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Opportunities in China’s Air Compressor Industry

NOVEMBER 2013

Contents

Chinese Air Compressor Industry Opportunities
Introduction to the Parthenon Industrial Practice

©2013 Parthenon Group LLC | 2

Now Is an Ideal Time to Consider an Investment in the Chinese Compressor Industry

Market Rebound Will
Drive Sustained
Growth

Local Market Leaders
Are Well Positioned to Capitalize on
Future Growth

Select Cost Efficient
Players Will Be Able to
Outgrow the Market

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The China screw compressor market experienced a downturn in 2012 due to the end of economic stimulus-funded demand and the overall economic slowdown in China.
However, industry insiders expect the market to rebound and grow at 8-10% annually over the next three to five years, driven by increasing investment in downstream industries and additional replacement of piston compressors

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Local leading players are expected to outpace market growth and continue to gain share in the domestic oil-flooded screw compressor market by offering reliable products with relatively low prices compared to multinational competitors. These companies possess the capability to expand into developing adjacent markets such as oil-free screw and centrifugal compressor, which is a key growth lever for further expansion •

Some recent market entrants are gaining share from both local and multinational players by providing very cost effective products which enables them to quickly gain market share and economies of scale

©2013 Parthenon Group LLC | 3

Screw Compressors Is the Most Attractive Segment for Investment Given the
Abundance of Local Companies of Investment Scale and Higher Margins
Piston Compressors
活塞空压机
Industry
Localization

Screw Compressors
螺杆空压机

Centrifugal Compressors
离心空压机

HIGH

MID-HIGH

LOW

• Local player market share: 90%+

Commentary

Industry
Profitability

• Has been gradually replaced by screw compressors due to lower efficiency in 15+ kW applications, higher maintenance costs and noise issues

• Local player market share:
60-70%
• Has fully replaced piston compressors in above 55 kW sector and will further take share from piston compressors driven by end users increasing efficiency requirements and government energy saving policies

LOW

MID

• Local player market share: 20%

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Sales: RMB 150-200M
Net profit: RMB 20-30M
Net margin: 10-15%
CAGR ’09-’13E: 5-10%

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Sales: RMB 100-200M
Net profit: RMB 15-30M
Net margin: 10-15%
CAGR ’09-’13E: 10-15%

Largest local screw air compressor producer after Kaishan (listed) with broad product range
Strong position in drilling & digging equipment providing significant customer synergies in mining sector
Starting to develop solution providing capabilities to capture increasing demand from heavy industries

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High brand awareness as an early entrant in double screw compressor market Reliable product quality with mature screw cutter production technology
Local leading OFS producer to better serve light industries such as food & beverage, pharmaceuticals, electronics, etc. •

High net margin owing to nation-wide direct sales and large amount of aftermarket spare parts sales
No. 1 local player in single screw air compressor market with in-house screw cutter production capability
Developing centrifugal air compressors to extend business coverage

Source: Parthenon interviews and analysis

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©2013 Parthenon Group LLC | 9

Companies We Like: Add-on Acquisitions
Kangkeer
康可尔

Business Scope

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Air compressors (OIS)
Air cooling machines

Company
Background

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Xinlei
鑫磊

Jufeng
巨风

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Air compressors (piston, OIS)

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Air compressors (OIS)

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Established: 1996 (started to produce