Weekly A-Share Picks. Mar 14, A-Share Market. (Note: This is selected translation from the Chinese version of our A-share research notes)

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1 Weekly A-Share Picks Mar 14, 2016 (Note: This is selected translation from the Chinese version of our A-share research notes) A-Share Market (1) Sany Heavy Industry ( CH): The Company plans to intensify its efforts to implement an employee stock-ownership plan, and boost its strategic transformation through the industrialization of its defence and building divisions. (P.1) (2) In-depth Report on Shenzhen Tianma-A [ CH]: a Leader in LTPS + AMOLED + 3D Display Technology (P.3) Sany Heavy Industry ( CH): The Company plans to intensify its efforts to implement an employee stock-ownership plan, and boost its strategic transformation through the industrialization of its defence and building divisions. 1. Employee stock-ownership plan The Company announced that it plans to implement an employee stock-ownership plan in two phases, which would involve raising funds of up to RMB400m. Phase I of the plan will be carried out in 2016 with a lock-up period of 12 months. 2. Our analysis and judgment (I) The employee stock-ownership plan, which features wide coverage and substantial contributions, is firmly supported by Sany Group Co., Ltd. The plan covers no more than 2,800 people, including directors, supervisors, senior executives, mid-level managers and other key employees. It is estimated that the contributions from a wide range of personnel, like directors, supervisors and senior executives will be as much as RMB76m in Phase I, which will be an important and effective boost for the Company. Wong Chi Man Head of Research (852) cmwong@chinastock.com.hk In its announcement, the Company said the capital management plan would include a senior tranche and subordinated tranche at a ratio of 2:1 or less. Where it is practicable to achieve the expected annualized return of the senior tranche (about 6%), or if a capital loss occurs or the capital of the subordinated tranche reports a loss, the difference will be covered by the controlling shareholder Sany Group Co., Ltd., indicating the full confidence of the controlling shareholder in the listed company. (II) Sany Heavy Industry has been approved as a qualified supplier of military equipment, and its military business is expected to develop more than previously expected. The Company declared in September 2015 that it had signed a Strategic Cooperation Agreement for Joint Research and Manufacturing of Unmanned Equipment with the 1

2 College of Mechatronic Engineering and Automation of the National University of Defence Technology and that it had jointly established an Engineering Center of Unmanned Equipment, which would develop high -intelligence equipment, technologies and products jointly with the military. According to an announcement in February 2016, Sany Automobile, a wholly owned subsidiary of the Company, obtained a License for Scientific Research and Production of Weapons, issued by the State Administration of Science, Technology and Industry for National Defence. This qualifies it to carry out scientific research and manufacturing of licensed weapons. We believe the Company will actively carry out the transformation of its military businesses and will benefit from civil-military integration. Therefore, it is expected to develop more than expected. (III) New profit growth drivers will be created through strategic transformation and building industrialization. In February, the Company announced that it had signed an Investment Agreement for the Sany Heavy Industry-Kunshan Building Industrialization Project with the Management Committee of the Kunshan Economic & Technical Development Zone and planned to invest in the establishment of Kunshan Sany Housing Co., Ltd. in the Zone, which will focus on the development of a new type of building industrialization. According to its plan, the Company will invest RMB 6bn over a five-year period, giving it an annual capacity of more than 10m sqm of floor area for building industrialization by The Company earlier publicly issued convertible bonds and raised RMB4.5bn (RMB 7.5/share for conversion, with a downward adjustable duration of six years), RMB650m of which has been used for Phase I of the building industrialization R&D project. The Company has indicated that building industrialization will be one of the focuses in the transformation of its development strategy, which in our opinion will create new profit growth drivers for the Company. (IV) The industry has yet to recover, but the One Belt and One Road initiative and overseas projects will boost the Company s recovery and performance. According to data from cmol.com, sales of excavators in February 2016 recorded YoY growth of 32.8%. However, sales of excavators in January and February 2016 fell 2.8% on a YoY basis, with a narrowed YoY decline, and showed no notable sign of improvement overall. It is estimated that the industry will remain slow in According to 2015 semi-annual Company report, its revenue contribution from overseas exceeded 40%, and sales grew rapidly in Asia Pacific, Latin America, North Africa, India, Germany and other regions. More than 50 African envoys visited the Company s industrial park in Changsha in June 2015, as a result of the One Belt and One Road initiative of Hunan. Some US$ 170m (approx. RMB1.1bn) out of the convertible bonds raised and issued by the Company will be used for Phase I of a construction project to build an industrial park in Brazil for businesses covering the import, manufacture, sales, service and leasing of engineering machinery products. After going into operation, the project is estimated to generate annual sales of RMB1.8bn and annual net profit of over RMB 100m. We predict that with the implementation of the One Belt and One Road initiative and continuous progress in overseas projects, the Company will gradually see a performance recovery. 2

3 3. Investment advice It is estimated that the Company s EPS will reach RMB 0.01, RMB 0.09 and RMB 0.11, and accordingly, the PER will be 364x, 62xand 48x in 2015, 2016 and 2017, respectively. The PBR of the Company is 1.81x, and its strategic transformation will be facilitated by military and building industrialization. Therefore, its rating is maintained at Prudently Recommended. In-depth Report on Shenzhen Tianma-A [ CH]: a Leader in LTPS + AMOLED + 3D Display Technology Investment highlights: Shenzhen Tianma s goal is to be the leader in future displays with its diversified research and production capability. Screen-display technology is constantly developing, ranging from traditional a-si technology and rapidly growing LTPS technology to OLED technology for future flexible displays and the 3D display technology for ultimate development. By virtue of its independent research and development, Shenzhen Tianma has broken through the former foreign monopoly on this technology and mastered display technology in the full range of the most advanced display fields, including a-si, LTPS, AMOLED and 3D displays. As a dominant firm in a-si, pioneer in LTPS, leader in AMOLED and explorer in 3D display technology, the Company has set a smooth course to continued robust and sustainable development. LTPS pioneer: The Tianma LTPS production line, which will be commissioned this year or next, will serve as the new growth engine of the Company. LTPS LCD has become the mainstream choice for medium- and high -end cell phones. The cell phone LTPS penetration rate around the globe is expected to see rapid growth, from 22.9% in 2014 to 45.9% in With three LTPS production lines, including one Generation 5.5 line (with capacity of 30K/month), which is already in production, and two Generation 6 lines (with capacity of 60K/ month), which will be commissioned next year, Tianma has become the pioneer of LTPS in China. The LTPS screens produced by the Generation 5.5 line, in particular, are used in medium- and high-end cell phones such as the Redmi Note 2 (5.5 inches), Huawei Maimang 4 (5.5 inches), Huawei Honor 3X Pro (5.5 inches) and HTC One M9 (5 inches), indicating strong acceptance of Tianma s LTPS technology by mainstream cell phone manufacturers. The two Generation 6 lines will each realize annual revenue of RMB10bn and annual profit of RMB1.12bn at full capacity. The company expects them to serve as the new growth engines of the Company after reaching their designed capacity. Leader in AMOLED: By virtue of strategic position in AMOLED technology, the Company is the leader in nextgeneration high-end display applications. With advantages such as infinite contrast, excellent colour performance and ultrafast response, OLED is suitable for flexible displays, transparent displays and virtual reality, among other application scenarios, demonstrating a favourable long-term development trend. Because of factors like yield, durability and price, OLED has been in a market incubation period for the last several years. In the second half of this year, however, both Samsung and LG will significantly increase their purchases of OLED, leading to a recovery in the OLED industry. With the first Generation 4.5 AMOLED pilot line in China in 2011, Shenzhen Tianma successfully mastered the key technology and production processes for AMOLED. In 2013, the Company built a Generation 5.5 AMOLED mass production line, which has been successfully launched and is about to go into mass production. By virtue of its strategic position in AMOLED technology, the Company has become a leading player in the domestic market. 3

4 Explorer in 3D display technology: Shenzhen Tianma s goal is to explore, develop and build a complete 3D display ecosystem. By virtue of its dedicated research in 3D display technology, Shenzhen Tianma has obtained over 170 relevant patents and boasts unique advantages in realizing 2D/3D display technology with fixed lens. The Company can provide a complete set of 3D display solutions, including high-resolution (above 500PPI) TFT display modules, colour film production and customization, and liquid crystal lens production and customization. In 2014, the Company provided 3D display solutions for the world s first holographic cell phone, and in 2015, it developed a naked eye 3D ecosystem in cooperation with SuperD, Foxconn and DreamWorks. Profit forecast and estimates: With its diversified reserves of display technology, the Company has become dominant in a-si, a pioneer in LTPS, a leader in AMOLED and an explorer in 3D display technology, setting a smooth course for robust and sustainable development. The Generation 6 line of LTPS, which is expected to be commissioned next year, will provide accelerated growth impetus, and the strategic position of the Company s AMOLED technology shows great promise. In addition, Xiamen Tianma, the company s highestquality asset, has strong expectations of being injected to the listco. Without including Xiamen Tianma, the EPS is expected to be RMB0.40/0.52/0.76 in 2015/2016/2017, which is rated as Recommend. 4

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