Global
Industrials and Materials Capital Goods & Machinery
9 January 2009
China Industrials Monthly
2009 outlook: focus on Rail
and T&D
Peter Reilly
Research Analyst
(44) 20 754 59835
peter.reilly@db.com
Nigel Coe, CFA
Research Analyst
(1) 212 250 7808
nigel.coe@db.com
Michael Tong, CFA
Research Analyst
(852) 2203 6167
michael.tong@db.com
A much more challenging year
We expect 2009 will be very different from 2008, with deflation replacing inflation
and investment flat or falling in key sectors such as property and manufacturing.
We see s a silver lining for companies exposed to the rail and T&D markets as the
stimulus packages mean much higher spending on transport and energy
infrastructure.
Deutsche Bank AG/London
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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. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Companies featured
Alfa Laval (ALFA.ST),SEK67.75 Buy
Alstom (ALSO.PA),EUR42.08 Buy
Andritz (ANDR.VI),EUR19.92 Buy
Atlas Copco (ATCOa.ST),SEK65.50 Buy
Cookson (CKSN.L),GBP143.00 Hold
Danaher (DHR.N),USD55.54 Hold
Dover (DOV.N),USD35.02 Hold
Emerson Electric (EMR.N),USD36.99 Hold
General Electric (GE.N),USD16.14 Hold
Heidelberger Druck (HDDG.DE),EUR5.24 Sell
Ingersoll-Rand (IR.N),USD19.93 Buy
The Manitowoc Company (MTW.N),USD8.39 Hold
Rockwell Automation (ROK.N),USD32.02 Hold
Sandvik (SAND.ST),SEK54.50 Hold
Schneider Electric (SCHN.PA),EUR56.37 Hold
Siemens (SIEGn.DE),EUR52.96 Hold
SKF (SKFb.ST),SEK78.25 Hold
SPX Corporation (SPW.N),USD44.88 Hold
United Technologies (UTX.N),USD53.51 Buy
Kone (KNEBV.HE),EUR15.80 Hold
Global Markets Research Company
Macro data
Our economists have reduced their forecasts again. We now expect 2009 GDP
growth of 7%, compared to our forecast of 10% at the start of 2008. Our 2009
fixed asset investment growth forecast has fallen from 21% at the start of 2008 to
10% today, although some of this is down to lower inflation expectations. Private
real estate development is expected to fall 25% in 2009 and manufacturing
investment to stagnate. Infrastructure and Utility investment should accelerate
(29% growth) as the government’s stimulus packages kick in.
Rail
The Rail network should be a major beneficiary of the stimulus package.
Investment out to 2010 has been increased by 60% or RMB 750bn (~USD 110bn)
with the money being spent on increasing track length, speed and capacity. The
signalling and high-speed segments are major opportunities for western
companies including Alstom and Siemens. Metro systems are another opportunity,
with the number of railcars expected to triple by 2010.
Transmission & Distribution
The stimulus package should also benefit the T&D sector. State Grid, the largest
operator, has more than doubled its planned investment in 2009-2011 to
RMB 1.2trn (~USD 176bn) with much of this going on long distance, high voltage
lines. Recent data from State Grid show that foreign suppliers have over 50% of
the market for transformers over 550kV, which suggests that western companies
including Siemens and ABB remain well positioned at the top end of the market.
China industrial news-flow
Newsflow since our last periodical ((published in November) has been dominated
by macro-driven events. The Chinese government is reacting to the downturn
faster than in most western countries by raising investment, easing lending and
cutting taxes.
Valuation and risks
For our valuation methodology in Europe, we prefer to use EV/EBIT, sum of the
parts for complex companies (particularly when undergoing changes), and DCF
selectively. In the US our preferred valuation methodology is DCF, supporting this
with relative multiple analysis with a preference for P/E and EV/EBITDA. Industry
risks: The capital goods sector is very diverse. Demand for industrial products
correlates with GDP over time but can diverge significantly over the shorter term
depending on company-specific factors. (See page 42 for more detail).

Table of Contents
Investment thesis .............................................................................. 3
Introduction..............................................................................................................................3
Macro data...............................................................................................................................3
Rail ...........................................................................................................................................3
Transmission & Distribution......................................................................................................3
China industrial news-flow ........................................................................................................3
Valuation and risks ....................................................................................................................3
China forecasts .................................................................................. 4
The big picture................................................................................... 6
Chinese inflation.......................................................................................................................6
Industrial value added ...............................................................................................................7
Urban Fixed Asset Investment (FAI) .........................................................................................8
Chinese PMI.............................................................................................................................9
OECD CLI...............................................................................................................................10
China Outlook 2009 ......................................................................... 11
Overview................................................................................................................................11
Consumption will be more resilient ........................................................................................11
FAI – continue to decelerate for the next 1.5 years ................................................................12
Exports – worst performance in 32 years ...............................................................................14
China’s Railway Construction – High-speed Railway................... 16
Overview................................................................................................................................16
Railway Management System ................................................................................................17
The revised railway development plans ..................................................................................18
More opportunities in High-speed Railway .............................................................................19
A boom in the metro railcar market ........................................................................................25
The Power Grid Development ........................................................ 28
Overview................................................................................................................................28
Recent development of electric industry ................................................................................28
Investment on T&D to be doubled in the next 2-3 years.........................................................31
Electrical equipments market..................................................................................................33
Industrial news flow........................................................................ 37
Macro economy......................................................................................................................37
Stimuli ....................................................................................................................................38
Electric Power.........................................................................................................................39
Company news .......................................................................................................................40
Valuation & risks ............................................................................. 42
Europe....................................................................................................................................42
US ..........................................................................................................................................42
Risks ......................................................................................................................................42