Page 1 of 18

21 March 2012

Antony Cheng

antony.cheng@cinda.com.hk

(852) 2235 7127

Trading data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditors

Result Due

1.05/4.36

3.1

1,011

2,882

Chen Cheng

(69.58%)

EY

FY11: 22 March

Company description

Chu Kong Pipe is the largest LSAW pipelines

producer in China, and the only one in China

accredited to produce LSAW deep sea oil and gas

pipelines. As of end-2011 the company has annual

capacity of 1.75mn tonnes.

Price chart

0123456

Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12HK$

Fortune in the pipeline Rating Buy Initial

Target Price HK$3.80

Current price HK$2.83 Upside + 34%

China’’’’s largest pipeline manufacturing company specialized

in the highend LSAW pipes. Chu Kong Pipe (“PCK”) is the first company in China producing LSAW pipes which are the high-end pipes used in large scale oil and gas transmission. Currently CKP has the production capacity of 1mn tones of LSAW, by far outnumbering the second and third players which are SOEs.

Massive national pipeline projects are kicking start. Major national pipeline projects are expected to kick start earliest in 2012, including West-East III & IV totaling over 10,000 km. National pipelines in the PRC is targeted to double from 77,000km to 150,000 km by 2015, according to the 12

th FYP. This will also be followed by city and regional

pipelines construction projects.

Visible order backlog from local and overseas projects. National projects to follow. The company has obtained order of 257k tons of pipelines in 2H11, up 20% hoh. Order backlog as of end-2011 was 381k tons, 56% more than total delivery in 2010 and equivalent to the peak in 2010. We expect those orders will be signed and delivered in FY12, while more orders will come once West-East III starts tender.

Expanded capacity to get ready for upbeat order outlook. PCK is expanding capacity. The new LSAW plant in Zhuhai will commence production in 2Q12, and two more plants in Jiangsu will start operation in 2H12. They will increase capacity from currently 1.45mn to 2.05mn tonnes This is to cater for the strong orders expected for the 12th FYP. Also, the company has sign for a JV with the world’s 4

th largest coating company to

build the only LSAW plant in the Middle East.

Trading at an undemanding 6.6/4.9x FY12/13 EPS, BUY recommended. PCK is due to release results on 22 March. Our FY11 forecast is slightly behind consensus as we believe financing cost could be higher than consensus expected. Upon commencement of West-East gas III & IV and deep water pipeline projects, we expect volume growth to drive NP CAGR of 43% during FY11-13. Our TP HK$3.8 represents PE of 9x FY12 PE, which is the average of its historical trading range.

RMB million FY09A FY10A FY11E FY12E FY13E

Revenue 2,826 1,682 3,588 5,292 6,624

Operating profit 508 116 358 561 721

Net Profit 401 70 226 357 480

Consensus NP N/A N/A 238 311 384

Diluted EPS (HK$) 0.51 0.08 0.27 0.42 0.57

P/E (x) 5.5 33.3 10.4 6.6 4.9

P/B (x) 2.5 1.2 1.1 1.0 0.9

ROE (%) 42.1 3.5 10.5 14.9 17.6

ROA (%) 17.2 1.9 4.7 5.9 6.8

Sources: Bloomberg, CIRL estimates

Chu Kong Pipe | 1938.HK

China Puti

Page 2 of 18

China’s largest pipeline company focusing on LSAW products

What is LSAW?

LSAW refers to “longitudinal submerged arc welded” steel pipes, which are used for

majority of the pipeline construction projects globally. In contrast to SSAW (spiral

submerged arc welded) pipes, LSAW production techniques allow making pipelines with

thicker steel and larger diameters. Therefore, LSAW are generally more resilient to

pressure, and thus are being used in locations such as cities and underground pipelines.

SSAW pipes are cheaper to produce given the same diameter and thickness.

Exhibit 1: Steel pipes, LSAW vs SSAW

Source: Company, CIRL

Exhibit 2: LSAW steel pipes

Source: CIRL

LSAWLSAWLSAWLSAW SSAWSSAWSSAWSSAW(Longitudinal Submerged Arc Welded) (Spiral Submerged Arc Welded)Features High end product segment More common in less populated areasIdeal for high pressure oil & gass pipelines For less demanding applicationsRequired for demanding applications Made from hot-rolled coilsUsed in subsea appliacationsMore common in populated areasMade from customized steel platesMaximum diameter 2.7-3.0 meters 2.2 metersMaximum thickness 40mm 25-28mmApplication Main pipes and city pipes (70%) Main pipes & city pipes (30%)Sub pipes (30%) Sub pipes (70%)Deep sea pipes (100%, excl seamless pipes)Note Usually higher margin due to higher technologyrequirement and thicker product specifications Smaller margin than LSAW products, due tocompetition and lower product specifications

Page 3 of 18

Exhibit 3: SSAW steel pipes

Source: CIRL

World’s largest in LSAW production, plus the only one in China accredited to produce deep sea pipelines

By end-2009, the company possessed the world’s largest capacity of LSAW pipeline,

with market share of around 24%. Current, the company has annual production capacity

of 1.45mn tons, majority are for LSAW products.

Exhibit 4: PCK as the largest LSAW producer in China, in terms of capacity (by end-2009)

Source: HATCH

PCK is the only one in China accredited to produce deep sea pipes. Due to enormous

water pressure, LSAW is the only kind of steel pipes allowed for transferring oil and gas

underneath the sea. PCK, being the first LSAW producer in China in May 2010, is also

the first and currently the only steel pipe manufacturer in China to have developed deep

sea LSAW steel pipes and obtained certification from the American Petroleum Institute

(API). Since then, the company has successfully secured a number of large-scale

offshore pipeline projects and also the first deep sea project in China, combined

116,200 tons to be constructed in South China Sea by CNNOC.

Page 4 of 18

Exhibit 5: PCK’s Deep sea projects on hand

Source: CNOOC, Husky, Company, CIRL

Strong customer base and track record

PCK is involved in major pipeline projects in china. In 2010, PetroChina, CNOOC and

Sinopec respectively accounted for 13%, 21% and 2% of PCK’s turnover in 1H11. The

company is also active in seeking international orders since 2001 when the company

started delivering LSAW steel pipes for overseas clients in UAE, Norway and Romania.

Overseas sales accounted for 58% of sales volume in 1H11. As of Jun 2011, the

company had over 700 clients spanning 70 countries. In contrast, Shengli Pipe

(1080.HK) which focuses predominantly in projects with PetroChina and Sinopec, does

not literary have overseas customers despite efforts spent in recent years.

Exhibit 6: Strong track record of PCK

Source: Company, CIRL

Name of deep sea projectName of deep sea projectName of deep sea projectName of deep sea project Order signed dateOrder signed dateOrder signed dateOrder signed date Length of orderLength of orderLength of orderLength of order NoteNoteNoteNoteLiwan offshore project Mar-11 66200 ton The "shaddow" part of Liwan offshore oil project, 300km south-east of HKHusky Liwan Deep Sea project May-11 50000 ton The deep sea part is constructed by Husky Energy, listed in Toronto

Client Quantity (tonnes) Mill Usage Year

KURT Urban Partners, USA 3,000 UOE Oil 2001Chunxiao Gas Complex Development Project, CNOOC 68,645 UOE Offshore Gas 2003Shanghai SECCO, BP, SINOPEC 3,000 UOE JCOE Material 2003CNOOC & SHELL Petro Chemicals Company Ltd. 12,149 UOE Offshore Water 2004Zhuhai-Zhongshan Natural Gas Pipeline, CNOOC 11,000 UOE Gas 2004Western Crude Oil and Product Oil Pipeline, CNPC 33,000 UOE Oil 2004Panyu/Huizhou Natural Gas Development Project, CNOOC 58,881 UOE Offshore Gas 2005Guangzhou Gas Company 14,270 UOE Sour Gas 2005Beijing Gas Group Co., Ltd. 13,000 UOE City Gas 2005Jamnagar Refinery Complex, Reliance/Bechtel, India 36,000 JCOE Offshore Gas 2006Sichuan-East Gas Pipeline Project, SINOPEC 100,000MT UOE/JCOE Sour Gas 2007Ledong Gas Fidelds Engineering PMT. CNOOC 27,000MT UOE Offshore Gas 2007Caspian Gas, Kazakhstan Shagyriy-shomyshty Gas 10,264 JCOE Gas 2007China Petroleum Technology and Development Corporation 77,400 Oil 2008Yulin-jinan Gas Pipeline,SINOPEC 14,000 UOE Gas 2008ESPERANZA Project, China 36,000 UOE/JCOE Mineral Slurry 2008Kazakhstan-China Pipeling, CNPC 77,400 UOE/JCOE Gas 2008Shell Canada 10,690 UOE Tailing Pipe 2009Eletricity Network, China 70,000 JCOE Structure 2009

Exhibit 7: Worldwide client base with long track record

Source: Company, CIRL

Page 5 of 18

Worldwide client base with long track record

Page 6 of 18

Massive national pipeline projects are kicking start

The national pipeline network to double by 2015, under policy agenda

China has scheduled to raise the ratio of natural gas consumption from currently ~5% to

8-10% by 2020. Total capacity of gas-fired power capacity was only 27GW as of

end-2011, estimated by China Electricity Council. It was reported that the capacity of

gas-fired power plants would likely be increased to 60GW by 2015. Interestingly, this

would be much higher than the target of 40GW that the central government announced

in 2007. This is sensible given construction and successful completion of the major

national pipe of West-East II after 2007.

To facilitate the huge gas demand, China has put national pipeline among its top

agenda, in order to transport gas resources from western provinces, such as Xinjiang

and Sichuan, to coastal provinces. In the 12th FYP, the PRC government targeted to

double the length of national pipelines from 77,000 as of end-2010 to 150,000 by

end-2015. Notice that the figure does not include city pipeline which normally follow

after completion of national pipelines.

Exhibit 8: Length of national pipeline to double in the next 5 years, under policy agenda

Source: 12th FYP of the PRC; CIRL

0

5

10

15

20

25

0

50

100

150

200

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

E

20

12

E

20

13

E

20

14

E

20

15

ETotal length of national oil & gas pipeline ('000km)

New completion (RHS) Accumulated length (LHS)

Page 7 of 18

Under this national agenda, large giants such as PetroChina, has laid out pipeline

construction plans for the 12th FYP. Under such plan, PetronChina will build 54,000 km

of oil and gas pipes during 2011-2015, which represents a double of that in 11th FYP, or

more than the sum of the previous 42 years.

Exhibit 9: Current major oil & gas pipeline network constructed by PetroChina and Sinopec

Source: Websites of PetroChina and Sinopec; CIRL

Sinopec has started constructing its own pipe network for oil & gas

PetroChina is the major investor of West-East Pipelines. The West-East I & II Pipelines

were fully ramp-up, helping PetroChina to gain market share in the Eastern provinces.

Sinopec, a long-standing leader in the Yantze River Delta region, felt the threat and

planned for a massive construction of pipelines. Sinopec joined hands with local

governments (e.g. Zhejiang) which intends to secure source of gas energy. They

together announced plan to build the Xinjian-Zhejiang Pipeline, with combined length

over 11,000 km, which exceeded the scale of the West-East Pipe II. Amid the scramble

for market share between PetroChina and Sinopec, we expect to witness another wave

of pipeline construction in the years ahead.

Page 8 of 18

National projects are kicking start in 2012

Among the major pipelines on PetroChina’s agenda, the largest ones are West-East III

& IV, which are expected to commence construction in 2012. Moreover, Sinopec is

starting to construct Xinjian-Guangdong-Zhejiang (新粵浙線) and Xinjian-Shangdong

(新魯線), which would become China’s largest pipeline for coal-bedded gas.

Exhibit 10: Major oil & gas pipeline network to be constructed

Source: Websites of PetroChina and Sinopec; varies news from websites; CIRL

StartStartStartStart EndEndEndEnd Length (km)Length (km)Length (km)Length (km) Volume (million m2)Volume (million m2)Volume (million m2)Volume (million m2) Construction startConstruction startConstruction startConstruction start CompletionCompletionCompletionCompletionInvested by PetroChinaInvested by PetroChinaInvested by PetroChinaInvested by PetroChinaWest-East Gas Pipeline Phrase I Tarim, Xinjiang Shanghai 5,800 17,000 2002 2004Phrase II Horgo, Xinjiang Guangdong, HK 9,102 30,000 2008 2011Phrase III Horgo, Xinjiang Fuzhou City, Fujiang 5,220 30,000 2012E2012E2012E2012E 2014EPhrase IV Tarim, Xinjiang n/a n/a n/a 2012E2012E2012E2012E n/aPhrase V Ili n/a n/a n/a n/a n/aPhrase VI n/a n/a n/a n/a n/a n/aPhrase VII n/a n/a n/a n/a n/a n/aInvested by SinoPecInvested by SinoPecInvested by SinoPecInvested by SinoPecSichuan-Eastern Pipeline Sichuan Shanghai 2,246 12,000 2007 2010Yulin-Jinan Pipeline Shaanxi Shandong 970 3,000 2008 2009Xinjian-Guangdong-Zhejiang line Xinjian Guangdong 7,373 30,000 2012E2012E2012E2012E n/aXinjian-Shangdong line Xinjian Shangdong 4,463 30,000 2012E2012E2012E2012E n/aAlready constructed

Page 9 of 18

Visible order backlog from local and overseas projects Harvesting from the increased order backlog

The company is the only one in China’s pipeline manufacturing industry to announce

quarterly orders-on-hand. Undelivered order-on-hand was 381k tons as of end-2011,

represented a yoy increase of 20%. New order gained momentum sequentially in 2H11,

when the company obtained new order of 256,956 tons, 20% higher than in 1H11.

Based on the figures of new orders obtained and orders-on-hand, we calculated that the

pipeline delivery during FY11 amounted to 445k ton, representing yoy increase of

103%.

Exhibit 11: Orders on hand and forecasted delivery

Source: Company, CIRL

Exhibit 12: Higher-margin overseas and deep water projects to be delivered in 2H11

Source: Company, CIRL

Orders-on-hand

(period-end)

New order

obtained

Delivery

(implied)

Orders-on-hand

(period-end)

New order

obtained Delivery

(implied)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

tonne

3Q

3Q

4Q

4Q

1H11 2H11

tonne

3Q

3Q

4Q

4Q

1H11 2H11

ProjectsProjectsProjectsProjects Expected delivery in 2011 Expected delivery in 2011 Expected delivery in 2011 Expected delivery in 2011 Columbia Gas project 82,200Liwan Offshore Project 66,200Columbia Gas Project (Re-order) 61,000West-to-East Gas II - Shenzhen branch 44,200State Grid Corporation of China 33,000Husky Liwan Deep Sea Project 30,000Peru Natural Gas Project 29,429CNOOC Guangdong LNG 17,000Changqing Gas Field to Huhhot Natural Gas Pipeline 10,200WESTERN Siberia - Pacific Ocean project 10,080West-to-East Gas Offshore II 7,000Overseas projectsNew category: Offshore deep sea, domestic non-oil & gas

Page 10 of 18

Overseas order to be maintain steady growth ahead

Overseas projects have the advantage of usually better margin and better visibility.

Those projects are tendered a year ahead such that investors would easily gauge the

time and size of delivery. Leveraging on its superior technology (i.e. the internationally

recognized technology to produce LSAW), PCK has long developed successful track

records in overseas market, which contributed 42% of revenue from during 1H11.

With the commencement of mega projects in China, we expect the proportion of

overseas project for FY12 & FY13 should be reduced. However, there is no sign of

slowdown in overseas planned pipeline projects. Projects currently in talks include oil

and gas pipelines in South America, Australia and Middle East. The company is looking

to diversify into non-power intensive pipelines such as those for the transportation of

iron ore liquid.

Exhibit 13: Worldwide pipeline planned & under construction

Source: Company

Note: The above assumes maximum diameter to be produced.

Effective tonnage would be less than that if smaller diameter products

were chosen to produce

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2008 2009 2010 2011

Under construction

Planned

miles

Page 11 of 18

Expanded capacity to get ready for upbeat order outlook

Expansion gathering pace in FY12

PCK’s capacity is scheduled to expand from currently 1.45 million tonnes to 2.05 million

tonnes by end-2012. The company is building two plants, in Guangdong Zhuhai and

Jiangsu Lianyungang (“連雲港”). This is to cater for the strong orders expected for the

12th FYP. Also, part of the production capacity is tailored to produce deep sea oil and

gas pipelines.

Partnering global giant in the Middle East to establish the only LSAW plant in the region

The company has formed a JV with AHQ in Saudi Arabia to establish a JV company

with a total capital of US$160mn, among which 50% will be funded by the company. The

JV will set up 300,000 tonnes annual capacity of LSAW, which will then become the only

LSAW manufacturer in Middle East.

AHQ is the 3rd

largest coating manufacturer in the world. We think the JV will likely reap

the synergy from PCK’s LSAW technology and AHQ’s network in the local pipeline

markets.

Exhibit 14: Capacity and expansion path

Source: Company, CIRL

Annual production capacity (tonnes)Annual production capacity (tonnes)Annual production capacity (tonnes)Annual production capacity (tonnes) 2009200920092009 2010201020102010 2011201120112011 2012201220122012 Completion of new capacityCompletion of new capacityCompletion of new capacityCompletion of new capacityPanyuLSAW (for oil & gas) 700,000 700,000 700,000 700,000LSAW (for infrastructure) 300,000 300,000 300,000ERW 150,000 150,000 150,000 150,000JiangyinLSAW 300,000 300,000 300,000 300,000ZhuhaiLSAW 300,000 1Q12Lianyungang ("連雲港連雲港連雲港連雲港" in Jiangsu province)LSAW 300,000 4Q12JV at Saudi ArabiaLSAW 300,000 by mid-2013TotalTotalTotalTotal 1,150,0001,150,0001,150,0001,150,000 1,450,0001,450,0001,450,0001,450,000 1,450,0001,450,0001,450,0001,450,000 2,050,0002,050,0002,050,0002,050,000

Page 12 of 18

Financial forecasts and recommendation Delivery forecast

PCK announces quarterly its order-on-hand, undelivered order, as well as order

received during the period. Therefore, we could infer the volume of delivery would be

445k tons in FY11, representing a yoy jump of 81%. However, the volume surge in FY11

was attributed to 1) overseas projects as they resumed after the financial tsunami in

08-09; 2) domestic non-oil & gas projects which requires LSAW pipes for infrastructure

uses (such as orders from the State Grid); 3) offshore deep sea projects as the

company obtained certifications by API in 2010. We expect that the growth driver for

FY12 & FY13 will come from national projects which literary stalled since 2010.

Exhibit 15: Delivery forecasts

Source: Company, CIRL

Stable per ton gross profit, with back-to-back procurement policy

Steel represents 90% of the COGS. To avoid taking risks on cost of steel, the company

adopted back-to-back procurement policy on steel since 2006. It means that the actual

delivery price of pipeline is referenced upon the actual cost of steel purchased by the

company. Furthermore, the time from price negotiation to delivery is often less than a

year (or even within 3-4 months for domestic projects), according to management.

Therefore, the company earns a certain dollar margin on instead of a percentage to its

revenue.

Exhibit 16: Gross profit per tonne

Source: Company, CIRL

Volume (thousond ton)Volume (thousond ton)Volume (thousond ton)Volume (thousond ton) FY09AFY09AFY09AFY09A FY10AFY10AFY10AFY10A FY11FFY11FFY11FFY11F FY12FFY12FFY12FFY12F FY13FFY13FFY13FFY13FPipelineLSAW 230.3 184.5 369.0 516.6 619.9ERW 75.1 34.0 44.2 55.3 63.5ServiceLSAW 17.2 18.3 22.9 27.5 32.9ERW 31.2 8.7 9.6 11.5 13.2Total 353.8 245.5 445.6 610.8 729.6

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0

FY09A FY10A FY11F FY12F FY13F

GPGPGPGP per ton (RMB)per ton (RMB)per ton (RMB)per ton (RMB)

Page 13 of 18

We expect finance cost will drag FY11 earnings below consensus estimates

PCK is scheduled to release FY11 results after market close on 22 March. We expect

revenue to rise 119% to RMB3.6bn, higher than consensus of RMB3.4bn. GPM is

forecasted at 17.0%, improved from 15.7% in FY10 and 16.5% at 1H11 due to the

delivery of higher-margin deep sea pipeline products. However, our NP forecast of

RMB226mn is lower than consensus RMB238mn due to higher finance cost.

To prepare for better sales order in 2H11 and upcoming CAPEX, the company would

deploy more short-term debts. Moreover, we notice that interest rate for both RMB and

USD (LIBOR) rose in 2H11 amid liquidity concern in China and debt crisis in Europe,

which will contribute a sharp rise of finance cost in 2H (RMB52mn vs RMB20mn in

1H11), we expect. The company finances half of its debt from offshore, which could

alleviate its funding and interest rate risk.

Recommended BUY at TP HK$3.8

Trading at an undemanding 6.7x FY12 EPS, BUY recommended. Upon commencement

of West-East III gas and deep water pipeline projects, we expect volume growth to drive

NP CAGR of 43% during FY11-13. Our TP HK$3.8 represents PE of 9x FY12 PE, which

is the average of its historical trading range, as well as the current valuation of Shengli

Pipe (1080.HK), its closest peer.

Page 14 of 18

Exhibit 17: Peers comparison

Source: Bloomberg, CIRL

Exhibit 18: PCK’s historical PE & PB ratio

Source: Bloomberg, CIRL

BloombergBloombergBloombergBloomberg Mkt CapMkt CapMkt CapMkt Cap PricePricePricePrice PER (x)PER (x)PER (x)PER (x) P/B (x)P/B (x)P/B (x)P/B (x) ROE (%)ROE (%)ROE (%)ROE (%) ROA (%)ROA (%)ROA (%)ROA (%) Net Gearing (%)Net Gearing (%)Net Gearing (%)Net Gearing (%)code (HKD mn) (HKD) FY10A FY11E FY12E FY10A FY11E FY12E FY11E FY11E FY10APipeline Pipeline Pipeline Pipeline CHU KONG PETROLE 1938 HK 2,862 2.83 35.2 9.9 7.2 1.2 1.0 0.9 10.7 5.4 20.1SHENGLI OIL&GAS 1080 HK 2,406 0.97 23.5 23.1 9.0 1.0 1.0 0.9 5.6 3.7 (18.2)ANHUI TIANDA - H 839 HK 1,542 1.53 9.5 10.1 6.3 0.6 0.5 0.5 5.8 2.6 37.4AverageAverageAverageAverage 22.822.822.822.8 14.314.314.314.3 7.57.57.57.5 1.01.01.01.0 0.80.80.80.8 0.70.70.70.7 7.47.47.47.4 3.93.93.93.9 13.113.113.113.1

02468101214

161820

Mar-10 Jun-10 Aug-10 Nov-10 Feb-11 Apr-11 Jul-11 Oct-11 Dec-11 Mar-12avg.

+1std

-1std.

Forward P/E Ratio

0.00.20.40.60.81.01.21.41.61.82.0

Mar-10 Jun-10 Aug-10 Nov-10 Feb-11 Apr-11 Jul-11 Oct-11 Dec-11 Mar-12avg.

+1std

-1std.

Forward P/B Ratio

Page 15 of 18

Financial Summary

Exhibit 19: Financial summary

Source: Company, CIRL

Income statement Cash flow

Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E

Revenue 2,826 1,682 3,588 5,292 6,624 Pre-tax profit 466 93 285 447 601Gross profit (reported) 642 264 611 904 1,134 Taxes paid -40 -24 -19 -57 -90EBITDA 540 155 414 639 803 Depreciation 32 40 56 78 82Depreciation -32 -40 -56 -78 -82 Associates 0 0 0 0 -30EBIT 508 116 358 561 721 CFO bef. WC change 458 109 322 469 563

Net interest income (exp.) -42 -23 -72 -114 -149 Change in working cap -392 -737 -159 -611 -478

Associates 0 0 0 0 30 Cashflow from operation 66 -628 163 -143 85Exceptionals/others -1 -4 -2 0 0 CAPEX -770 -609 -800 -800 -200Profit before tax 465 89 283 447 601 Free cash flow -704 -1,237 -637 -943 -115Tax expenses -64 -19 -57 -90 -121 Dividends 0 -22 -48 -97 -136Minority interest 0 0 0 0 0 Balance sheet adj. -380 181 -0 -0 -30Net profit 401 70 226 357 480 Sharse issued 952 1,039 0 0 0Dividends 0 -22 -69 -109 -147 Others 0 0 0 0 0

Net cash flow -133 -39 -685 -1,040 -280

Balance sheet Net cash (debt) start -20 -120 -316 -982 -2,035

Year to Dec (RMB mn) FY09A FY10A FY11E FY12E FY13E Net cash (debt) at year-end -153 -158 -1,001 -2,022 -2,315Cash & equiv 550 651 685 432 666

Trade receivables 267 355 646 953 1,192 Ratios

Other receivables 0 0 0 0 0 Year to Dec FY09A FY10A FY11E FY12E FY13E

Inventories 520 978 1,077 1,588 1,987 Growth rate (%)Other current assets 116 361 361 361 361 Revenue NA -40.5 113.3 47.5 25.2Fixed assets 500 1,071 1,815 2,537 2,655 EBITDA NA -71.2 166.4 54.5 25.5Intangible assets 4 4 4 4 4 EBIT NA -77.3 209.7 56.8 28.5Investment, associates etc 376 196 196 196 226 Net profit NA -82.5 221.9 57.9 34.4Total assets 2,334 3,615 4,783 6,069 7,091 Fully diluted EPS NA -83.6 220.8 57.9 34.4

Margins (%)Account payables 396 204 435 642 803 Gross margin (reported) 22.7 15.7 17.0 17.1 17.1Other payables 0 0 0 0 0 EBITDA 19.1 9.2 11.5 12.1 12.1Short-term debt 293 727 1,127 1,427 1,677 EBIT 18.0 6.9 10.0 10.6 10.9Other current liabs 311 414 472 518 560 Net margin 14.2 4.2 6.3 6.7 7.2Long-term debts 377 240 540 1,040 1,290 Other ratiosDeferred tax and others 6 39 60 48 32 ROE (%) 42.1 3.5 10.5 14.9 17.6Other long-term liabs 0 0 0 0 0 ROA (%) 17.2 1.9 4.7 5.9 6.8Total liabilities 1,382 1,624 2,635 3,674 4,362 Net gearing (%) 16.0 7.9 46.6 84.4 84.9

Interest coverage (x) 12.1 5.1 4.9 4.9 4.8Share capital 0 89 89 89 89 Receivables days 34.5 77.0 65.7 65.7 65.7Reserves 952 1,902 2,059 2,307 2,639 Payables days 51.1 44.3 44.3 44.3 44.3Shareholders' equity 952 1,991 2,148 2,395 2,728 Inventory days 67.2 212.1 109.5 109.5 109.5Minorities 0 0 0 0 0 Effective tax rate (%) 13.8 20.2 20.2 20.2 20.2Total equity 952 1,991 2,148 2,395 2,728Net cash (debt) -120 -316 -982 -2,035 -2,301

Page 16 of 18

Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Antony Cheng Research Director (852) 2235 7127 antony.cheng@cinda.com.hk

Hayman Chiu Senior Research Analyst (852) 2235 7677 hayman.chiu@cinda.com.hk Kenneth Li Senior Research Analyst (852) 2235 7619 kenneth.li@cinda.com.hk

Lewis Pang Research Analyst (852) 2235 7847 lewis.pang@cinda.com.hk Susanna Chui Research Analyst (852) 2235 7131 Susanna.chui@cinda.com.hk

Analyst Certification

I, Antony Cheng hereby certify that all of the views expressed in this report accurately reflect my personal views about

the subject company or companies and its or their securities. I also certify that no part of my compensation was / were,

is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclosure Cinda International Capital Limited, subsidiaries of Cinda International Holdings Limited, is currently acting as the Compliance Advisor of Chu Kong Pipe.

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