global: machinery: constructionpg.jrj.com.cn/acc/res/cn_res/indus/2012/6/15/ee461... · 6/15/2012...

June 15, 2012

Global: Machinery: Construction

Equity Research

Global Construction Machinery Essentials: Key themes and top stock picks

Selective in global construction machinery

We see a balanced risk-reward for our global

construction machinery coverage, with a visible (and

largely discounted) North America recovery and

room for continued fleet buildout in Brazil offset

by sluggish recovery for most key China product

lines and continued trough sales in Europe. We

are buyers of Caterpillar (CL), Zoomlion, United

Tractors, Mills, and Manitowoc where we see

leading market positions, margin upside, product

lines in early stages of recovery, and compelling

valuation. We are sellers of Shantui, Oshkosh,

XGMA, and Sunward Intel where we see stretched

consensus estimates and relative valuations.

Cautious on China but outlook improving

We expect a sluggish construction equipment

recovery to emerge in 3Q off a low 2H2011 base

driven by the impact of gradual policy loosening

on infrastructure demand, balanced by continued

weakness in property. We prefer concrete

machinery to other product types due to the

ongoing ready-mix concrete penetration toward

lower tier cities.

US recovery on track, focus on laggards

The path for US construction machinery recovery

to mid-cycle levels is highly visible, reinforced by

improving home inventories, strong rental and

used equipment prices for key product lines. We

are buyers of Manitowoc (MTW) as we expect a

crane capex recovery to emerge over the next 12

months driven by a continued recovery in

utilization rates and eventual rental rate increases

off cyclical lows.

Europe machine sales to remain near trough

We expect construction equipment demand in

Europe to remain near cyclical lows (down 70%

from peak) driven by the impact of austerity

measures on public construction and soft private

construction activity.

Brazil demand mixed near-term, intact LT

While near-term construction equipment demand

is mixed, we estimate public infrastructure projects

will add 15% CAGR to total construction spending

over the next three years, driving a continued

buildout in construction equipment fleets.

RELATED RESEARCH

Europe: Construction: What lending surveys tell us about

the construction outlook; 1Q12 – May 24, 2012

Mills (MILS3.SA) Buy: Mapping regional expansion and

infrastructure pipeline; up to Buy – May 23, 2012

Manitowoc (MTW): Trough valuation, emerging US crane

upturn trump low returns; raise to Buy – May 22, 2012

Caterpillar (CAT): Best-in-class margin expansion,

compelling entry point; CL Buy – April 26, 2012

China: Machinery: Reinforced confidence in concrete

machinery, lower risks in leasing; Buy Zoomlion (H)/(A) –

April 5, 2012

Indonesia: Machinery & Diversified Industrials: Indonesia

equipment upturn ahead: Reiterate UT Buy – March 8, 2012

China: Machinery: Construction: Cautious stance on

construction machinery – February 3, 2012

Americas: Machinery & Diversified Industrials 2012 Outlook:

Focus on secular winners as growth slows – January 5, 2012

Jerry Revich, CFA (212) 902-4116 [email protected] Goldman, Sachs & Co. Goldman Sachs 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Tian Lu, CFA +86(10)6627-3036 [email protected] Beijing Gao Hua Securities Company Limited Miang Chuen Koh, CFA +65-6889-2465 [email protected] Goldman Sachs (Singapore) Pte

Eduardo Siffert Couto, CFA +55(11)3371-0764 [email protected] Goldman Sachs do Brasil CTVM S.A.

The Goldman Sachs Group, Inc. Global Investment Research

June 15, 2012 Global: Machinery: Construction

Goldman Sachs Global Investment Research 2

Table of Contents

PM Summary: Selective in global construction machinery 3

North America: Recovery on track, focus on laggards 10

South America: Demand mixed near-term, intact longer-term 17

Europe machine sales to remain near trough 22

China: expect yoy growth to trough in 2Q and sluggish recovery mainly on low base 30

Indonesia: Strong structural growth to continue 39

This report has been priced as of June 12, 2012

Global Machinery & Infrastructure Team

Machinery and Diversified Industrials China Infrastructure Construction & Machinery Europe Autos & Capital GoodsJerry Revich, CFA 212-902-4116 Tian Lu, CFA 86-10-6627-3036 Stefan Burgstaller 44-20-7552-5784Ravi Gill 212-357-5020 David Jin 86-10-6627-3007 Stephan Puetter 44-20-7552-2919Chandni Luthra 212-934-9629 Ashik Kurian 44-20-7051-3084

Europe Construction

Latin America Infrastructure & Transportation ASEAN Conglomerates Will Morgan, CFA 44-20-7051-1823Eduardo Siffert Couto, CFA 55-11-3371-0764 Miang Chuen Koh, CFA 65-6889-2465 Alessandro Vaturi 44-20-7552-9373Tais Correa 55-11-3371-0883 Wieta Anton Honoris 65-6889-2462

Europe

Latin America Indonesia

US China



PM Summary: Selective in global construction machinery

We see a balanced risk-reward for our global construction machinery coverage with a visible (and largely discounted) North

America recovery and room for continued fleet buildout in Brazil offset by sluggish recovery for most key China product

lines and continued trough sales in Europe. We are buyers of Caterpillar (CL), Zoomlion, United Tractors, Mills, and

Manitowoc where we see leading market positions, margin upside, product lines in the early stages of recovery, and

compelling valuation. We are sellers of Shantui, Oshkosh, XGMA, and Sunward Intel where we see stretched consensus

estimates and relative valuations.

Exhibit 1: Construction equipment industry near mid-cycle levels End market’s share of GDP vs. mid-cycle average

Source: Company data, Goldman Sachs Research estimates.

Aerial Work Platforms - Europe

Earthmoving Equipment - Europe Cranes - Europe

Cranes - N America

Earthmoving Equipment - N America

Aerial Work Platforms - N America Construction Equipment Average

Aerial Work Platforms - S America

Earthmoving Equipment - S America

Earthmoving Equipment - China

Mid-cycle



Exhibit 2: Summary outlook by region

Note: 1Fixed investment % chg used for South America, China, and Indonesia Source: Company data, Goldman Sachs Research estimates, Goldman Sachs Global ECS Research, International Monetary Fund.

Sluggish recovery in China (20% of global construction vs. 14% of GDP)

We expect a sluggish construction equipment recovery to emerge in 3Q off a low 2H2011 base. We expect near-term

economic easing measures are likely to drive a recovery in infrastructure construction spending; we also see continued

weakness in property (property tightening likely to stay in place) plus an underutilized fleet. Excavator sales have declined

from recent 2011 peak levels in line with the decline in growth of new property starts (Exhibit 3). We believe social housing can

help buffer a slowdown in broader property investment, but the impact may be limited as it takes 2% growth in social housing to

offset every 1% decline in commodity property declines.

Exhibit 3: China excavator sales are coincident with property investment Excavator volume growth % chg yoy vs. new property starts % chg yoy

Exhibit 4: China excavators: high capital stock drives recovery delay China excavator sales vs. fixed investment

Source: CEIC, China Construction Machinery Association, Gao Hua Securities Research. Source: CEIC, China Construction Machinery Association, Gao Hua Securities Research.

Construction equipt.Region Construction market above % of 2012E

2012E 2013E 2014E 2012E 2013E 2014E spending GDP (below) mid-cycle Company revenues

North America 4% 7% 4% 27% 11% 5% 20% 23% + 6%Terex (TEX, Neutral)

Manitowoc (MTW, Buy)Oshkosh (OSK, Sell)

33%21%18%

South America 4% 6% 10% 8% 3% 6% 6% + 98% Mills (MILS3.SA, Buy) 100%

Europe -2% -1% 2% 0% 6% 3% 20% 24% - 15% Terex (TEX, Neutral) 30%

China 8% 9% 8% 18% 20% 14% + 97%

Xiamen XGMA (600815.SS, Sell)Lonking (3339.HK, Neutral)

Zoomlion (H) (1157.HK, Buy)Sany Heavy (600031.SS, Neutral)Sunward Intel (002097.SZ, Sell)

Guangxi Liugong (000528.SZ, Neutral)Shantui (000680.SZ, Sell)

96%96%95%93%93%88%78%

Indonesia 9% 9% 24% 25% 23% 1% 1% PT United Tractors (UNTR.JK, Buy) 100%

Growth forecastsConstruction spending1 Construction equipment sales

Companies with most exposureGlobal share

-20%

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0%

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Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11

Excavator - 12-month rolling change

Property new Start rolling YOY

Ex

ca

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Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11

Excavator - 12-month rolling change Loader - 12-month rolling change

Infra + Prop FAI rolling YOY FAI rolling YOY

Ex

ca

vato

r/ L

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I YO

Y%

6-9 months



N America recovery on track, focus on laggards (20% of global construction, 23% of GDP)

We are constructive on a continued recovery in North America construction equipment capex toward mid-cycle levels due

to a recovery in construction spending off a multi-decade trough and depleted capital stock – the primary drivers of

construction equipment capex (Exhibit 5, 86% R2). Our forecasts for 27%/ 11% 5% construction equipment capex growth in

2012-2014 are based on (1) a pick-up off the bottom for US residential construction spending (forecasted growth of 15%/

20%/ 10% in 2012-2014) as inventories move toward normalized levels and housing prices bottom, and (2) low capital stock

following sharp industry capacity cuts in 2009-2010. Market share leaders Caterpillar and Deere have expanded their scale

advantage to the rest of the industry over the past five years, with CAT’s share now 32% and Deere’s 17%. Terex and CNH have lost

market share over that time period. We recently upgrade Manitowoc (MTW) to Buy as we see a compelling risk reward with the

stock trading at a trough multiple on near-trough earnings, with the North America crane cycle in the early stages of recovery,

reinforced by improving rental utilizations off cyclical lows. Companies with the most significant exposure to the North American

construction equipment market are Terex (33% of 2012E revenues), Manitowoc (21%), Oshkosh (18%), CAT (15%), and Deere (15%).

We forecast 27%/ 11%/ 5% construction equipment sales growth in 2012-2014 based on our three-factor model (86% adjusted R2) –

driven by the construction spending outlook, construction equipment capital stock (measured by age), and used equipment values.

Exhibit 5: N America: emerging residential recovery and depleted capital

stock provide visibility for a continued construction equipment recovery N America construction equipment demand forecasts (86% R2)

Exhibit 6: US construction spending share of GDP is at a historical trough

Real GDP vs. Real Construction put in place

Source: Census Bureau, Rouse Asset Services, Company data, Goldman Sachs Research estimates.

Source: Census Bureau, Company data, Goldman Sachs Research estimates.

15%

4% 3%

-10%-6%

7%

20%

28%

12%

-13%-17%

-52%

28%

46%

27%

11%

5%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

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1998

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Actual Construction Equipment Sales - % Chg YoYRegression estimate of Construction Equipment Sales - % Chg YoYErrors

75

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1974

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E

Real GDP, indexed at 100 in 1974

Real construction put in place, indexed at 125 in 1974



Brazil demand mixed near-term, intact LT (S America 6% of global construction vs. 6% of GDP)

We are constructive on a continued modest buildout in Brazil’s construction equipment fleet over the next three years

driven by visible public infrastructure projects that add 15% CAGR to total construction spending over the next three years.

We forecast construction equipment sales growth of 10%/ 8%/ 3% in 2012-2014, slower than the 17% CAGR reported in

2006-2011 due to a substantial installed base, as construction equipment sales have outpaced GDP growth by sevenfold

over the past ten years. For 2012-2014, we expect approximately US$50 billion in infrastructure investments necessary to the

support the games and tourists (Exhibit 7), which will add 15% CAGR to total construction spending over the next three years based

on estimated 2011 total construction spending of $100 billion. Market share leader Caterpillar has gained share over the past five

years, with Hitachi Construction seeing market share erosion. Companies with the highest exposure to the South America

construction equipment market include Mills (100%) and Komatsu (12%). We are buyers of Mills, which is highly exposed to

infrastructure projects related to the FIFA 2014 World Cup and the Rio de Janeiro 2016 Olympic Games. The deadline for most of

these projects is an important catalyst for Mills earnings in the coming years and we believe that its volume of equipment rental will

continue to grow in the coming years translating into accelerating earnings growth.

Exhibit 7: $50 billion in short-term investments for the World Cup and

Olympics Short-term infrastructure projects related to the FIFA 2014 World Cup, Rio

2016 Olympic Games and supporting infrastructure

Exhibit 8: Brazil earthmoving construction equipment demand to pick-up in

2013E driven by a fixed investment recovery Actual sales vs. Regression estimate of sales (60% R2)

Source: Goldman Sachs Research estimates.

Source: Company data, Goldman Sachs Research estimates, Goldman Sachs Global ECS Research.

Europe sales to remain near trough (20% of global construction vs. 24% of GDP)

While construction equipment sales are down 70% from prior cycle highs, we expect construction spending to remain in

recession through at least 2013, driving our expectations for machinery sales to remain well below historical levels. We

forecast 0%/ 6%/ 3% construction machinery capex growth in 2012-2014 driven by some modest level of replacement capex

off a historical trough in capital stock (Exhibit 9), partly offset by a continued contraction in construction investment. We

forecast a construction spending contraction of 2% in 2012, a contraction of 1% in 2013, and modest 2% growth in 2014, with

4

11

18

162

0

15

30

45

60

World Cup stadiums

Rio 2016 Olympics

Subways Highways Airports TOTAL

Infr

astr

uctu

re S

pend

($U

S bn

)

50

2% 4% 4%

-6%

36%

3% 5%

37%

18%

-21%

-4%

18%

-1%

7%

33%27%

19% 16%

30%

-36%

61%

42%

10% 8%3%

-60%

-40%

-20%

0%

20%

40%

60%

80%

1990

1991

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Actual Equipment Sales - % Chg YoYRegression estimate of Equipment Sales - % Chg YoYErrors



residential construction the closest to bottoming, in our view, while the risk to civil construction spending remains to the downside

(Exhibit 10).

Exhibit 9: Our regression model correctly predicted the direction of

equipment sales in 15 of the past 18 years Actual sales vs. Regression estimate of sales (65% R2)

Exhibit 10: Infrastructure spend in Europe follows budget deficits Civil construction spending vs. budget balances


Source: Euroconstruct, Goldman Sachs Research estimates.

Indonesian demand to continue structural growth (Indonesia 1% of global const. vs. 1% of GDP)

We are constructive on the near-term outlook for the Indonesian construction sector driven by strong private fixed

investment, accommodative monetary policy, and increased government spending. We expect approval for the land reform

bill later this year to help jump-start many of the much-needed infrastructure projects across the country, and a higher level

of replacement capex following a slowdown in replacement sales during the 2009-2010 global financial crisis. United

Tractors is most exposed in our coverage to upside in the Indonesian construction equipment sector, and we are buyers with

outlook for the following near-term catalysts: (1) the expected approval of the land reform bill to likely drive very strong growth for

construction equipment; (2) unfulfilled replacement demand from 2009-2010 driving strong growth through 2012E-2013E; (3) the

reversal in the interest rate cycle.

Top actionable ideas

Caterpillar (CAT, CL-Buy) – We are CL-Buy on CAT as we believe incremental margins will accelerate in 2012 and the cyclical

outlook is more balanced than the market is attributing to Construction Industries as South America is in the midst of a fleet and

infrastructure build-out and North America is early in the cyclical recovery.

Manitowoc (MTW, Buy) – We are Buy-rated on MTW as the stock's compelling trough valuation and the emerging US crane

recovery trump our preference for high returns and recurring revenue businesses at this point in the cycle. We believe: (1) the US

-11%

19%

27%

-2%

8%

34%

-3%

4% 1% 2%

15%

26%

18% 16%

34%

11%

-46%

14%

49%

0%6% 3%

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Actual Equipment Sales - % Chg YoYRegression estimate of Construction Equipment Sales - % Chg YoYErrors

‐8%

‐6%

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4%

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Budget balance as a % of GDP (t‐1) Civil construction (% yoy)



crane capex recovery is emerging, with rising utilizations providing visibility on price and capex increases and downside for MTW’s

Europe business is limited with crane capex only 5% above trough.

Zoomlion (A)/(H) (000157.SZ, Buy; 1157.HK, Buy) – We are bullish on Zoomlion, given expectations for higher growth in concrete

machinery and lower risks in leasing. We expect the resilience of Zoomlion’s concrete machinery growth to continue to positively

surprise investors due to: (1) ongoing promotion of bulk cement and ready-mixed concrete usage; (2) penetration into lower tier

cities; and (3) better profitability of mixing plants which account for over 70% of concrete machinery buyers, whereas ‘mom and

pop’ shops are the main customers for excavators. We believe investors’ concerns over credit risks associated with leasing sales are

overdone, as Zoomlion has transferred the majority of risks to banks/third parties via relatively low cost non-recourse factoring to

banks.

PT United Tractors (UNTR.JK, Buy) – We are bullish on United Tractors as we believe that the market is underestimating the

resilience of UT’s returns and growth profile. Despite the weaker macro environment, we expect UT to leverage on the following

factors to deliver high and stable returns through 2015E: (1) Its position as Indonesia’s leading coal contractor and heavy equipment

distributor; (2) blue-chip customer base and strong track record; and (3) net cash balance sheet. We expect higher heavy equipment

sales given: (1) the expected approval of the land reform bill to likely drive very strong growth for construction equipment; (2)

unfulfilled replacement demand from 2009-2010 driving strong growth through 2012E-2013E; and (3) the reversal in the interest rate

cycle.

Mills (MILS3.SA, Buy) – Mills is the largest supplier of forms and scaffolding equipment to Brazilian Engineering & Construction

companies and is highly exposed to infrastructure projects related to the FIFA 2014 World Cup and the Rio de Janeiro 2016 Olympic

Games, two of the most important sporting events globally that will take place in Brazil in the next two to four years. In our view, the

deadline for most of these projects is an important catalyst for Mills earnings in the coming years. Mills is currently supplying

equipment for 10 of the 12 World Cup stadiums under construction. Given Mills’ high exposure to Brazil’s infrastructure spending,

we believe that its volume of equipment rental will continue to grow in the coming years translating into higher revenues and

earnings for the company.

Oshkosh (OSK, Sell) – We are Sell-rated on Oshkosh and see 30% downside to consensus estimates, driven by: (1) a longer path to

Access Equipment recovery in a slow construction cycle, (2) further downside in Defense driven by our view of widening losses on

the FMTV platform that accounts for 38% of segment 2012E sales, (3) rising municipal budget pressures for the Fire & Emergency

segment, and (4) only modest underperformance since mid-July despite sharp increases in company specific headwinds.

Shantui (000680.SZ, Sell) – We are Sell-rated on Shantui on (1) our concerns over the sharp decline in associate income from the

Shantui/Komatsu 30/70 joint venture remain; and (2) the company’s new accounting policy change which we expect will also

negatively impact its earnings, due to higher future provisions for receivables and depreciation expenses.

Sunward Intel (002097.SZ, Sell) – We remain cautious on Sunward’s (1) volume growth for its main businesses: pile driving

machinery (48% of 2012E revenue) and excavators (38% of 2012E revenue), and (2) the company’s diversification plans (such as

entering the yacht business). We believe current valuation is stretched, even if we assume the same historic “small/growth”

premium. While we believe Sunward’s deteriorating returns profile no longer justifies a valuation premium, we see 20% potential

downside even after assigning a 40% “small/growth” premium to the sector average ValRatio for the stock. In addition, although

Sunward’s P/E premium relative to Sany has not expanded materially, its growth has slowed and on a PEG basis Sunward’s

premium relative to Sany has widened significantly. Mediocre execution – (1) Sunward has not been able to further consolidate

market share in its core pile-driving and small excavator market; and (2) its significant diversification efforts have not materialized.



Xiamen XGMA (600815.SS, Sell) – We are Sell-rated on Xiamen XGMA Machinery given: (1) its relatively expensive valuation vs.

its closest peers Liugong and Lonking; and (2) risks of further margin erosion.

Exhibit 11: Global construction equipment valuation comparables


12 month EV/EBITDA P/E Other Valuation Metrics GS Estimate SummaryPrice Price Target Target Current Historical Target Current valution Historical EV/Sales FCF Yield GS GS vs Consensus

Company Ticker 6/12/12 Rating Value Upside 2012E 2012E 2013E 2014E average 2012E 2012E 2013E 2014E average 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Construction Equipment

Americas-listed Construction Equipment ManufacturersCaterpillar CAT $87.05 CL-Buy $131 50% 8.3 6.1 5.3 4.9 9.0 12.9 8.6 7.3 6.7 14.0 1.1 1.1 1.0 7% 11% 15% $10.13 $11.95 $12.95 4% 4% -3%Manitowoc MTW $10.53 Buy $15 42% 9.5 8.2 6.6 5.5 7.2 17.7 12.5 8.1 6.2 14.4 0.9 0.8 0.8 16% 14% 19% $0.85 $1.30 $1.69 4% -13% -19%Oshkosh OSK $20.45 Sell $21 3% 6.1 6.0 5.3 4.7 7.4 14.7 14.3 11.9 10.7 13.0 0.4 0.4 0.4 14% 10% 12% $1.79 $1.65 $1.85 -4% -30% -34%Terex TEX $17.30 Neutral $27 56% 7.7 6.0 5.1 4.5 7.8 15.5 9.9 7.2 6.0 10.4 0.3 0.4 0.4 -1% 9% 12% $1.75 $2.40 $2.90 -4% -16% -27%Case New Holland CNH $37.51 Not Rated NA NA NA 5.1 4.8 4.5 9.8 NA 8.3 8.2 8.2 13.8 0.6 0.6 0.7 -3% 7% 9% $4.50 $4.55 $4.55 -3% -7% -12%Deere DE $74.06 Neutral $90 22% 6.9 5.9 5.9 6.1 9.0 10.7 8.8 8.6 9.0 14.6 1.1 1.1 1.1 5% 9% 8% $8.44 $8.65 $8.25 2% 1% -10%

Americas Average 35% 7.7 6.2 5.5 5.0 8.4 14.3 10.4 8.5 7.8 13.4 0.7 0.7 0.7 6% 10% 12% 0% -10% -18%

Europe-listed Construction Equipment ManufacturersVolvo VOLVb.ST Skr 81.35 Neutral Skr 118.00 45% 7.8 4.3 4.0 3.9 12.7 10.0 8.7 8.4 0.5 0.5 0.5 10% 11% 11% Skr 8.15 Skr 9.33 Skr 9.67 -3% -7% -7%Fiat Industrial SPA FI.MI € 7.47 Not Rated NA NA NA 4.4 3.9 3.7 NA 9.2 7.5 6.7 0.5 0.5 0.5 6% 8% 11% € 0.81 € 1.00 € 1.11 5% 6% 1%

Europe Average 45% 7.8 4.3 3.9 3.8 12.7 9.6 8.1 7.6 0.5 0.5 0.5 8% 10% 11% 1% 0% -3%

China and HK-listed Construction Equipment ManufacturersLonking Holdings 3339.HK HK$ 2.04 Neutral HK$ 2.80 37% 3.6 3.4 2.6 2.4 5.0 5.2 3.6 3.2 0.6 0.5 0.5 36% 22% 21% HK$ 0.39 HK$ 0.56 HK$ 0.63 4% 22% 22%Sany Heavy 600031.SS Rmb 14.71 Neutral Rmb 15.90 8% 7.8 9.2 7.2 5.8 9.8 11.7 9.1 7.3 2.1 1.8 1.4 0% 5% 7% Rmb 1.26 Rmb 1.61 Rmb 2.03 -7% -1% 7%Zoomlion (H) 1157.HK HK$ 10.10 Buy HK$ 13.30 32% 4.8 4.2 3.4 2.9 7.6 6.6 5.8 4.9 0.9 0.8 0.6 17% 17% 13% HK$ 1.54 HK$ 1.75 HK$ 2.07 16% 14% 6%Guangxi Liugong 000528.SZ Rmb 13.80 Neutral Rmb 12.90 -7% 6.7 8.9 7.2 5.8 8.9 12.2 9.5 7.6 1.0 0.8 0.7 24% 9% 11% Rmb 1.13 Rmb 1.45 Rmb 1.80 -15% -4% 5%Sunward Intel 002097.SZ Rmb 9.42 Sell Rmb 7.10 -25% 5.5 9.6 8.0 7.0 13.2 23.0 17.6 16.1 1.2 1.0 0.8 12% 2% -3% Rmb 0.41 Rmb 0.54 Rmb 0.58 -31% -22% 1%Xiamen XGMA Machinery 600815.SS Rmb 9.69 Sell Rmb 6.80 -30% 5.8 15.3 7.9 6.7 7.4 14.5 10.5 9.0 0.9 0.7 0.6 14% 0% 1% Rmb 0.67 Rmb 0.93 Rmb 1.08 -26% -1% 14%Shantui 000680.SZ Rmb 10.18 Sell Rmb 9.00 -12% 7.2 11.2 8.0 6.9 12.4 23.5 14.0 12.4 0.7 0.5 0.5 10% -8% -2% Rmb 0.43 Rmb 0.73 Rmb 0.82 -45% -10% -6%

China and HK Average 1% 5.9 8.8 6.3 5.3 9.2 13.8 10.0 8.6 1.1 0.9 0.7 16% 7% 7% -15% 0% 7%

Brazil-listed Construction Rental SupplierMills MILS3.SA R$ 24.78 Buy R$ 31.30 26% 8.8 8.9 7.1 5.6 16.7 18.1 13.2 10.1 3.8 3.0 2.4 1% -1% -4% R$ 1.37 R$ 1.88 R$ 2.44 1% 7% 13%

Indonesia-listed Construction Equipment ManufacturersPT United Tractors UNTR.JK Rp 23,450 Buy Rp 34,000 45% 7.1 5.9 4.8 4.1 13.8 11.9 9.6 7.9 1.3 1.1 0.9 3% 6% 8% Rp 1,968 Rp 2,455 Rp 2,955 6% 12% 20%

Global Construction Average 20% 6.9 7.2 5.7 5.0 11.9 12.2 9.4 8.3 1.0 0.9 0.8 10% 8% 9% -6% -3% -2%

S&P 500 SPX $1,324 $1,250 -6% 12.5 13.7 13.2 12.5



North America: Recovery on track, focus on laggards

We are constructive on a continued recovery in North America construction equipment capex toward mid-cycle levels due

to a recovery in construction spending off a multi-decade trough and depleted capital stock – the primary drivers of

construction equipment capex (Exhibit 12, 86% R2). Our forecasts for 27%/ 11%/ 5% 2012-2014 construction equipment

capex growth are based on (1) a pick-up off the bottom for US residential construction spending (forecast growth of 15%/

20%/ 10% in 2012-2014) as inventories move toward normalized levels and housing prices bottom, and (2) low capital stock

following sharp industry capacity cuts in 2009-2010. Market share leaders Caterpillar and Deere have expanded their scale

advantage relative to the rest of the industry over the past five years, with CAT’s share now 32% and Deere at 17%. Terex and CNH

have lost market share over that time period (Exhibit 24). We recently upgraded Manitowoc (MTW) to Buy as we see a compelling

risk reward, with the stock trading at a trough multiple on near-trough earnings and the North America crane cycle in the early

stages of recovery, reinforced by improving rental utilizations off cyclical lows. Companies with the most significant exposure to the

North American construction equipment market are Terex (33% of 2012E revenues), Manitowoc (21%), Oshkosh (18%), CAT (15%),

and Deere (15%).

We forecast 27%/ 11%/ 5% construction equipment sales growth in 2012-2014 based on our three-factor model (86% adjusted R2) –

driven by the construction spending outlook, construction equipment capital stock (measured by age), and used equipment values.

Exhibit 12: Equipment capex is driven by construction spending, fleet

age, and used equipment values Construction equipment sales vs. construction spending, used equipment values,

fleet age (86% R2)


equipment sales in each of the past 14 years Actual sales vs. Regression estimate of sales



15%

4% 3%

-10%-6%

7%

20%

28%

12%

-13%-17%

-52%

28%

46%

27%

11%5%

20%

25%

30%

35%

40%

45%

50%

55%

60%-60%

-40%

-20%

0%

20%

40%

60%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

Construction Equipment Sales - % Chg YoY (Left Axis)Real US Construction Put in Place - % Chg YoY (Left Axis)Used Equipment Values - % Chg YoY (Left Axis)Age Index (Right Axis)

15%

4% 3%

-10%-6%

7%

20%

28%

12%

-13%-17%

-52%

28%

46%

27%

11%

5%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

Actual Construction Equipment Sales - % Chg YoYRegression estimate of Construction Equipment Sales - % Chg YoYErrors



Construction spending outlook: Residential investment remains key lynchpin to recovery

We forecast US construction spending growth of 4%/ 7%/ 4% in 2012-2014, driven primarily by a pick-up off the bottom for

US residential construction, with modest private non-residential construction recovery offsetting continued weak public

construction spending. As indicated in Exhibit 14, construction spending share of GDP is near a 20-year low.

Exhibit 14: US construction spending share of GDP is at a historical trough Real GDP vs. real construction put in place

Exhibit 15: Mild recovery in construction equipment demand following three

years of sharp underinvestment Construction machinery sales vs. construction put in place



Residential construction spending set to recover off a multi-decade trough

The existing home inventory level is the most significant indicator for this end market, in our view, as inventories ultimately

drive pricing and new home capex (Exhibits 16-17). Existing home inventory has declined 48% since peaking in mid-2008 to a

supply of 6 months at current levels of existing home sales. A significant shadow inventory level of 10 months of supply has

delayed the recovery in housing starts; however, we would note shadow inventory levels have declined 34% from a peak of 16

months in mid-2010 (Exhibit 19).

With the modest US economic recovery continuing along with improving employment markets and household formations

in 2012-2014, we expect lower inventories and bottoming home prices to drive a recovery in housing construction. We

estimate private residential construction spending to increase 15%/ 20%/ 10% in 2012-2014. The US Census Bureau reported that

private residential construction put in place increased 7% year-over-year in the first four months of 2012, with growth accelerating

since mid-2011.

75

100

125

150

175

200

225

250

275

300

1974

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1978

1980

1982

1984

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1998

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2002

2004

2006

2008

2010

2012

E

Real GDP, indexed at 100 in 1974

Real construction put in place, indexed at 125 in 1974

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1969

1971

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1991

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1997

1999

2001

2003

2005

2007

2009

2011

2013

E

Construction Machinery sales, indexed in 1969US construction investment, indexed in 1969



Exhibit 16: Housing starts should accelerate as inventory levels normalize Existing US home inventory vs. US housing starts (# of units)

Exhibit 17: Home price declines have moderated and are closer to bottoming New housing starts vs. home prices

Source: National Association of Realtors, Census Bureau.

Source: S&P, Census Bureau.

Exhibit 18: Residential construction leveraged to consumer spending US real residential construction vs. real consumer spending

Exhibit 19: All-in home inventory down 40% from peak to 17 mos. of supply US home inventories (existing + shadow), months of supply (as of 4Q11)

Source: US Census Bureau, Goldman Sachs Research estimates.

Source: Mortgage Bankers Association, National Association of Realtors, Goldman Sachs Research.

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

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Jan-

10

Jan-

11

Jan-

12

Existing Home Inventory US Housing Starts

0

500

1,000

1,500

2,000

2,500

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

US Housing Starts SAAR (RHS)

S&P Case Shiller Home Price Index- % Chg YoY (LHS)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

E

US Residential Construction Spending (LHS) US Consumer Spending (RHS)

16.7

6.2

0

5

10

15

20

25

30

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Mon

ths

of S

uppl

y10.5

"SHADOW " INVENTORY

"REGULAR" INVENTORY



Private non-residential construction is in the early stages of recovery

We forecast private non-residential construction spending growth of 3%/ 5%/ 5% in 2012-2014 driven by improving

manufacturing capacity utilization and declining office vacancy rates. Growth thus far in the recovery has been driven by

spending in the manufacturing, energy, and education sectors (Exhibit 22).

Exhibit 20: Improving ABI points to continued growth in non-res constructionYoy change in non-res spending vs. ABI (12-mo. lag)

Exhibit 21: Declining vacancy rates to drive continued recovery in capex Yoy change in non-res spending vs. Vacancy rate

Source: Census Bureau, National Association of Architects, Goldman Sachs Research estimates.

Source: Census Bureau, PPR, Goldman Sachs Research estimates.

Exhibit 22: Strongest end markets have been mftg, energy, and education Private non-residential construction growth (YTD 2011 vs. YTD 2010) by sector

Exhibit 23: Public construction spending should decline given tight budgets US Public construction spending vs. federal and local government spending

Source: Census Bureau. Source: Bureau of Economic Analysis, Census Bureau.

25

30

35

40

45

50

55

60

65

70

75

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

YoY change in non-residential structure spending (Left Axis)

ABI National Billing Index (1 year lagged; Right Axis)

10%

15%

20%

25%-30%-25%-20%-15%-10%-5%0%5%

10%15%20%

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

E

Real Non-residential Construction Spending (Left Axis) Vacancy rate - USA (Right Axis)

42%

24% 23%

13% 12% 10%

6% 3%

1%

(3%)

(8%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

Man

u-fa

ctur

ing

Pow

er /

Ene

rgy

Edu

catio

n

Rec

reat

ion

Com

m-

erci

al

Hea

lth

care

Off

ice

Tran

spor

t

Lodg

ing

Com

mun

-ic

atio

n

Rel

igio

us

-4%

-2%

0%

2%

4%

6%

8%

(15%)

(10%)

(5%)

0%

5%

10%

15%

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Public Construction Spending yoy change - LHSTotal Gov't Spending (Federal + Local) - RHS



Public construction spending: Challenged by government austerity measures

Government budgets are likely to remain tight given continued austerity measures, even after three consecutive years of

declines in real spending by state and local governments. Public spending on construction has historically been leveraged to overall

government spending (Exhibit 23).

Public construction spending data points have remained negative in recent months, with the US Census Bureau reporting

public construction put in place declining 4% in the first four months of 2012 versus declines of 6% and 4%, respectively, in 2011 and

2010. Our estimates call for public construction spending declining 5%/ 5%/ 5% in 2012-2014.

Market share trends: CAT and Deere have picked up share from CNH and Terex

The North American construction machinery market has average concentration relative to other machinery markets, with

the top three players holding over 60% of the market in 2011 (Exhibit 26). These players have consolidated market share

since the market peak in 2006, gaining nine percentage points of share over the last five years at the expense of smaller

players, including TEX, CNH, and OSK (Exhibit 24).

Exhibit 24: Top players have maintained their market share positions since market peak in 2006

Market share rankings 2011 vs. 2006

Source: Company data, Off Highway Research, Goldman Sachs Research estimates.

0%

5%

10%

15%

20%

25%

30%

35%

CAT DE Komatsu TEX CNH Volvo OSK Hitachi Const. MTW Doosan

2006

2011



The most significant product lines in North America are excavators (22% of revenues), aerial work platforms (15%), and

dozers (12%). Aerial work platforms are a significantly higher proportion of North America sales than for other regions due to more

stringent safety regulations and higher labor costs that drive higher productivity.

Exhibit 25: Excavators, AWPs, and dozers constitute about

40% of the North American market North America market share by product - 2011

Exhibit 26: CAT, DE, and Komatsu command over 60% share

in the North American market North America market share by revenue - 2011



Key data points to monitor

Monthly dealer stats – CAT, DE, and CNH publish regional dealer sales statistics on a monthly basis, which can be used for

intra-quarter sales trends by region.

ABI National Billings – The American Institute of Architects (AIA) publishes their index of architectural billings on a monthly

basis. Historically, trends in the ABI lead construction spending by 9-12 months.

Used equipment values – Rouse publishes used equipment values on a monthly basis, which historically have been correlated

with demand for new construction equipment.

Home inventory turnover (new home inventory to new home sales) – The Census Bureau publishes the number of new home

sales and the inventory of new homes on the market each month. The turnover of new homes is a useful indicator of

Crawler excavators

17%

Mini excavators

5%

Crawler dozers12%

Wheel Loader9%

Graders8%

Articulated Dump Trucks

4%

Rigid dump trucks2%

Aerial Work Platforms

15%

Cranes6%

Skid steer loaders

8%

Backhoe loaders

7%

Other7%

Caterpillar32%

John Deere17%Komatsu

13%

Terex7%

Case New Holland

5%

Volvo5%

Oshkosh4%

Hitachi Construction

3%

Manitowoc3%

Doosan3% Other

8%



construction spending required to replenish new home stock, although the overstock of existing homes in this cycle has

lowered the utility of this indicator.

Cement consumption – The PCA publishes historical data on cement shipments, production, and imports by region on a

monthly basis and also provides forecasts of cement consumption, which can be used as an indicator for construction activity.



South America: Demand mixed near-term, intact longer-term

We are constructive on a continued modest buildout in Brazil’s construction equipment fleet over the next three years

driven by visible public infrastructure projects that add 15% CAGR to total construction spending over the next three years.

We forecast construction equipment sales growth of 10%/ 8%/ 3% in 2012-2014, slower than 17% CAGR in 2006-2011 due to

a substantial installed base, as construction equipment sales have outpaced GDP growth by sevenfold over the past ten

years. For 2012-2014, we expect approximately US$50 billion in infrastructure investments necessary to the support the games and

tourists (Exhibit 29), which will add 15% CAGR to total construction spending over the next three years based on estimated 2011

total construction spending of $100 billion. Market share leader Caterpillar has gained share over the past five years, with Hitachi

Construction seeing market share erosion (Exhibit 32). Companies with the highest exposure to the South America construction

equipment market include Mills (100%) and Komatsu (12%). We are buyers of Mills, which is highly exposed to infrastructure

projects related to the FIFA 2014 World Cup and the Rio de Janeiro 2016 Olympic Games. The deadline for most of these projects is

an important catalyst for Mills earnings in the coming years and we believe that its volume of equipment rental will continue to

grow in the coming years, translating into accelerating earnings growth.

Exhibit 27: Equipment capex at cyclical highs as share of construction

spending, but highly visible secular growth to drive continued fleet build-outConstruction machinery sales vs. Brazil real construction spending


equipment sales in 17 of the past 22 years Actual sales vs. Regression estimate of sales (60% R2)



World Cup and Olympics provide visibility on medium term outlook

The Rio de Janeiro Olympics Committee has outlined 97 high priority infrastructure projects with a 2014-15 deadline, most of

which will begin construction in 2012-2013, and we expect strong fixed investment growth and continued fleet build-outs

-

100

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2003

2004

2005

2006

2007

2008

2009

2010

2011

S America - Construction equipment sales, indexed at 50 in 2000

Brazil - Real construction spending, indexed at 100 in 2000

16%12%

20%

14%

2% 4% 4%

-6%

36%

3% 5%

37%

18%

-21%

-4%

18%

-1%

7%

33%

27%

19%16%

30%

-36%

61%

42%

10% 8%3%

35%

37%

39%

41%

43%

45%

47%

49%

51%

53%

55%-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

1986

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2012

E

2013

E

2014

E

CAT S America equipment sales - % Chg YoY (Left Axis)Brazil Fixed investment - % Chg YoY (Right Axis)Age Index (Right Axis)



over the next three years for the Brazil construction industry to deliver on-time construction projects. Most of these projects are

already in development, giving a better idea of the infrastructure pipeline in Brazil until 2015-2016.

1. FIFA 2014 World Cup: There are 12 stadiums for the World Cup under new construction or significant refurbishment across

Brazil. As only five are more than 50% complete, we expect a pick-up of construction in the coming months. According to the

Federal government, direct investments related to the World Cup should reach US$28 billion, a sum that not only includes the

stadiums ($4 billion alone), but also the build-out and enhancement to the urban transportation systems, airports, hotels,

security, telecommunication and energy production to support the expected daily capacity crowds of 700,000.

2. Rio 2016 Olympics: In contrast to the World Cup, the Rio 2016 Olympic Games will be in a concentrated area. Of the total

infrastructure investments of US$11 billion directly related to the event, US$570 million will be devoted to the Olympic city to

accommodate the athletes; US$1.8 billion will be spent to build sports arenas and media centers to broadcast the games; US$3

billion will be spent on a new subway line to connect the Barra da Tijuca and Ipanema areas of Rio de Janeiro; US$2.7 billion to

build four new express highways; and US$2.6 billion from a combination of public and private sector funds will be devoted to a

revamp of the port and downtown area.

Exhibit 29: $50 billion in short-term investments for the World Cup and Olympics adds 15% CAGR to construction spending

Short-term infrastructure projects related to the FIFA 2014 World Cup, Rio 2016 Olympic Games and supporting infrastructure

Source: Goldman Sachs Research estimates.

Strong infrastructure funding growth from BNDES to support fleet buildouts

In the last couple of years, the majority of the Brazilian infrastructure projects have been funded by the federal government through

the Brazilian Development Bank (BNDES). Since 2003, annual disbursements from BNDES have increased around sevenfold, from

US$12 bn to US$83 bn. By sector, disbursements have been to the industrial sector (45%), to infrastructure (35%), to farming (5%)

and to trade and services (15%). BNDES has been one of the most pro-active multilateral banks globally. According to recent

4

11

18

162

0

15

30

45

60

World Cup stadiums

Rio 2016 Olympics

Subways Highways Airports TOTAL

Infr

astr

uctu

re S

pend

($U

S bn

)

50



conversations held with BNDES, it remains strongly committed to support infrastructure, supplying credit to heavy

construction projects. Total disbursements for infrastructure are expected to grow 25% in 2012 and 30% in 2013.

Long-term outlook driven by infrastructure “catch-up”

Over the longer-term horizon, we believe construction equipment capex growth will be driven by a narrowing of the

infrastructure gap between South America and other emerging economies. While the degree of urbanization of most countries

in South America has reached, and in some cases surpassed, the levels of developed economies, the necessary provision of

transportation and utilities networks has not caught up with the expansion of the population in the region’s largest cities. We expect

this infrastructure “catch-up” to drive secular growth in the South America equipment markets over the longer-term horizon

(Exhibits 30-31).

Exhibit 30: Road density in Brazil is relatively high…but quality of roads is

poor Road density (left chart) vs. road quality (right chart)

Exhibit 31: Quality of overall infrastructure in S. America is substantially

below the Asian Tigers average Global Competitiveness Index, 1= extremely underdeveloped; 7= sufficient and

reliable

Source: World Bank, World Development Indicators.

Source: World Economic Forum.

21

5

13

24

41

0

5

10

15

20

25

30

35

40

45

BRA CHN RUS S Af r. US

Roads in km per 1000 workers

6

54

80

17

67

0

10

20

30

40

50

60

70

80

90

BRA CHN RUS S Afr. US

Paved roads, % of total roads

3.5 3.6

5.5

3.6 3.7

4.6

3.52.9

0

1

2

3

4

5

6

7

ARG BRA CHI COL ECU PAN PER VEN

(Idx pts, 1-7 scale) Asian Tigersweighted avg (6.0)



CAT has delivered modest share gains in recent years, Hitachi Construction has lost share

Caterpillar and Komatsu are the top two players in the South American construction machinery market (Exhibit 34). CAT and

several smaller players, including Volvo, Oshkosh, Deere, and Manitowoc, have been able to gain share from Komatsu and Terex

over the past five years (Exhibit 32). Over the past several years, Chinese brands have competed to gain a foothold in the

South American market through both imports as well as assembly factories in Brazil. Volvo’s share has benefitted from its

Shandong Lingong (SDLG) subsidiary (owns 70%), which has been the market leader of Chinese brands in Brazil. In addition, Sany

Heavy is looking to aggressively expand its share in South America (which we currently estimate is in line with Hitachi Construction).

Brazil is one of Sany’s focus markets in its goal to expand overseas sales to 25% of total revenue by 2015 (7.5% in 2011).

The most significant product lines in South America are excavators (17% of revenues), cranes (16%), motor graders (16%),

and compactor rollers (15%).

Exhibit 32: Komatsu, Hitachi Construction and Terex have lost share over the past five years to CAT, Volvo, and JLG (Oshkosh)

Market share rankings 2011 vs. 2006

Note: Excludes certain market players due to lack of regional sales disclosures. Source: Company data, Goldman Sachs Research estimates.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

CAT Komatsu CNH TEX Volvo OSK DE MTW Hitachi

2006

2011



Exhibit 33: Excavators, cranes, and graders make up the

majority of equipment revenue South America market share by product - 2011

Exhibit 34: Caterpillar and Komatsu have the leading

share in South America South America market share by revenue - 2011

Source: Sobratema, Goldman Sachs Research estimates.

Note: Excludes certain market players due to lack of regional sales disclosuresSource: Company data, Goldman Sachs Research estimates


Construction development of World Cup projects: The Brazilian Ministry of Sports releases updates on the development of

the infrastructure projects for the World Cup every six months. The detailed reports are an important tool to assess construction

works and gives updated schedules for completion. 2012 will mark the peak of stadium construction/refurbishment where 8 of

the 12 World Cup stadiums will be completed.

Cement consumption data: One of the leading indicators of heavy construction activity is cement consumption, which is

published by the Brazilian Cement Association (SNIC).

Hydraulic excavators

17%

Dozers5%

Shovel loaders

9%

Motor graders16%

Compactor rollers15%

Cranes16%


10%

Back hoe loaders

10%

Skid steer loaders

1%

Telehandlers1%

Caterpillar39%

Komatsu26%

Case New Holland

10%

Terex9%

Volvo6%

Oshkosh3%

John Deere3%

Manitowoc3%


1%



Europe machine sales to remain near trough

While construction equipment sales are down 70% from prior cycle highs, we expect construction spending to remain in

recession through at least 2013, driving our expectations for machinery sales to remain well below historical levels. We

forecast 0%/6%/3% construction machinery capex growth in 2012-2014 driven by some modest level of replacement capex

off a historical trough in capital stock (Exhibit 35), partly offset by a continued contraction in construction investment

(Exhibit 37). We forecast a construction spending contraction of 2% in 2012, contraction of 1% in 2013, and modest 2% growth in

2014, with residential construction the closest to bottoming, in our view, while the risk to civil construction spending remains to the

downside.

Exhibit 35: Equipment demand bouncing off trough levels

Construction machinery sales vs. construction spending

Exhibit 36: Europe equipment capex is driven by euro area fixed

investment and fleet age CAT EAME equipment sales vs. Euro area fixed investment, fleet age (65% R2)



Construction activity to remain under pressure, led by civil

In summary, we continue to see Europe, as a whole, facing pressure on overall construction spending in 2012 and 2013, with only a

slight recovery forecast in 2014. Within this, we see civil construction providing the main drag, with residential seeing some

recovery in 2012. The geographical picture remains highly mixed, however. In general, we see some improvement in areas of

Northern and Eastern Europe, with Southern Europe and France remaining relatively weak.

40

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2006

2007

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2009

2010

2011

2012

E

2013

E

2014

E

W Europe - Construction equipment sales, indexed at 100 in 1999

W Europe - Real construction spending, indexed at 100 in 1999

-11%

19%

27%

-2%

8%

34%

-3%

4% 1% 2%

15%

26%

18% 16%

34%

11%

-46%

14%

49%

0%6% 3%

30%

35%

40%

45%

50%

55%-60%

-40%

-20%

0%

20%

40%

60%

1993

1994

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1996

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2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

CAT EAME equipment sales - % Chg YoY (Left Axis)Europe Fixed investment - % Chg YoY (Right Axis)Age Index (Right Axis)



Exhibit 37: GS construction forecasts % Yoy change (real)


Residential Construction Civil Construction Non-Residential Construction Total ConstructionCountry 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014EAustria -0.7% 0.1% 2.6% 0.0% 0.0% 2.5% 0.1% 0.1% 1.1% -0.3% 0.1% 2.2%Belgium -2.8% 0.1% 1.6% 2.0% -3.0% 2.5% -2.7% -1.3% 1.1% -1.8% -1.0% 1.6%Denmark 0.9% 0.9% 1.9% 0.0% 2.0% 2.5% -1.0% 0.9% 1.9% 0.2% 1.2% 2.0%Finland 0.1% 0.1% 1.2% 0.0% -2.0% 2.5% -0.7% 0.1% 1.2% -0.2% -0.3% 1.5%France -1.3% -3.8% 1.8% -5.0% -5.0% 0.0% -3.7% -1.8% 1.9% -2.8% -3.5% 1.5%Germany 2.9% 3.0% 3.0% 0.0% 0.0% 2.5% 1.5% 1.4% 3.3% 2.0% 2.0% 3.0%Ireland -5.8% -3.4% 1.0% -10.0% -10.0% 2.5% -6.9% -3.5% 1.0% -7.6% -5.8% 1.5%Italy -4.4% -1.5% 1.0% -10.0% -10.0% 0.0% -5.1% -2.5% 1.0% -5.8% -3.5% 0.8%Netherlands -2.5% -1.3% 1.3% -5.0% -5.0% 2.5% -2.8% -1.3% 1.3% -3.2% -2.2% 1.6%Norway 3.0% 3.7% 2.4% 5.0% 5.0% 2.5% 5.0% 5.0% 2.4% 4.3% 4.6% 2.4%Portugal -5.4% 0.0% 1.0% -10.0% -10.0% 0.0% -10.0% -5.0% 1.0% -8.2% -4.6% 0.7%Spain -6.3% 0.0% 1.0% -17.0% -15.0% -5.0% -10.0% -5.0% 1.0% -10.8% -6.0% -0.6%Sweden -1.5% -0.7% 2.5% 1.0% 1.0% 2.5% -0.9% 1.5% 2.5% -0.4% 0.6% 2.5%Switzerland -3.2% 0.0% 1.0% 1.0% 2.0% 2.5% -3.1% -1.6% 2.5% -2.2% 0.0% 1.8%UK 1.0% 1.0% 2.1% -5.0% -2.0% 2.5% -0.1% 1.0% 2.0% -0.4% 0.6% 2.1%Total Western Europe -0.9% 0.0% 2.0% -5.2% -4.4% 1.0% -2.1% -0.4% 2.0% -2.2% -1.1% 1.8%

Czech Republic -1.5% 1.5% 5.4% -5.0% -5.0% -2.0% 1.5% 1.0% 3.1% -2.3% -1.8% 1.1%Slovakia -2.6% 1.5% 6.7% 2.0% -5.0% -2.0% 0.0% 0.7% 4.9% 0.0% -0.9% 3.2%Hungary -1.6% 1.1% 4.9% 0.0% -5.0% -2.0% -0.3% 0.4% 4.2% -0.6% -1.3% 2.4%Poland 1.8% 3.6% 4.7% 4.8% -8.5% -2.6% 2.6% 4.2% 5.2% 3.3% -1.3% 2.0%Eastern Europe Total 0.2% 2.6% 5.0% 1.3% -7.0% -2.4% 1.8% 2.7% 4.6% 1.2% -1.4% 1.9%

Europe Total -0.9% 0.1% 2.0% -4.5% -4.7% 0.6% -1.8% -0.2% 2.2% -2.0% -1.1% 1.8%



Residential construction closest sector to bottom

Residential construction has seen the biggest fall since the peak, down 20% in Europe from 2007-2011. For a number of

countries, housing starts are now at all time low levels historically, which suggests limited downside and the potential for

some recovery. However, overcapacity remains an issue in a number of countries, especially in areas like Spain, which makes the

potential for recovery more limited. On the other hand, housing starts in France are at more normal levels historically, but given the

prospects for the removal of tax credits for new build housing, we see a French residential construction recovery as more vulnerable.

Exhibit 38: Housing construction has come under most pressure Western Europe absolute construction spend (indexed at 1.0 in 1990)

Exhibit 39: Low activity and low supply is the ideal combination Housing stock per household vs. housing starts as percentage of pre-crisis average

Source: Euroconstruct.

Source: Datastream, Country statistics institutes, Goldman Sachs Research estimates.

In the near-term, housing starts and permits have started to come under pressure in a number of countries. While adverse weather

conditions at the beginning of the year explains some of the weakness, the trends remain concerning, partially offset by stronger

data points from the relatively healthier UK and German markets (Exhibit 40).

This bifurcation of performance is also evidenced in bank lending survey data. Looking at survey responses for 1Q12, we can

subtract net survey responses on mortgage demand from those on mortgage criteria to get a sense on whether mortgage demand

is outpacing tighter criteria or vice-versa. The results demonstrates that Northern and Eastern European countries are generally

showing stronger lending trends, while Southern European countries less so (Exhibit 41).

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011F

2012E

2013E

2014E

Western Europ

e Absolute construction

spen

d (1990 inde

xed to 1)

New Residential Renovation Residential Non‐Residential Civil

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

0% 20% 40% 60% 80% 100% 120%

Hou

sing

stock pe

r hou

seho

ld

Housing Starts (or permits) ‐ Latest as a % of pre‐crisis average (2000‐2007)

France

Germany

Spain

UK

Italy

Average = 56%

Average = 1.18



Exhibit 40: Starts data under some pressure Housing starts (or permits) - % yoy change

Exhibit 41: Lending survey data highlights a mixed picture Net % response on mortgage demand – net % response on mortgage lending

criteria (1Q12)

Source: Datastream, Country statistics institutes, Goldman Sachs Research estimates.

Source: ECB, Central banks of individual countries.

Non-Residential recovery remains challenged by weak economic activity and tight lending

Historically, non-residential construction in Europe has tended to lag residential spending by approximately one year. We

would thus naturally expect recovery to be more delayed than in residential.

The European Architectural Barometer is a new survey of architects similar to the US Architectural Billings Index (albeit with a

shorter track record). Results suggest signs of improving order books in Germany, with static developments in France and

the UK. Southern Europe continues to be weak, as does the Netherlands (Exhibit 42).

Lending conditions also support some ongoing pressure in non-residential construction at the Europe-wide level, with the latest

ECB lending surveys showing weaker demand for commercial lending and tighter lending criteria (Exhibit 43). The net of

these two tend to provide a good one-year lead indicator of non-residential construction activity, and current trends point to

ongoing near-term weakness.

‐80%

‐60%

‐40%

‐20%

0%

20%

40%

60%

80%

Q1 20

08

Q2 20

08

Q3 20

08

Q4 20

08

Q1 20

09

Q2 20

09

Q3 20

09

Q4 20

09

Q1 20

10

Q2 20

10

Q3 20

10

Q4 20

10

Q1 20

11

Q2 20

11

Q3 20

11

Q4 20

11

Q1 20

12

France Germany Spain UK Italy

6047

28 2412

‐56‐68

‐90‐99 ‐100

‐113‐140

‐120

‐100

‐80

‐60

‐40

‐20

0

20

40

60

80

Poland

Norway US

Germany

UK

Spain

ECB

Portugal

France

Nethe

rlands

Italy



Exhibit 42: Improving order books in Germany offset by weakness in

Southern Europe and the Netherlands European Architectural barometer survey

Exhibit 43: Lending survey data implies further pressure on non-residential ECB net % response on commercial loan demand and commercial lending

standards

Source: Archvision.

Source: ECB.

Civil construction outlook is grim on back of fiscal austerity

Pressure is building for more infrastructure from some. While overall construction activity remains below even its downward

trend relative to overall GDP, infrastructure spending relative to GDP is little changed over the last 10 years. Overall European

spending on infrastructure has remained around 2.5% of GDP, suggesting economic improvement is needed to renew growth.

Nevertheless spending in the UK and Germany has remained significantly below peers for some time, creating an arguable need for

more infrastructure spend (Exhibit 44). The same cannot be said of Southern Europe and the Czech Republic.

Ability to pay is more of an issue. The bigger issue for many remains high levels of budget deficit, with this being a good 1-2

year indicator of civil construction activity (Exhibit 45). This varies by country, but should generally lead to spending being under

pressure for Europe as a whole.

Focus likely to shift more to power and communications. Despite budgetary pressures, infrastructure spending with a positive

knock-on economic impact is necessary for many European countries. The focal point for spending appears to be shifting more

towards power and telecommunications, as exemplified by the UK government’s infrastructure plan, which calls for the greatest

spending increases in these areas. This trend, in our view, is driven by: (1) rapidly developing technology leading to a need for more

regular investment, and (2) financing is more dominated by the private sector, unlike traditional infrastructure where government

financing remains important, at least in part.

30

40

50

60

70

80

90

100

110

120

130

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

UK Germany France Spain Italy Netherlands

‐60

‐40

‐20

0

20

40

60

80

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

Commercial RE standards Commercial RE demand



Exhibit 44: Infrastructure spending to GDP lagging in Germany and UK Spending on civil construction as percentage of GDP by country

Exhibit 45: Infrastructure spend in Europe follows budget deficits

Civil construction spending vs. budget balances

Source: Euroconstruct.


CAT and Volvo have expanded their share in a fragmented market

CAT and Volvo are the top two players in the European construction machinery market, each commanding almost one-fifth of the

market (Exhibit 46). Similar to North America, the top five players in Europe hold over 60% share (Exhibit 50). CAT and Volvo have

consolidated market share over the past five years, with Komatsu, CNH, and Terex the relative under-performers.

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%

Total Infrastructure as a % of G

DP (201

1E)

Total Infrastructure as a % of GDP (Average 2000‐11)

Austria

Belgium

Denmark

FinlandFrance

Germany

Ireland

ItalyNetherlands

Norway

Portugal

Spain

Sweden

SwitzerlandUK

Czech Republic

Slovakia Hungary

Poland

Europe

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

2014

E

Budget balance as a % of GDP (t‐1) Civil construction (% yoy)



Exhibit 46: CAT and Volvo have consolidated market share since market peak in 2006 Market share rankings 2011 vs. 2006

Source: Company Data, Off Highway Research, Goldman Sachs Research estimates.

The most significant product lines in Europe are crawler excavators (25% of revenues), wheeled excavators (14% of revenues),

wheeled loaders (14%), and cranes (10%).

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

CAT Volvo Komatsu TEX JCB Liebherr Hitachi CNH DE Manitou Doosan MTW OSK

2006

2011



Exhibit 47: Excavators, AWPs, and loaders constitute

about 60% of the European market Europe market share by product - 2011

Exhibit 48: CAT and Volvo command about 35% of the

European market Europe market share by revenue - 2011




Monthly dealer stats – CAT, DE, and CNH publish regional dealer sales statistics on a monthly basis, which can be used for

intra-quarter sales trends by region.

Cement volumes – data is released on a country by country basis (including Germany, the UK, France, Italy, Spain, Greece) and

is an indicator of construction activity levels.

Housing starts/permits –data on housing permits and starts is available on a monthly basis for several European countries,

including Germany, the UK, France, Spain, and Italy, among others.

European architectural barometer survey – Arch-Vision publishes its survey it architectural survey results on a quarterly basis,

using input from six countries (France, Germany, Italy, Spain, the Netherlands and the UK). The report is an important indicator

for the future construction activity.

Bank lending surveys for home mortgages and commercial loans are key leading indicators for construction activity. The ECB

release survey results on a country by country basis and are made available on a quarterly basis.

Crawler excavators

25%

Wheel excavators14%

Crawler dozers2%

Wheel Loader14%

Compact Wheel Loader

6%

Graders1%

Articulated Dump Trucks

3%

Rigid dump trucks2%


4%

Cranes10%

Skid steer loaders1%

Backhoe loaders3%

Telehandlers (RTLTs -

Telescopic)11%

Other4% Caterpillar

18%

Volvo18%

Komatsu10%Terex

9%

JCB7%


5%

Liebherr5%

Case New Holland

4%

Doosan3%

Manitou3%

John Deere2%

Manitowoc2%

Oshkosh2% Other

12%



China: expect yoy growth to trough in 2Q and sluggish recovery mainly on low base

We believe yoy growth will trough in 2Q and start recovering in 2Q due to: (1) a significantly lower base in 2H11; and (2) a pick up in

infrastructure construction activities helped by easing measures and new infrastructure projects. However we think the recovery will

be slow and gradual as (1) property new starts are likely to remain weak, and (2) given current large and underutilized fleets. We

prefer concrete machinery to other major categories, with resilient growth mainly due to the ongoing ready-mix concrete

penetration toward third- and fourth-tier cities. We are optimistic on opportunities for Chinese manufacturers to build their export

business because: (1) Chinese players have demonstrated solid improvement in product quality and strong commitment to R&D, (2)

we believe Chinese producers will continue to benefit from a cost advantage, and (3) they are deploying capital to establish global

distribution via acquisitions and new factories (for example, Sany Heavy opened its Brazil factory in 2010).

Exhibit 49: Infra + Property FAI is better than total FAI in explaining the

monthly volume growth with 6-9 months’ lead...

Exhibit 50: ...excavator growth has good correlation with property new starts

Source: CEIC, China Construction Machinery Association, Gao Hua Securities Research.


Muted construction machinery growth in 2012: infrastructure recovery and property slowdown

We continue to expect muted growth in the China construction machinery industry (8% yoy) in 2012 driven by a modest

infrastructure FAI recovery and continuous slowing in property FAI. In particular, we expect property investments to grow by 11%, a

significant reduction from the 30% growth in 2011 but decidedly not a crash. We also expect infrastructure investments to grow by

12%, a recovery from 3% in 2011 as credit conditions continue to loosen and the potential new projects to kick off in 2H12.

January-April accumulated excavator/loader/dozer sales growth was -42%/-26%/-44% respectively, which was mainly due to: (1) a

slowdown in infrastructure and property investment growth (i.e. railway investment); (2) weak property new starts; and (3) low

utilization levels. Although we expect yoy growth will improve in 2H due to easier comps, we maintain our cautious view on the

sector, especially on earth-moving equipment, i.e. excavators/dozers.

0%

5%

10%

15%

20%

25%

30%

35%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11

Excavator - 12-month rolling change Loader - 12-month rolling change

Infra + Prop FAI rolling YOY FAI rolling YOY

Ex

ca

vato

r/ L

oa

der v

olu

me

yo

y g

row

th

FA

I YO

Y%

6-9 months

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11

Excavator - 12-month rolling change

Property new Start rolling YOY

Ex

ca

vato

r v

olu

me

yo

y g

row

th

Ne

wS

tart

YO

Y%



Exhibit 51: Domestic construction machinery sales has high correlation with

Infra + Property FAI...

Exhibit 52: ...historically domestic construction machinery revenue

represented around 3% of total Infra + Property FAI


Note: the Infrastructure and property FAI numbers here are based on the absolute

numbers in 2010 and yoy growth each year.


Exhibit 53: We forecast 8% growth in China domestic construction machinery industry in 2012

Source: CEIC, China Construction Machinery Association, Gao Hua Securities Research estimates.

R² = 0.9824

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

0 5,000,000 10,000,000 15,000,000

Infra + Property FAI

Domestic construction

machinery sales

Rmb mn

Rmb mn

2004 100,672 2,850,021 3.5%

2005 102,276 2% 3,498,815 2.9%

2006 122,870 20% 4,284,957 2.9%

2007 158,472 29% 5,261,820 3.0%

2008 185,428 17% 6,365,574 2.9%

2009 257,400 39% 8,215,892 3.1%

2010 368,559 43% 10,265,860 3.6%

2011 436,514 18% 12,125,383 3.6%


machinery revenue

CM/(infra

+ prop FAI)Growth

Total infra

+ prop FAIRmb mn

Utility Railway HighwayUrban public

transitWaterway Water conservancy Other

2004 564,097 87,561 510,143 35,707 54,351 76,784 57,935 1,386,577 1,463,444 2,850,021 100,672 2,850,021 3.5%

2005 739,531 127,577 593,806 47,990 79,678 83,848 62,936 1,735,365 1,763,450 3,498,815 102,276 3,498,815 2.9%

2006 831,972 205,271 668,032 77,311 101,669 95,252 94,084 2,073,590 2,211,367 4,284,957 122,870 4,284,957 2.9%

2007 913,505 246,735 711,454 104,448 113,666 113,445 135,141 2,338,393 2,923,427 5,261,820 158,472 5,261,820 3.0%

2008 1,054,185 397,737 753,430 127,322 121,282 145,776 170,027 2,769,759 3,595,815 6,365,574 185,428 6,365,574 2.9%

2009 1,354,628 666,210 1,055,555 203,333 167,126 221,871 235,786 3,904,509 4,311,382 8,215,892 257,400 8,215,892 3.1%

2010 1,453,516 749,487 1,276,166 236,070 207,905 274,677 312,345 4,510,165 5,755,695 10,265,860 368,559 10,265,860 3.6%

2011 1,508,749 580,852 1,401,230 262,509 206,242 319,449 381,215 4,660,246 7,465,137 12,125,383 436,514 12,125,383 3.6%

2012E 1,659,624 522,767 1,611,415 301,886 237,178 399,311 495,579 5,227,760 8,286,302 13,514,061 472,992 13,514,061 3.5%

2013E 1,908,568 548,905 1,804,784 377,357 272,754 499,139 644,253 6,055,761 9,943,562 15,999,323 559,976 15,999,323 3.5%

Utility Railway Highway

Urban public

transit Waterway Water conservancy Other

2005 31% 46% 16% 34% 47% 9% 9% 25% 21% 23% 2%

2006 13% 61% 13% 61% 28% 14% 49% 19% 25% 22% 20%

2007 10% 20% 6% 35% 12% 19% 44% 13% 32% 23% 29%

2008 15% 61% 6% 22% 7% 29% 26% 18% 23% 21% 17%

2009 29% 68% 40% 60% 38% 52% 39% 41% 20% 29% 39%

2010 7% 13% 21% 16% 24% 24% 32% 16% 34% 25% 43%

2011 4% -23% 10% 11% -1% 16% 22% 3% 30% 18% 18%

2004-11 CAGR 15% 31% 16% 33% 21% 23% 31% 19% 26% 23% 23%

2012E 10% -10% 15% 15% 15% 25% 30% 12% 11% 11% 8%

2013E 15% 5% 12% 25% 15% 25% 30% 16% 20% 18% 18%

YOY

Infra FAI breakdown

Total Infra Property

Infra FAI breakdown

Rmb mn Total Infra Property

Total infra + prop

FAI


machinery revenue

CM/(infra

+ prop FAI)

Total infra

+ prop FAI

Total infra + prop

FAI

Total construction

machinery domestic

revenue



Property: moderate slowdown in commodity housing, balanced by social housing pickup

Our strategists expect total property completions will grow by 11% in 2012, assuming 5% growth in commodity housing, other

residential housing and also non-residential property (for more details please refer to ‘Social housing #8: Policy conviction remains,

completions pick up yoy’ by Helen Zhu, Feb 23, 2012).

Residential private property (commodity property): Our strategists think the most likely outcome is a combination of a

substantial slowdown in new starts but continued construction of existing projects, thus a moderate slowdown in private residential

(commodity) housing investment.

Social housing: Our strategists expect the slowdown in commodity property to be somewhat offset by a greater investment in

social housing. While the new starts target for 2012 is 7 mn units, lower than the 10 mn target in 2011, our strategists estimate that

completions will be up significantly in 2012 (due to long construction cycle). Our strategists estimate that every 1% decline in

commodity property can be offset by a 2% growth in social housing.

Exhibit 54: We expect 11% growth in property completions in 2012

Property completion, breakdown by type, 2010-2013E

Source: NBS, CEIC, MOHURD, GS Global ECS Research estimates.

Exhibit 55: We think social housing can help buffer a slowdown in commodity housing

Sensitivity analysis of total property completion to social housing completion units and commodity housing growth

Source: NBS, CEIC, MOHURD, GS Global ECS Research estimates.

Residential housing

Growth rate

Commod

housing Growth rate

Social

housing

new starts

Social

housing

completed

Growth

rate

Other

residential

housing

Growth

rate

Growth

rate

2010 885 7% 612 3% 336 107 150 1,754 7% 6% 12%

2011E 1,198 35% 717 17% 562 166 55% 109 -27% 2,190 25% 8% 17%

2012E 1,258 5% 753 5% 393 301 81% 109 0% 2,420 11% 12% 26%

2013E 1,321 5% 790 5% 337 550 83% 109 0% 2,770 14% 20% 38%

Non-

residential

Floor

space

completed

(sqm mn)

Total floor

space

completed

Social

housing %

of total

Social

housing %

of

residential

11% 101 201 301 401 501

-5% -2% 3% 8% 12% 17%

0% 0% 5% 9% 14% 18%

5% 2% 6% 11% 15% 20%

10% 3% 8% 12% 17% 22%

15% 5% 10% 14% 19% 23%

Social housing 2012 completion (mn units)

Co

mm

od

ity

ho

usin

g

gro

wth



Exhibit 56: We expect the construction load will rise and reach a peak in 2012E

Timeline of social housing construction progress

Source: GS Global ECS Research estimates.

Infrastructure: modest recovery emerging

We expect infrastructure investments will recover to 12% growth in 2012 from 3% in 2011. Our classification of infrastructure

investments includes utilities (electricity/water/gas production and supply), railway, highway, urban public transit, waterway and

water conservancy, etc. We expect continuous pressure on local government funding due to a combination of restrictions on Local

Government Funding Vehicles (LGFV) borrowing and decreasing revenue from land sales, and we think this may prevent a full-

blown infrastructure investment recovery (despite a general credit loosening) as most infrastructure projects are funded by local

governments.

1Q10 2Q10 3Q10 4Q10 1Q11E 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E

2010 5.9m units total starts

5.9 m units % Structural construction

1Q 0.6 10% 0.6 0.6 0.6 0.6 0.6 0.6 Wiring, pipes and renovation etc

2Q 0.9 15% 0.9 0.9 0.9 0.9 0.9 0.9 0.9 Allocation, move in

3Q 2.1 35% 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1

4Q 2.4 40% 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4

2011 10m units total starts

10 m units %

1Q 1.0 10% 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

2Q 2.0 20% 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

3Q 4.0 40% 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

4Q 3.0 30% 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0


7 m units %

1Q 0.7 10% 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7

2Q 2.1 30% 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1

3Q 2.8 40% 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8

4Q 1.4 20% 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4


6 m units %

1Q 0.6 10% 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

2Q 1.8 30% 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8

3Q 2.4 40% 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4

4Q 1.2 20% 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2

By quarter (m units)

Under construction * 0.6 1.5 3.5 5.9 6.3 8.3 11.4 14.4 13.1 12.8 15.6 16.0 14.6 12.4 11.8 12.3 10.2 7.4 6.0 5.4

Marked for completion 0.6 0.9 2.1 2.4 1.0 2.0 4.0 3.0 0.7 2.1 2.8 1.4 0.6 1.8

Ready to move in 0.6 0.9 2.1 2.4 1.0 2.0 4.0 3.0 0.7 2.1 2.8 1.4

By year (m units) 2010E 2011E 2012E 2013E

Under construction 11.5 40.5 57.5 51.1

Marked for completion 0.6 3.0 5.4 9.8

Ready to move in 0.0 1.5 4.4 10.0

By year (sqm mn) 2010E 2011E 2012E 2012E

Under construction 646 2273 3227 2870

Marked for completion 33 166 301 550

Ready to move in 0 83 249 562



Exhibit 57: Infrastructure investments remain weak Infrastructure FAI and yoy growth, January 2004 – April 2012

Exhibit 58: Utility, railway and highways make up over 70% of total

infrastructure FAI Infrastructure FAI breakdown, 2004-2011

Source: CEIC, Gao Hua Securities Research.

Source: CEIC, Gao Hua Securities Research.

Product outlook: Strong concrete machinery vs. weak excavator

Weaker-than-expected excavator demand

Excavator demand has been very weak since January 2012, and total industry sales for January-April declined by 42% compared to

the same period last year. Sany Heavy, the No.1 player in 2011, recorded a 19% yoy sales decline in January-April, but still

outperformed other major manufacturers. All dealers we visited recently expect a decline in revenue for calendar year 2012.

We see three trends for the excavator market:

Move from mid-size to small and large: A structural shift away from mid-range excavators to both large and small tonnage

machines as road/railway/property types of construction jobs remain weak, while smaller jobs, such as gardening and mining

demand (where large excavators are used) appear more robust. We expect domestic brands to achieve lower ASPs due to their

limited exposure to the large-tonnage segment.

East to West: Increasingly customers are buying new equipment in developed areas, such as Jiangsu, and then taking the

machines to western regions where the market is less mature.

-10%

0%

10%

20%

30%

40%

50%

60%

70%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Jan-04 Nov-04 Sep-05 Jul-06 May-07 Mar-08 Jan-09 Nov-09 Sep-10 Jul-11

Infrastructure FAI

YoY - infra

Mo

nth

lyin

fra

str

uctu

re F

AI (

RM

B)

YO

Y g

row

th

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2004 2005 2006 2007 2008 2009 2010 2011

Other

Water conservancy

Waterway

Urban public transit

Highway

Railway

Utility

75%

Rmb mn



The strong become stronger: In our view, the dealers of stronger brands have stronger balance sheets and are receiving more

support from the OEMs. As a result they can afford to undertake more 'old for new' exchanges to incentivize sales. The

proportion of 'old for new' sales ranges widely, from zero to 80%, for different dealers.

Concrete machinery – best-performing segment ytd and is still growing fast

Concrete machinery has been the best-performing segment ytd, with the duopoly of Sany Heavy and Zoomlion reporting 15%/ >40%

yoy growth in 1Q2012.

We have identified three trends in concrete machinery:

Downstream consolidation: Consolidation between mixing plants continues and as a result, while the profitability of stand-

alone truck-mounted pump rental entities (most of which are ‘mom and pop’ shops, which now account for less than 20% of

total sales in Jiangsu vs. over 30% nationally) has fallen, mixing plants have to build their pump capacity according to their

maximum mixing capacity, in an effort to defend against competition.

Penetration into lower tier cities: Using Jiangsu as an example (the most mature regional market in China, with ready mixed

concrete usage at around 65% and well above the national average level of less than 50%), the majority of new equipment

demand in Jiangsu comes from lower-tier cities in the north of the province (less developed than southern Jiangsu). For

example cities such as Baoying, Gaoyou and Yizheng are all planning to double the number of mixing plants in the region. In

addition, we have begun to see customers purchasing equipment in Jiangsu then using it elsewhere.

Product upgrade: The mainstream product is now 40 mn-plus truck mounted concrete pumps vs. 30 mn-plus a couple of years

ago.

Exhibit 59: January-April excavator sales declined by 42% yoy... China excavator sales volume and yoy growth, Jan 06-April 12

Exhibit 60: ...while Zoomlion is reporting strong growth in its concrete

machinery sales

Source: China Construction Machinery Association, Gao Hua Securities Research.

Source: Company data, Gao Hua Securities Research.

-100%

-50%

0%

50%

100%

150%

200%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

units Excavator unit volume (LHS)

yoy growth - monthly volume (RHS)

yoy growth - 12 month average monthly volume (RHS)

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12



Exhibit 61: January-April loader sales declined by 26% yoy...

Exhibit 62: ...we also see -47% yoy for January-April truck crane sales



-100%

-50%

0%

50%

100%

150%

200%

250%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

units China monthly loader volume (LHS)



-100%

-50%

0%

50%

100%

150%

200%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

units China monthly truck crane volume (LHS)





Market share trends: domestic players continue to gain share in excavators

Among all the major construction machinery categories, the excavator category is the only one where foreign brands still

dominate the market. However, we are seeing domestic manufacturers catching up very quickly, with aggregate product and

dealer development driving share to 40% in 2011 from 23% in 2006. We expect domestic manufacturers’ market share to continue to

grow, driven mainly by: (1) further improvement in product quality i.e. efficiency and durability; (2) increased penetration into the

lower tier cities; and (3) greater flexibility in sales terms, i.e. providing more favorable finance leasing terms to clients.

Concrete machinery – duopoly with Zoomlion gaining market share from Sany Heavy

In contrast to the fragmented excavator market, Sany Heavy and Zoomlion have over 80% market share in the concrete machinery

industry and over 90% market share in truck-mounted concrete pumps. Zoomlion has been aggressively gaining market share since

4Q11, mainly due to: (1) improved product quality, especially after digesting the key technologies from CIFA; (2) increased

sales/service staff to compete with Sany Heavy; and (3) Zoomlion has the potential to offer better sales terms i.e. lower down

payment by clients because they have healthier balance sheet than Sany Heavy.

Exhibit 63: Domestic manufacturers’ market share is

expanding quickly... Market share comparison incl. export, 2006-2011

Exhibit 64: ...Sany Heavy is widening its competitive

edge from other players January – April excavator market share by company



77% 79%74% 72% 69%

60%

23% 21%26% 28% 31%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011

Foreign Brands Domestic Brands

HCM,

7.6%

Komatsu,

8.7%

Doosan, 8.7%

Hyundai,

7.8%

Kobelco,

7.4%

Volvo,

5.9%

Caterpillar,

5.7%

Sany Heavy,

15.1%

Lonking,

2.7%

Liugong,

3.9%

Zoomlion,

1.9%

Others,

24.7%



Exhibit 65: Concrete machinery market is more consolidated 2010 market share by company, truck mounted concrete pumps and truck mixers



Equipment sales data – released by China Construction Machinery Association (CCMA) each month, including monthly sales

volume across main categories i.e. excavator, loader, dozer, truck cranes.

FAI data – released by National Bureau of Statistics (NBS) each month, with detailed breakdown of fixed asset investment data

across industries.

Loan data – released by People’s Bank of China (PBOC) each month, the data that is closely related to construction machinery

sector is the medium & long-term loans to non-finance industries.

Monthly Komtrax – released by Komatsu, which is the average working hours of the Komatsu excavators installed in China,

showing the actually utilization of excavators.

Sany

54%

Zoomlion

42%

Hongdeli

2%Xingma Autos

1%

XCMG

0%CIMC

1%

Truck-mounted concrete pump

Sany

18%

Zoomlion

17%

Xingma Autos

24%

CIMC

27%

Fangyuan

2%

Huadong

construction

machinery

8%

Other

4%

Concrete truck mixer



Indonesia: Strong structural growth to continue

We are constructive on the near-term outlook for the Indonesian construction sector driven by strong private fixed

investment, accommodative monetary policy, and increased government spending. We expect approval for the land reform

bill later this year to help jump-start many of the much-needed infrastructure projects across the country, and a higher level

of replacement capex following a slowdown in replacement sales during the 2009-2010 global financial crisis. United

Tractors is most exposed in our coverage to upside in the Indonesian construction equipment sector, and we are buyers with

outlook for the following near-term catalysts: (1) the expected approval of the land reform bill to likely drive very strong growth for

construction equipment; (2) unfulfilled replacement demand from 2009-2010 driving strong growth through 2012E-2013E; (3) the

reversal in the interest rate cycle. Market share leader Komatsu has lost significant share since 2007, particularly to competing Asian

brands Doosan (South Korea) and Sany (China) looking to increase their foothold in the market.

Exhibit 66: Equipment capex driven by construction spending, fleet age and

interest rates (83% R2) Construction machinery sales vs. construction spend, fleet age and interest rates

Exhibit 67: Significant past infrastructure underinvestment creates

opportunities for strong infrastructure growth on back of land reform bill Infrastructure quality index

Source: CEIC, Company data, Goldman Sachs Research estimates.

Source: World Economic Forum

60

80

100

120

140

160

180

200

0

1,000

2,000

3,000

4,000

5,000

6,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E

Index

Equ

ipm

ent s

ales

Construction equipment sales (lef t axis) Construction spending index (right axis)

Equipment age index - inverse (right axis) Interest rate index - inverse (right axis)



Construction spending outlook: powered by both private and public spending

We are constructive on continued strong construction spending growth in Indonesia and forecast fixed investment growth of 9%/

9% in 2012-2013, on the back of an acceleration in private and public spending as the economy continues to recover from the impact

from the global financial crisis. We expect construction spending as a percentage of GDP to rise further in the future as Indonesia

continues to address the severe underinvestment for the infrastructure sector over the last few decades (Exhibit 67).

Exhibit 68: Construction spending continues to take up a larger share of GDPReal GDP vs construction spending as % of GDP

Exhibit 69: Gross capital formation and cement consumption showing

strong historical growth GCF and cement consumption Index to year 2000 vs. construction equipment

sales



For 2012, we are upbeat on the outlook given that business activity expectations have improved significantly versus 2011, and we

expect the Indonesia government to increase spending again in the year. We also see a positive medium-long term outlook, as

we expect Indonesia’s much-awaited land reform bill will be passed by the President later in 2012, which would help jump-

start many of the much-needed infrastructure projects across the entire country. Given the political elections in 2014, we also expect

the Indonesian government to further support government spending.

1,000

1,500

2,000

2,500

3,000

5.0%5.2%5.4%5.6%5.8%6.0%6.2%6.4%6.6%6.8%7.0%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2010

2011

201

2E

201

3E

(Rp Tn)(% of GDP)

GDP Construction spending as % of GDP

100

140

180

220

0

500

1,000

1,500

2,000

2,500

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2010

2011

(Index)(units)

Construction equipment sales (L)Cement consumption index (R)Gross Capital Formation (R)



Exhibit 70: Business activity has improved in 2012 given the recovery from

the global financial crisis Business activity expectation vs. construction equipment sales

Exhibit 71: Government expenditure is also expected to be higher in 2012

Government expenditure budget vs. construction equipment sales



Komatsu expected to lose market share to Korean and Chinese brands

The Indonesian construction equipment industry has above average concentration relative to other regions with the top three

players holding 80% share of the market (Exhibit 73). Komatsu has lost significant share since 2007, particularly to competing

Asian brands Doosan (South Korea) and Sany (China) looking to increase their foothold in the market (Exhibit 72).

Exhibit 72: We expect major brands like Komatsu to lose some market share to Korean / Chinese brands Komatsu historical and forecasted market share

Source: Company data Goldman Sachs Research estimates.

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2004 2005 2006 2007 2008 2009 2010 2011 2012E

(units)

Construction equipment salesBusiness activity expectation - construction (R)

20

40

60

80

100

120

140

160

0

500

1,000

1,500

2,000

2,500

3,000

3,500

20

04

20

05

20

06

20

07

20

08

20

09

2010

2011

201

2E

(Rp Tn)(units)

Construction equipment salesGovt Expenditure Budget - Capital (R)

46%

35%39% 37% 35% 34% 33% 32%

0%

20%

40%

60%

2007

2008

2009

2010

2011

2012

E

2013

E

2014

E



Exhibit 73: The top three players hold 80% market share

Indonesia revenue by company

Exhibit 74: Excavators are the dominant product in Indonesia

Indonesia revenue breakdown by product

Source: Company data, Goldman Sachs Research estimates,

Note: Includes equipment for construction mining, agriculture and forestry due to data limitations; construction makes up 13% of total equipment sold. Source: AEMR

Key data-points to monitor

Equipment sales – released monthly by distributors like United Tractors (Komatsu) and Hexindo (Hitachi);

Interest rates – Bank Indonesia meets monthly to determine whether or not to move benchmark interest rates;

Business activity expectations – Bank Indonesia releases it every quarter.

Cement sales – released quarterly by key domestic producers such as Indocement and Semen Gresik.

Komatsu, 34%

Hitachi, 25%

Caterpillar, 21%

Kobelco and others, 20%

Hydraulic Excavator

64%

Backhoe Loader

1%

Articulated D Truck4%

Crawler Dozers14%

Wheel Loaders4%

Rigid D Truck9%

Motor Graders4%



Price target methodologies and risks

Exhibit 75: Price target methodologies and risks

All price targets have 12-month time horizon.


Financial advisory disclosure

Goldman Sachs is acting as financial advisor to Oshkosh Corporation in an announced matter.

Ticker Company name Rating Price Target Price Target Methodology Risks

Americas-listed Construction Equipment ManufacturersCAT Caterpillar, Inc. CL-Buy $131 8.3x 2012 EV/EBITDA Downside risks: Bucyrus integration, oil & gas capex budgetsMTW The Manitowoc Company, Inc. Buy $15 8x mid-cycle EV/EBITDA, discounted at 20% for two years Downside risks: Weaker US construction capex, competitive pressure, material inflationOSK Oshkosh Corp. Sell $21 6.1x 2012E EV/EBITDA Upside risks: New military contract win, stronger Access Equipment marginsTEX Terex Corp. Neutral $27 7.6x 2012 EV/EBITDA Upside risks: Aerial Platform capex cycle. Downside risks: Construction marginsCNH CNH Global N.V. Not Rated NA NA NADE Deere & Co. Neutral $90 7x 2012 EV/EBITDA Upside risks: Stronger pricing and margins. Downside risks: N. America cyclical outlook

Europe-listed Construction Equipment ManufacturersVOLVb.ST Volvo Neutral Skr118 EV/IC multiple of 1.81x, assuming EV/IC equals ROIC/WACC with an 8% cost of capital Up/Downside risks: Weakening end markets in particular North American trucks, European Trucks, China

construction equipment; and weaker operating profitabilityFI.MI Fiat Industrial SPA Not Rated NA NA NA

China and HK-listed Construction Equipment Manufacturers3339.HK Lonking Holdings Neutral HK$2.80 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Up/Downside risks: Higher/lower than expected volume growth for loaders/excavators/forklifts; higher/lower than

expected margins; further increase/ decrease in market share of key products600031.SS Sany Heavy Neutral Rmb15.90 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Up/Downside risks: Market share gain/loss in concrete machinery, excavators, and truck cranes; lower/higher-than

expected raw material prices1157.HK Zoomlion (H) Buy HK$13.30 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Downside risks: Slower-than-expected policy loosening; lower-than-expected concrete machinery demand; and

pricing pressure in the concrete machinery market due to new entrants into the sector000528.SZ Guangxi Liugong Neutral Rmb12.90 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Up/Downside risks: Faster-/slower-than expected loader/excavator recovery; and lower-/higher than-expected steel

prices600815.SS Xiamen XGMA Machinery Sell Rmb6.80 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Upside risks: Improvement in gross margin and operating expenses control; higher-than-expected loader volume

growth; stronger-than-expected execution of diversification strategy000680.SZ Shantui Sell Rmb9.00 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Upside risks: Stronger-than-expected domestic dozer/excavator demand rebound; higher-than expected dozer export

growth; higher-than-expected associate income from Shantui-Komatsu002097.SZ Sunward Intel Sell Rmb7.10 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Upside risks: Faster-than expected excavator recovery; and stronger-than-expected execution of diversification

strategy

Brazil-listed Construction Rental SupplierMILS3.SA Mills Buy R$31.30 Based on DCF value (R$30.60) and 2012E EV/EBITDA target multiple of 11X (R$32.00) Downside risks: A strong economic activity slowdown or further project delays are risks

Indonesia-listed Construction Equipment ManufacturersUNTR.JK PT United Tractors Buy Rp34,000 Director’s Cut- 2012E EV/GCI vs. CROCI/WACC Downside risks: Weaker-than-expected global GDP growth, and hence coal demand and coal prices; stronger-than-

expected competition; and non-value-accretive acquisitions in coal mines or power plants



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