changzhou (Jiangsu province) next FY, and will deliver servomotors used in robots from its Shenyang plant, aiming to provide high quality robots with a reasonable price to the China market. The company is positive on the robot demand outlook in China. ■ Inventory: Yaskawa has one month of inventory and distributors also have some. Once distributors receive the orders from customers, they will deliver the products basically within 48 hours; Yaskawa sells products 100% through the distributors. There are 8 distributors including Sanwa, Chitaka, etc, who sell Yaskawa products only.

Zoomlion: Shen Ke (Board Secretary)

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Increased discipline: The domestic construction machinery makers are becoming visibly more disciplined. Both Sany and Zoomlion commented that they are reducing sales intensity, and shifting focus to product quality and receivable collections from market share gains. We view the change of stance of the two domestic leaders as a very good development for the market, which was rife with breakneck competition at the expense of credit quality and balance sheets.

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Flattish utilization: Zoomlion is actively reducing its sales intensity, particularly in the concrete machinery market, now that it has established dominant market share against its key competitor. As a result, it posted the first YoY sales decline of between 15 to 20% in October in the concrete machinery segment. Its excavator, environmental and sanitation machinery, and tower cranes grew 22%, 10% and 10% YoY respectively. Machinery utilization levels remain flattish sequentially.

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Past the worst: Management believes the worst is behind us for the construction machinery market, although the strength of recovery is still uncertain. Zoomlion does not expect a material improvement in the fourth quarter versus Q3 sequentially, especially since it has reduced the promotion intensity in the concrete machinery market.

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Guangdong pick-up: The company has seen pick up in real estate project starts during a recent trip to Guangdong province. This may not be representative of the entire China market since Guangdong has warm winters, but it is an encouraging sign nevertheless.

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Excess capacity: Zoomlion expects between 5-10% growth rates for the excavator market in 2013. Management believes the excavator market will be the most difficult in 2013 due to (1) large existing fleet (1-1.2mn units) and (2) over capacity at manufacturers (300,000-400,000 unit production capacity currently, going up to 600,000, compared with annual sales of 113,000/120,000 in 2012E/2013E).

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Companies Mentioned (Price as of 15 Nov 12) ADT Corporation (ADT, $41.40, OUTPERFORM [V], TP $48.00) Beiqi Foton Motor Company Ltd. (600166.SS, Rmb5.62) Caterpillar, Inc. (CAT, $81.30, OUTPERFORM, TP $108.00) China Automation Group (0569.HK, HK$1.84) China Communications Construction Co Ltd. (1800.HK, HK$6.84) China Railway Group Ltd. (0390.HK, HK$4.21) Cummins, Inc. (CMI, $94.87, OUTPERFORM, TP $110.00) Danaher Corp. (DHR, $51.58, NEUTRAL, TP $55.00) Dover Corp. (DOV, $60.70, NEUTRAL, TP $64.00) Emerson (EMR, $48.14, OUTPERFORM, TP $55.00) Gardner Denver, Inc. (GDI, $69.58, OUTPERFORM, TP $71.00) General Electric (GE, $20.06, OUTPERFORM, TP $24.00) Hollysys Automation Technologies (HOLI.OQ, $10.18) Honeywell International, Inc. (HON, $59.33, NEUTRAL, TP $64.00) Illinois Tool Works, Inc. (ITW, $58.75, NEUTRAL, TP $60.00) Ingersoll-Rand Plc. (IR, $45.32, OUTPERFORM, TP $47.00) Kennametal, Inc. (KMT, $34.98, OUTPERFORM, TP $41.00) Komatsu (6301, ¥1,752, NEUTRAL, TP ¥1,850, MARKET WEIGHT) Luxfer (LXFR, $11.05, OUTPERFORM [V], TP $13.00) Metso (MEO1V.HE, Eu26.52, OUTPERFORM, TP Eu35.00) NTN (6472, ¥142, NEUTRAL, TP ¥150, MARKET WEIGHT) Rexnord Corp. (RXN, $18.84, NEUTRAL [V], TP $19.00) Rockwell Automation, Inc. (ROK, $76.29, OUTPERFORM, TP $85.00) Sany Heavy Industry (600031.SS, Rmb8.96, UNDERPERFORM, TP Rmb8.40) Shanghai Electric Group Co., Ltd. (2727.HK, HK$3.10, RESTRICTED [V]) SKF (SKFb.ST, SKr151.50, UNDERPERFORM, TP SKr130.00) SPX Corp. (SPW, $63.15, RESTRICTED) Textron, Inc. (TXT, $23.14, NEUTRAL, TP $26.00) Tyco International, Ltd. (TYC, $26.50, NEUTRAL, TP $30.00) United Technologies Corp. (UTX, $74.84, RESTRICTED) Valmont Industries (VMI, $131.45, UNDERPERFORM, TP $133.00) Xinjiang Goldwind Science&Technology (2208.HK, HK$3.01, UNDERPERFORM [V], TP HK$1.70) Yaskawa Electric Corp. (6506, ¥619, OUTPERFORM, TP ¥630, MARKET WEIGHT) Zoomlion Heavy Industry (1157.HK, HK$9.45, UNDERPERFORM [V], TP HK$8.50)

Disclosure Appendix Important Global Disclosures I, Julian Mitchell, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. As of October, 2 2012 Analysts’ stock rating are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% or more, (depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 1015% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -1015% levels in the Neutral stock rating definition, respectively.

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Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight: The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight: The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight: The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse’s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 42% (53% banking clients) Neutral/Hold* 40% (48% banking clients) Underperform/Sell* 15% (40% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

China Trip_Nov'12.doc