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Darby Asia Investors

Darby Asia Investors

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Darby Asia Investors

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  1. Auckland Bangkok Beijing Boston Chicago London Los Angeles Melbourne Milan Mumbai Munich New Delhi New York Paris San Francisco Shanghai Singapore Sydney Tokyo Wroclaw Darby Asia Investors Project Lightning Draft Final Report 28 August 2009 The materials contained in this document are intended to supplement a discussion between Darby Asia Investors and L.E.K. Consulting on 28 August 2009. These perspectives are confidential and will only be meaningful to those in attendance. L.E.K. Consulting Limited, Floor 34, CITIC Square, 1168 Nanjing Road West, Shanghai 200041, China t: 86.21.6122 3900 f: 86.21.6122.3988 www.lek.com

  2. Context and Disclaimer –Terms of Access and Receipt • L.E.K. Consulting Pty Ltd (L.E.K. Consulting) wishes to draw the following important provisions to your attention prior to your receipt of or access to the L.E.K. report (the L.E.K. Report) including any accompanying presentation and commentary (the L.E.K. Commentary). • The L.E.K. Report and any L.E.K. Commentary have been prepared for Darby Asia Investor (the Client) in accordance with a specified scope of work described in the letter of engagement with the Client (the Engagement Letter). L.E.K. Consulting may provide upon request a copy of the Engagement Letter; • Any person or entity (including without limitation the Client) which accepts receipt of or access to the L.E.K. Report and any L.E.K. Commentary (the Recipient) agrees to be bound by the terms and conditions set out below; • In receiving or accessing any part of the L.E.K. Report and any L.E.K. Commentary, the Recipient acknowledges that: • L.E.K. Consulting has not been asked to independently verify or audit the information or material provided to it by or on behalf of the Client or any of the parties involved in the project; • the information contained in the L.E.K. Report and any L.E.K. Commentary has been compiled from information and material supplied by the Client and other third party sources and publicly available information which may (in part) be inaccurate or incomplete; • L.E.K. Consulting makes no representation, warranty or guarantee, whether express or implied, as to the quality, accuracy, reliability, currency or completeness of the information provided in the L.E.K. Report and any L.E.K. Commentary or that reasonable care has been taken in compiling or preparing them; • no part of the L.E.K. Report or L.E.K. Commentary may be circulated, quoted or reproduced for distribution outside the Client’s organisation without the prior written approval of a Director of L.E.K. Consulting; • the analysis contained in the L.E.K. Report and any L.E.K. Commentary is subject to the key assumptions, further qualifications and limitations included in the Engagement Letter and the L.E.K. Report and L.E.K. Commentary, and is subject to significant uncertainties and contingencies, some of which, if not all, are outside the control of L.E.K. Consulting; and • any L.E.K. Commentary accompanying the L.E.K. Report is an integral part of interpreting the L.E.K. Report. Consideration of the L.E.K. Report will be incomplete if it is reviewed in the absence of the L.E.K. Commentary and L.E.K. Consulting conclusions may be misinterpreted if the L.E.K. Report is reviewed in absence of the L.E.K. Commentary. The Recipient releases L.E.K. Consulting from any claims or liabilities arising from such an incomplete review; • L.E.K. Consulting is not responsible or liable in any way for any loss or damage incurred by any person or entity relying on the information in, and the Recipient unconditionally and irrevocably releases L.E.K. Consulting from liability for loss or damage of any kind whatsoever arising from, the L.E.K. Report or L.E.K. Commentary including without limitation judgements, opinions, hypotheses, views, forecasts or any other outputs therein and any interpretation, opinion or conclusion that the Recipient may form as a result of examining the L.E.K. Report or L.E.K. Commentary. The L.E.K. Report and any L.E.K. Commentary may not be relied upon by the Recipient, and any use of, or reliance on that material is entirely at their own risk. L.E.K. Consulting shall have no liability for any loss or damage arising out of any such use. • The L.E.K. Report and L.E.K. Commentary are strictly confidential and for the sole benefit of the Client. No person other than the Client (and the employees, directors, and officers of, and professional advisers to, the Client) or a Recipient (who has agreed to be bound the terms herein) may access the L.E.K. Report or L.E.K. Commentary or any part thereof. The Recipient undertakes to keep the L.E.K. Report and L.E.K. Commentary confidential and shall not disclose either the L.E.K. Report or L.E.K. Commentary or any part thereof to any other person without the prior written permission of a Director of L.E.K. Consulting. DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  3. Introduction L.E.K. was engaged to help to assess the potential investment in Lightning, a leading alternator and starter motor supplier • Darby is currently looking at potential investment in a senior note of up to USD33.5m associated with the China business of Lightning, a US-based producer of alternators and starter motors for diesel engines • The key objective of this project is to provide Darby with an understanding of the current and expected future expected future characteristics of medium and heavy truck and bus alternator and starter motor market in China, as well as an assessment of Lightning’s competitive position within this market • The key questions in this project, include: • development of growth driver and growth and size of the medium and heavy truck and bus alternator and starter motor market in China in the next 5 years • key market trend over the next 5 years and the impact on Lightning • key customer group and their typical purchasing behavior • Lightning’s positioning in these markets including their market share and future evolution DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  4. RHS table may change Introduction Today’s objective is to share our thoughts on the market and Lightning’s positioning based on the work over the past 3 weeks Timeline of the project Status of the project Weekly update Weekly update Draft final Final report DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  5. Introduction This report is based on 69 interviews with industry participants, including Lightning management, experts, fleet owners, vehicle OEMs … Interviews Customer - OEM manufacturer (17): • Engineer, Technology Centre, Yutong Bus • Engineer, Technology Centre, JAC Bus • Engineer, Engine Division, Huanghai Bus • Engineer, Technology Centre , Shaolin Bus • Engineer, Electrical Parts Department, Zhongtong Bus • Engineer, Electrical Parts Department, Yangzhou Yaxing Coach • Engineer, Quality Control Department, Yangzhou Yaxing Coach • Purchasing Manager, Yangzhou Yaxing Coach • Engineer, Engine Department, Guilin Daewoo Bus • Engineer, Development Department, Anhui Ankai Bus • Engineer, Electrical Parts Department, Anhui Hualing Automobile • Purchasing staff, Sinotruk – Jinan • Sales manager, Sinotruk Sales Company • Engineer, Corollary Equipment Department, Faw Jiefang - Qingdao • Engineer, Technology Department, Faw Jiefeng – Changchun • Purchasing Manager, Dongfeng Motor Corporation • Engineer, Technology Department, JAC Heavy Truck Management - Lightning Management (6): • General Manager • Marketing Director, Sales and Marketing Manager • OEM Sales Director • Application Director • Application Engineering Manager • Service Director Experts (3): • Expert, Statistics Department, China Auto Yearbook • Secretary General, China Internal Combustion Engine Industry Association Electrics Branch • Analyst, CITIC Securities Customer – Fleet Owners (9): • Manager, Anhui Anqing Transportation • Technical Manager, Yinjian International Travel Service • Technician, East Shanghai Truck Transportation • Purchasing Manager, LuoYang Bus Corporation • Technical Manager, Nanchang Public Transportation Group • Technical Engineer,Shandong Transportation Group • Director, Mechanical Division,North Transportation Corporation • Technical Manager, Shanghai Baoshan Bus • Engineer, Technical Department, Shenzhen Shenzhan Bus DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  6. Introduction … as well as engine manufacturers, competitors and aftermarket players Interviews Customer - Engine Manufacturer (12): • Senior Engineer, Sinotruk / CNHTC • Engineer, Electrical Parts Department, Sinotruk / CNHTC • Sales Manager, Truck Department, Dongfeng Chaoyang Diesel • Purchasing staff, Dongfeng Chaoyang Diesel • Engine Sales Manager,Dongfeng Cummins Engine • Sales Manager, Truck Department, FAW Jiefang Wuxi Diesel Engine Works • Engine Sales Manager, Kunming Yunnei Power • Electrical Parts Purchasing Manager, Kunming Yunnei Power • Purchasing Manager, Weichai Power • Engine Sales Manager,Yangzhou Diesel • Electrical Parts Purchasing Manager, Yangzhou Diesel • Engine Engineer, Guangxi Yuchai Power Competitors (10): • Sales Manager, Beijing AOBO Automotive Electronic & Electric Appliance • Sales Manager, Xiamen Representative Office, Beijing AOBO • Sales Manager, Huzhou Dehong Auto Electrical System -Anhui • Sales Manager, Huzhou Dehong Auto Electrical System -Yuchai • Sales Manager, Jiangsu Hengli Electric Motors • Sales Manager, Huzhou Longhao Auto Parts Competitors (10) continued: • National Sales Director , Quanzhou Yida Electric Appliance For Vehicle • Director, Technical Department, Shandong Liaocheng Wuyue Electric • Regional Sales Manager, Shendian – East China • Regional Sales Manager, Shendian – Shiyan Aftermarket Players (12): • Technical Director, Yandangshan Zhoushi Automotive Repairing Company • Technical Engineer, Repairing Department, Jieqin Auto Trading • General Manager, Wangjia Repairing works • General Manager, Chuge Company • Technical Engineer, Liaocheng Fenghuang Repairing works • Electrical Engineer, Shanghai Gold Dragon Repairing Shop – Nanjing Station • Plant Manager, Yantai Dongbao Repairing Works • Electrical Engineer, Repairing Works of Yangzhou Transportation • Plant Manager, #1 Works, Shanghai Nankong • Electrical Engineer, Shandong Zhaoyuan Linglong Repairing Firm • Electrical Engineer, Xian Kefeng • Electrical Engineer, Shuangyashan Shunda DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  7. Introduction We also come across a number of secondary sources Secondary Sources Internal Data: • Lightning Information Memorandum • Management Data Government & Associations: • China Association of Automobile Manufacturers • China Auto Industry Association • China Automotive Technology & Research Center • China Internal Combustion Engine Industry Association - Electrics Branch Statistics • National Bureau of Statistics • China Statistical Yearbook • China Economic Yearbook • China Automotive Industry Yearbook • China Environment Yearbook • China Urban Construction Yearbook • China Commercial Intelligence Network Broker Reports: • CICC • CITIC Securities • United Securities • Orient Securities External Reports: • China Auto-parts Market Analysis 2008, Information Explorer • Vehicle Alternator Market Analysis and Forecast, China Auto Motor Business • Great Potential of China High Power Alternator Market, Frost & Sullivan • China Engine Supplier Output & Sales Analysis 2008, CATARC • Competition and Market Trend in Engine Industry Given New Emission Standards, Advanced International • Truck Segment Analysis, Datamonitor • China Heavy Truck Market 2008: New Opportunities, China Auto Industry Association • China Truck Market Review and Forecast, ASKCI • Medium & Large Bus Demand Forecast 2008 • Auto Export Analysis 2008, China Auto Industry Association • Motor World DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  8. Agenda • Executive summary • Company overview • Lightning business assessment • Synthesis • Next steps DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  9. Section Title Executive summary TBD DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  10. Agenda • Executive summary • Company overview • Lightning business assessment • Synthesis • Next steps DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  11. Company overview Lightning is a leading alternator and starter motor supplier for medium and heavy trucks and buses in China • Lightning entered into China market through the JV with Beijing Jinhui Auto Electric in 2001 • Lightning now has a manufacturing site in Beijing, and a sales network consisting of 23 offices, 31 regional distributors and over 160 service point • Currently Lightning is focusing on alternators and starters for diesel engine in China • Lightning is primarily selling into the medium and heavy truck and bus sectors • Predecessor of Lightning’s China practice, Beijing Automotive Alternator Factory (BAAF), was established 1971 1996 • BAAF began joint venture discussion with Lightning US 1998 • BAAF started to carry Lightning’s products in China 2000 • BAAF was transformed from a collectively owned enterprise into a limited liability company, Beijing Jinhu Auto Electric 2001 • JV between Lightning US and Jinhu was founded Important note: in this report, buses and trucks refer to heavy and medium buses and trucks except indicated otherwise Source: Lightning Information Memorandum DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  12. Company overview Bus alternator is Lightning’s key product, accounting for 47% of its domestic sales in 2008. However majority of the growth comes from its truck alternator sales Lightning domesticsales revenue by product (2003-08) CAGR%(2003-08) Lightning domesticsales growth by product (2003-08) Millions of RMB Millions of RMB 26.3 Total 673 124 588 Starter85.0 130 75 Truck alternator51.8 391 35 673 306 19 142 253 12 209 6 Bus alternator12.6 317 303 237 209 212 194 175 2003 Increase in bus alternator Increase in truck alternator Increase in starter motor 2008 2003 04 05 06 07 08 Source: Management Data DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  13. Company overview Lightning is dealing with a relatively concentrated customer base with top 5 customers accounting for 53% of total revenue in 2008 • As the downstream industries, including vehicle OEMs and engine manufacturers, are very concentrated in China, Lightning’s customer base is also concentrated • share of Lightning’s top 5 customers increases from 41% in 2006 to 53% in 2008 • There was a significant jump in sales to major customers in 2007, management claims that it is because they successfully expanded their sales of truck alternators in those customers • Weichai Power had serious conflicts with its parent group and finally spin off from the group in 2006. During this process, Lightning fully supported and stayed closely with Weichai Power. In return, it gains trust from the senior management team Weichai Power and significantly increase its share within Weichai Power Lightning’s domestic revenue breakdown by customer (2006-08) CAGR%(2006-08) Millions of RMB 31.2 Total 673 589 23.7 Other 10.7 Shanghai Diesel 26.2 Wuxi Diesel (28.9) Weichai Deutz 391 4.6** Suzhou Kinglong 4.8 Chaoyang Diesel 11.1 Kinglong 65.5 Zhengzhou Yutong 58.7 Yulin Diesel 46.4 DCEC* 57.2 Weichai Power 2006 07 08 % of Top 5 customers 40.5 51.6 52.9 Note: * Dongfeng Cummins Engine Corp.; ** Growth between 2007 and 2008 Source: Lightning information memorandum DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  14. Company overview Lightning’s price has been slightly decreasing over the past 3 years and this trend is expected to continue in the future with a slightly lower rate except for starter motors Lightning historical domestic ASP of key products (2003-09H1) Lightning domestic ASP projection* (2008-12F) CAGR%(2007-09H1) CAGR%(2008-12F) Thousands of RMB per unit Thousands of RMB per unit Bus alternator Truck alternator Starter (4.0) Bus alternator-8SC3110VC (3.8) Management expects starter motor update due to new emission standard will require better products and hence slightly increase the ASP Truck alternator-JFZ27/25 Starter-M93R/94R/100R (0.6) (3.4) (3.5) (4.1) 2007 08 09H1 2008 09E 10F 11F 12F Source: Management Data DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  15. Company overview Lightning’s management projects a revenue growth of 13.5% over the next 5 years, with majority of the growth coming from starter motor Lightning’s historical and projected domestic sales revenue (2003-12F) CAGR%(2003-08) (08-12F) Lightning domesticsales growth by product (2008-12F) Millions of RMB Millions of RMB Total 26.3 13.5 1,115 964 349 Starter motor 85.0 38.5 787 673 657 (4) 588 1,115 Truck alternator 51.8 9.8 391 306 673 253 209 Bus alternator 12.6 (0.8) 2008 Increase in bus alternator Increase in truck alternator Increase in starter motor 2012F 2003 04 05 06 07 08 09E 10F 11F 12F The key objective of the project is to assess the likelihood of the growth projection Source: Management Data DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  16. Agenda • Executive summary • Company overview • Lightning business assessment • Synthesis • Next steps DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  17. Lightning business assessment Lightning assessment set-up Chinese alternator and starter motor market Market overview Sector analysis Bus alternator Truck alternator Bus starter motor Truck starter motor Aftermarket Market size and growth Customer overview Supplier overview Sector size and growth Customer purchasing behavior Competitive landscape Market Feedback on Lightning DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  18. Lightning business assessment Market size and growth Chinese alternator and starter motor market Market overview Sector analysis Bus alternator Truck alternator Bus starter motor Truck starter motor Aftermarket Market size and growth Customer overview Supplier overview Sector size and growth Customer purchasing behavior Competitive landscape Market Feedback on Lightning DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  19. Market size and growth The total alternator and starter motor market in China is estimated to be ~1.1bn in 2008 Alternator and starter motor market size – new installation market(2008) PRELIMINARY Percent RMB620m RMB489m 100 Bus 90 80 Dummy 70 60 50 Truck 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Alternator Starter motor Source: China Association of Automobile Manufacturers, L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  20. Market size and growth The Chinese alternator and starter motor market has grown at ~14% from 2003 to 2008 Historical new installations of alternators and starter motors(2003-08) CAGR% (2003-08) • 2005 drop was largely due to the decline in heavy-duty truck sales. Main reasons for heavy truck sales drop include: • FAI decline due to macro-economic control • strict control on overload • raw material price surged Thousands of units 14.1 1,802 Total 1,733 1,313 13.4 Starter motor 1,251 1,065 934 13.8 Truck alternator Bus alternator 18.8 2003 04 05 06 07 08 Source: China Association of Automobile Manufacturers, L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  21. Market size and growth Robust growth in underlying markets and increase in bus alternator usage are the two key drivers for the growth of alternators and starter motors Underlying market growth Alternator usage change Historical sales of medium and heavy duty truck and medium and large buses(2003-08) CAGR%(2003-08) Thousands of units 16.1 Heavy duty truck 8.8 Medium-duty truck 11.3 Medium and large bus 2003 04 05 06 07 08 • The sales of medium-heavy duty trucks and medium-large buses have experienced fast growth since 2003 despite a temporary drop of heavy duty trucks in 2004/05 • the increasing transportation demand and highway construction are the major drivers of truck sales • increased urbanization has stimulated the passenger transportation, driving the demand for medium and large buses • Several years ago, most large buses and almost all medium buses are equipped with only one alternator • as more buses are equipped with large air conditioning systems, single alternator cannot meet the increasing electricity demand and new buses often equip 2 alternators • bus OEMs think average usage of alternators used in bus has become matured and will not change in the next five years • All the trucks use only one alternator and the number will not change Source: China Association of Automobile Manufacturers, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  22. 50 Market size and growth Medium and heavy trucks and buses are expected to grow at a slower pace given the growth rate of major drivers have been slowing down • FAI directly drives the sales of heavy and medium-duty trucks • heavy and medium-duty trucks mostly serve for fixed asset constructions Historical and forecasted FAI growth (2003-10F) China cumulative highway length (2003-13F) CAGR%(2003-08)(08-13F) Urbanisation rate forecast*(2003-13F) CAGR%(2003-08)(08-13F) Percent Thousands of kilometers Percent 12.3 6.8 2.2 1.6 2003 2003 2003 04 05 06 07 08 09E 10F 05 07 09 11 13 05 07 09 11 13 • The cumulative of highway length is highly correlated with the sales of heavy-duty trucks and buses • heavy-duty trucks and large buses are mainly serving long-distance transportation • The development of urbanization is one of the key drivers of heavy-duty trucks and buses • urbanization directly drives the demand of real estate • a larger number of urban population requires more public transportation Note: * The data derives from interpolation from UN’s projection for 2000 to 2050 Source: United Nations, China Economic Yearbook, Deutsche Bank, CICC, CITIC Securities, Nomura and First Capital, L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  23. Market size and growth As a result,the total sales of medium-and-heavy-duty trucks and medium-and-large buses are expected to grow at 5-10% over the next 5 years Projected sales volume* of medium-and-heavy duty trucks and medium-and-large buses in China (2003-13F) CAGR%(2003-08)(08-13F) Thousands of units 10.5 High case 16.1 9.6 L.E.K. Heavy-duty trucks 8.0 Low case Medium-duty trucks 5.4 High case 8.8 5.0 L.E.K. 5.0 Low case 8.4 High case L.E.K. 11.3 4.5 Large and medium bus 3.4 Low case 2008 09E 10F 11F 12F 13F Note: * Include both domestic and export sales Source: China Auto Industry Association, CICC, CITIC securities, United Securities, Orient Securities, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  24. Market size and growth Therefore, new installations of alternators and starter motors are expected to grow at c.7% over the next 5 years Projected new installationsofalternator and starter motor (2008-13F) CAGR% (2008-13F) Thousands of units Total 6.7 2,498 2,329 2,171 2,024 1,888 6.8 1,802 Starter motor Truck alternator 7.2 Bus alternator 4.5 2008 09E 10F 11F 12F 13F Source: L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  25. Lightning business assessment Market size and growth Chinese alternator and starter motor market Market overview Sector analysis Bus alternator Truck alternator Bus starter motor Truck starter motor Aftermarket Market size and growth Customer overview Supplier overview Sector size and growth Customer purchasing behavior Competitive landscape Market Feedback on Lightning DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  26. Customer overview The purchasing and usage of alternators and starter motors involve multiple parties, including fleet owners, vehicle OEMs, engine manufacturers with engine manufacturer being the major direct purchaser China alternators and starter motors value chain Alternator & starter manufacturers Engine manufacturers Truck/bus manufacturers Fleet owners Alternator & starter Diesel Engine Vehicle Major product route Bus alternator Minor product route Source: L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  27. Customer overview The diesel engine sector is fairly concentrated, with top 5 suppliers accounting for ~70% of the overall market and ~90% of heavy duty truck engine sector China diesel engine market share by volume(2008) • China diesel engine manufacturing is highly concentrated • most diesel engine suppliers are within giant SOE* autogroups or have good relationship with large SOE truck and bus OEMs • Diesel engine manufacturers usually have strong influence on decisions on alternator and starter motor supplier • except for the bus alternator sector, where fleet owners are inclined to specify the brand, engine suppliers typically are the major decision maker for the purchase of alternators and starters • Some major OEMs and engine suppliers have internal alternator and starter motor supplier, such as FAW Engine and AOBO Alternator, Xiangfan Dongfeng’s alternators and starters to supply DCD** and DFMC*** • in Dongfeng’s engine plants, over 80% alternator and starter purchasing is from captive suppliers “… Dongfeng’s internal starters and alternators company enjoys higher price and secured sales volume each year due to internal orders …” Purchasing Manager, Weichai Power Percent 100 Others Shanghai Diesel 90 BAIC Foton 80 Yangchai CNHTC (Sinotruck) 70 Jiangling Auto 60 Dongfeng Motor Chaochai 50 Weichai (Shaanxi Heavy) 40 Yunnei FAW 30 Yuchai 20 10 0 Overall diesel engine Heavy duty truck engine Engine manufacturers are the key customer group for both alternators and starter motors With Captive supply Note: * SOE = State owed enterprise ** DCD = Dongfeng Chaoyang Diesel Engine *** DFMC = Dongfeng Motor Corporation Source: China Association of Automobile Manufacturers, Lightning Information Memorandum, L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  28. Customer overview Both medium-and-heavy-duty truck and medium-and-large bus OEM industries are also very concentrated in China China medium and heavy truck and medium and large bus market share by volume(2008) • China medium-and-heavy-duty truck and medium-and-large bus OEM industries are both concentrated • top 2 bus manufacturers account for ~50% of the market • top 5 truck manufacturers represent over 70% of total sales volume in 2008 • In most cases, vehicle manufacturers use the alternators and starters recommended by engine suppliers • there are some exceptions when fleet owners specify the brand or vehicle manufacturers have big concern on the product quality of supplier recommended by engine manufacturers Percent 123k units 748k units 100 90 Others Others 80 Dummy 70 BAIC Foton Shaolin Weichai (Shaanxi Heavy) 60 Huanghai Jianghuai 50 CNHTC (Sinotruk) Zhongtong 40 Yutong FAW 30 20 King Long Dongfeng 10 0 Vehicle OEMs are typically less important for Lightning as they normally do not purchase or make supplier decision, except for some bus OEMs 0 10 20 30 40 50 60 70 80 90 100 Medium and heavy duty truck Medium and large bus Source: China Association of Automobile Manufacturers, Lightning Information Memorandum, L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  29. Customer overview The fleet owner sector, however, is generally very fragmented with the largest bus fleet accounting for only 5% of the total number of vehicles Market share of leading public bus fleets(2007) • Fleet operation is a very fragmented industry with a large number of regional fleet owners • using public transport sector as an example: in 2007 there are 342k buses in China, however the largest fleet owner, Beijing Public Transport Holdings, only account for ~5.5% of the total number • truck fleets are usually owned by small companies or individuals, therefore they are even more fragmented than the bus fleets • Most large bus fleet owners typically specify alternator brand, as they care about the quality due to higher requirements. Truck fleet owners generally do not specify suppliers for both alternators and starter motors • Lightning has already penetrated into most bus fleets and established good reputation Percent 100 90 80 70 60 Others 50 40 30 Tianjin Public Transport Group Chengdu Public Transport Group 20 Chongqing Public Transport Holdings 10 Shanghai Bus Group Beijing Public Transport Holdings 0 The strong influence and low concentration of fleet owners ensures Lightning is not likely to substantially lose its share in bus alternator segment 2007 Source: China Association of Automobile Manufacturers, China Automotive Industry Yearbook, company websites, L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  30. Customer overview To summarize, the customer base for truck and bus alternators and starter motors is very concentrated with engine manufacturers being the key customer group Role of value chain participants in purchasing decision process Lightning’s sales revenue to Top 10 customers* by customer type (2008) Percent 100 90 Bus manufacturer 80 70 60 50 40 Engine manufacturer 30 20 10 0 2008 Lightning’s own sales data also reflect the importance of engine manufacturers Note: * Top 10 customers account for 63% of Lightning’s domestic sales in 2008Source: Management Data, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  31. Lightning business assessment Market size and growth Chinese alternator and starter motor market Market overview Sector analysis Bus alternator Truck alternator Bus starter motor Truck starter motor Aftermarket Market size and growth Customer overview Supplier overview Sector size and growth Customer purchasing behavior Competitive landscape Market Feedback on Lightning DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  32. Supplier overview Bus and truck alternator and motor starter industries are highly concentrated; Lightning is a major supplier of bus and truck alternators as well as bus starter motors China truck and bus alternator and starter market share by volume(2008) Percent 184k units 748k units 123k units 748k units 100 Others Others Others 90 Others BOSCH Dongfeng 80 Yida Hengli Iskra 70 BOSCH 60 Shendian AOBO 50 Yida Lightning Dehong 40 Shendian 30 Lightning 20 Lightning Dongfeng 10 Lightning 0 0 10 20 30 40 50 60 70 80 90 100 Bus alternator Truck alternator Bus starter Truck starter Source: Company websites and releases, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  33. Supplier overview Almost all the major suppliers are supplying both alternators and starter motors Major bus and truck alternator and starter suppliers in China ü ü ü ü û No presence Dominant presence Minor presence Source: Company websites and releases, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  34. Supplier overview Multiple suppliers and open bidding are the most common purchasing practice in the market Multiple suppliers Open bidding • Engine manufacturer and bus and truck OEMs usually have multiple suppliers with relatively stable relationship • customers can avoid supplying shortage by using multiple suppliers • the competition among suppliers can also lower the price and maintain the high quality of products “… Customers usually introduce multiple suppliers to drive the competition and lower the purchase price …”Sales Manager , Huzhou Dehong Auto Electrical System • Historically, customers gradually reduced the number of suppliers. Currently, most of them keep one or two major suppliers and another 3-4 minor suppliers • interview feedback suggests that most customers would like to keep the number of suppliers unchanged • Open bidding is often used in alternator and starter purchase • most engine manufacturers are required to use open bidding in the process of component purchasing “… As I know, most SOE companies registered in National Ministry of Industry and Information Technology are required to include open bidding in the purchasing process …” Engine Sales Manager, Dongfeng Cummins Engine • However, customers generally stick to their supplier pool and normally only suppliers on their qualified suppliers list could attend the bidding • the purchase price and sales volume spit between suppliers is usually determined through open bidding Source: L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  35. Supplier overview However, long-term relationship, high switching cost and under-the-table transaction make new suppliers difficult to penetrate into existing customers Long-term relationship High switching cost Under-the-table transaction • Existing customers value suppliers with long-term relationship and would like to stay with the best ones • Current suppliers generally have good track record in both the engine manufacturers and its customers • they understand customer needs well and satisfy customers’ requirement for quality and price • Switching costs is high as customer need new design, testing and checking feedback from their customers • engine and OEM customer concern own reputation if any problem occur due to switching to new supplier • Existing customers would not easily switch suppliers due to high costs • new suppliers have to go through very long and strict process. It usually take at least 2-3 years for suppliers to achieve large volume in a new customer • Under-the-table transaction is popular in the market • suppliers would try their best to build relationships with key personnel and sometimes give kick-back directly • it is generally regarded as a common practice in this industry and new suppliers need time to build relationships Even having penetrated into customers, new supplier need some time to achieve large volume orders Source: L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  36. Lightning business assessment Market size and growth Chinese alternator and starter motor market Market overview Sector analysis 1 2 3 4 5 Bus alternator Truck alternator Bus starter motor Truck starter motor Aftermarket A B C D Market size and growth Customer overview Supplier overview Sector size and growth Customer purchasing behavior Competitive landscape Market Feedback on Lightning DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  37. 1-A Bus alternator- market size and growth Bus alternator market is expected to recover to 2008 level in 2013 Bus alternator market value(2008-13F) Bus alternator market volume(2003-13F) CAGR% (2003-08)(08-13F) CAGR% (2008-13F) Thousands of units Millions of RMB 18.8 4.5 0.5 PRELIMINARY 2003 04 05 06 07 08 09E 10F 11F 12F 13F 2008 09E 10F 11F 12F 13F Source: China Association of Automobile Manufacturers, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  38. Major route Minor route 1-B Bus alternator- purchasing behavior Although majority of the bus alternators are purchased by engine manufacturers, fleet owners are typically involved in the supplier selection and willing to specify brands based on own experience • Bus alternators are purchased by either bus OEMs or engine manufacturers with the latter accounting for majority of the volume • Although not purchasing directly, fleet owners are typically the key decision makers in bus alternator segment • fleet owners, especially large ones, usually specify the alternator brand as they care the reliability of alternators. They prefer to brand that they have good experience with “… City bus fleets like us usually choose the alternator supplier ourselves.We usually designate the brand that we have used and appreciate …” Technical Manager, Shanghai Baoshan Bus • Lightning has established a very good reputation among fleet owners, which in return makes it top of their choices • compared with products from other suppliers, Lightning’s products are considered to have longer life span and higher reliability • in addition, Lightning also have very good after-sales service and can quickly response to the problems of fleet owners • Fleet owners are increasingly willing to specify alternator brands, which will benefit Lightning given its current high penetration and outstanding track record within fleet owners Purchasing decision process in bus alternator segment Fleet owners ~Half ~Half Large fleet owners Small fleet owners Majority Minority Majority Minority Large fleet owners make purchasing decision Leave to bus manufacturers Make purchasing decision Minority Majority Bus manufacturers make purchasing decision Leave to engine manufacturers Engine manufacturers make purchase decision Strong influence from fleet owners on supplier decision is favorable for Lightning to maintain its current dominant position in the bus alternator segment given its very good track record with fleet owners Source: L.E.K. interview and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  39. 7 1-B Bus alternator- purchasing behavior Quality is cited as the key selection criteria by bus alternator customers, followed by service and customer relationship Key Purchasing Criteria for Bus Alternator Average Ranking • Both fleet owners, the major decision makers, and engine manufacturers, the major purchaser, regard quality as key selection criteria. They care about the life span and reliability most “… Quality is the most important criteria in selecting bus alternators. We would prefer products with longer life span …” Engine Sales Manager, Dongfeng Cummins Engine “… Among all the selection criteria, we value quality the most. Bus operation really needs alternators to have stable performance and low failure rate …” Technical Manager, Nanchang Public Transportation Group • Service and customer relationship are also very important when determining the alternator suppliers • Price is less important and customers are willing to pay the premium for bus alternators with higher quality “… We know that Lightning’s alternators are more expensive than other brands. But compared with the total price of a bus, this is less important and we would like to pay more for its better quality …” Technical Manager, Yinjian International Travel Service Fleet • Moving forward, customers are expecting better customization from alternator suppliers to deal with complex electrical applications in buses. Meanwhile more large alternators will be used to satisfy the increasing power demand n=14 1 Quality 2 Service 3 Customer relationship 4 Price Track record and reputation 5 6 Customization 7 Delivery and lead-time 8 Payment terms Degree of importance Least Important Most Important Source: L.E.K. interview and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  40. 1-C Bus alternator- competitive landscape Lightning occupies c.90% of the bus alternator market, followed by several minor suppliers including Feipeng and AOBO Estimated bus alternator market share (2008) • Market participants agree that Lightning is the leading supplier in bus alternator sector with a share of c. 90% • most leading bus OEMs and their engine supplier are using primarily Lightning’s alternators. They feel that Lightning’s quality is much better than domestic suppliers • as alternators used in bus are large in size and more complicated, it is regarded as high in technology requirements. Minor suppliers, such as Feipeng and AOBO, are not able to compete with Lightning. They recognize Lightning’s dominant position in the bus alternator sector “… Lightning clearly has technical advantage in the bus alternator market…” Sales Manager, Sales Manager, Beijing AOBO Automotive Electronic & Electric Appliance • The only supplier with comparable quality is BOSCH, however BOSCH is regarded as less interested in this market and very poor in service. With its higher price, BOSCH has a much smaller market share “… BOSCH is a famous alternator supplier for its good quality. However, it provides very poor services in China market. I think BOSCH haven’t put much efforts and investment in this area, probably because the company does not really care this market at all …”Engineer, Engine Division, Huanghai Bus • Because Lightning’s alternators have outstanding quality, customers usually stick to Lightning’s product. Therefore Lightning is very likely to maintain its strong position in bus alternators moving forward “… Lightning’s product does have better quality than other brands. Once people try it, they will keep using it …” Engineer, Development Department, Anhui Ankai Bus Percent 100 Others * 80 60 Lightning 40 20 0 2008 Note: * Including Feipeng, AOBO, Dehong, Qianghua, Dongfeng, Daewoo and other minor alternator suppliers Source: L.E.K. interview and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  41. 1-C Bus alternator- competitive landscape Customers generally regard Lightning’s product quality and service as unmatched in the bus alternator sector Source: L.E.K. interview and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  42. 1 Bus alternator-summary In general, Lightning has a very solid positioning in the bus alternator market. While it is expected to maintain its position, the overall market growth is slower • The total market size reaches RMB277mn in 2008 • large bus accounting for 35.8% of the market Market size Market growth • Same as the underlying bus market, the future market growth of bus alternators is expected to be 0.5% over the next 5 years. It is slower than historical level due to the larger base and economy slowing down Lightning’s Current Positioning • Currently, Lightning is the market leader in bus alternator sector with significant competitive advantage over other competitors against key purchasing criteria (quality, service and customer relationship) • Lightning has a very good relationship with all major customers (engine manufacturer and bus OEMs) and end-users (bus fleets) Lightning’s Future Outlook • Lightning already has very high penetration in the market, and there is limited room for Lightning to further increase its market share • However customers are generally very sticky to Lightning for its outstanding quality and services, therefore Lightning is likely to maintain its dominant position in the market Source: L.E.K. analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  43. 2-A Truck alternator- market size and growth Truck alternator market is expected to grow at ~5% p.a. and reach RMB440m in 2013 Truck alternator market value(2008-13F) Truck alternator market volume(2003-13F) CAGR% (2003-08)(08-13F) CAGR% (2008-13F) PRELIMINARY Millions of RMB Thousands of units 13.8 7.2 5.0 2008 09E 10F 11F 12F 13F 2003 04 05 06 07 08 09E 10F 11F 12F 13F Source: China Association of Automobile Manufacturers, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  44. Major route Minor route 2-B Truck alternator- purchasing behavior In most cases, alternator supplier is specified by engine manufacturer in the medium and heavy truck sector Purchasing decision process in truck alternator segment • Truck OEMs typically get alternator supply from engine manufacturers rather than purchasing by themselves “… We do not purchase alternator ourselves and all the truck alternators come along with engines from the engine suppliers …” Engineer, Anhui Huangling Auto • It is generally the engine manufacturer that makes the decision to select alternator suppliers “… Our purchasing and technology department will choose alternator supplier and provide to customers …” Senior Engineer, Sinotruk “… Some new OEM customers may specify brands that previously used in their trucks with reliability but in most cases customers would trust in our professional selection and accept our recommendations …” Purchasing Staff, Dongfeng Chaoyang Diesel • Truck OEMs are increasingly relying on engine manufacturers in choosing alternator suppliers “… With more experience in working with suppliers and OEM customers, we know what customers want and would equip engines with the most suitable and reliable alternators for them …” Purchasing Manager, Weichai Power Fleet owners Minority Majority Fleet owners decide brand Leave to truck OEMs Majority Minority Leave to engine manufacturers Truck OEMs decide brand Engine manufacturers decide brand Engine manufacturers are the most important decision maker along the value chain Source: L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  45. 6.4 2-B Truck alternator- purchasing behavior Price and quality are the most important criteria to truck alternator customers Key Purchasing Criteria for Truck Alternator Average Ranking • Being the key decision maker, engine manufacturers value both price and quality the most • price is a major consideration for engine manufacturers • quality, referring to high reliability and long life span, is also important to choose truck alternator supplier “… We want to use products with less problems otherwise it would ruin our reputation and increase our warranty costs …” Sales Manager, Dongfeng Chaoyang Diesel • for medium truck engines, quality of alternators would not be as important as that of heavy truck engines due to less complexity in products • Truck alternator customers are more and more caring about services from their suppliers • services include pre-sales services to engine suppliers and after-sales services to OEMs and fleet owners “… We would prefer using alternator suppliers who can offer appropriate products to meet our specification requirement and response quickly when problems occur on customers’ side …” Purchasing Manager, Weichai Power n=8 1 Price 2 Quality 3 Service 4 Customer relationship 5 Track record and reputation 6 Customization 7 Delivery and lead-time 8 Payment terms Degree of importance Least Important Most Important Source: L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  46. 2-C Truck alternator- competitive landscape Lightning is already the largest supplier in the truck alternator sector with 30-40% of the market, however it is most strong in the larger capacity alternators for heavy trucks and relatively less competitive in the smaller capacity units • Lightning entered truck alternator market in 2003 and has become the largest supplier. Lightning is stronger in large capacity truck alternator used primarily in larger heavy duty trucks due to their apparently better quality over other suppliers • its share of wallet in Weichai Power and FAW Wuxi Diesel Engine, the largest two engine supplier for heavy duty trucks, has reached 95% and 40% respectively due to good quality, service and close relationship “… Lightning has a dominant position in our truck alternator supply since 2006/2007 as it offered us great support and also our OEM customers all appreciate its quick response and service support …”Purchasing Manager, Weichai Power • in smaller truck alternators, market feedback is that the Lightning’s quality advantage is less significant. Lightning is behind other local suppliers, such as Dehong, for higher price “… Lightning’s alternator is superior for higher power products for heavy trucks, but its medium truck alternator does not have obvious advantage in terms of quality and local suppliers such as us are also doing well …” Sales Manager, Huzhou Dehong • China truck market are moving towards more heavy duty trucks, which will benefit Lightning given its strength in the larger capacity truck alternators • Among the major suppliers, Dongfeng Alternator is captive to its parent automotive group, Dongfeng Motor Corporation (DMC). 30% of the engines used by DMC is from internal supply, which is almost only using own alternators • AOBO has kept a very tight relationship with FAW for components supply Estimated truck alternator market share (2008) Percent 100 Others 90 Dongfeng 80 Iskra 70 60 AOBO 50 Dehong 40 30 20 Lightning 10 0 2008 Source: L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  47. 2-C Truck alternator- competitive landscape All the current customers of Lightning are very satisfied with its products and services Source: L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  48. 2 Truck alternator-summary Overall Lightning is likely to further increase its share in this sector. However the share gain may not be very significant as it is relatively difficult for Lightning to increase penetration dramatically in the smaller alternator segment • Total market size for medium and heavy truck alternators reached ~RMB340mn in 2008 • heavy truck alternators, where Lightning is stronger, account for 50-60% of the market Market size Market growth • In line with medium and heavy truck market, the truck alternator market is likely to see steady growth at ~5% p.a. • heavy trucks would expect to have higher growth than medium trucks, due to central government’s investment plan in infrastructure and increasing demand in transportation • Lightning is already the largest supplier for truck alternators. It has apparent quality advantage for larger capacity truck alternators primarily used in heavy trucks. In the smaller truck alternator, its quality advantage is regarded as less significant • With good quality and unmatched service, Lightning has very good relationship with major customers Lightning’s Current Positioning • Lightning would benefit from higher growth rate in heavy truck where it is stronger. As a result it could increase its share in the overall truck alternator market • Lightning is likely to keep or increase current share in major customersfor its high quality and better services. However as the smaller alternator customers typically see no difference in quality among major suppliers and have existing suppliers with long-term relationship, it would be difficult for Lightning to significantly increase its penetration in those customers Lightning’s Future Outlook Source: L.E.K. interview and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  49. 154 3-A Bus starter motor- market size and growth Bus starter motor market is expected to grow at ~2% p.a. and reach ~RMB80m in 2013 Bus starter motor market volume (2003-08) Bus starter motor market value(2008-13F) CAGR% (2003-08)(08-13F) CAGR% (2008-13F) 2.4 Thousands of units Millions of RMB 11.3 4.5 2008 09E 10F 11F 12F 13F 2003 04 05 06 07 08 09E 10F 11F 12F 13F Source: China Association of Automobile Manufacturers, L.E.K. interviews and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT

  50. 3-B Bus starter motor- purchasing behavior Bus starter motor suppliers are generally specified by engine manufacturers • Unlike bus alternators, bus starter motors suppliers are mainly specified by engine manufacturers • starter motor is viewed as part of the engine and hence it is usually engine manufacturers that decide starter motor brand “… Since the matching of starter motor and engine is very important, I believe those engine manufacturers want to choose the starter motors themselves …” Engineer, Technology Centre, JAC Bus • another reason is that customers do not care the quality of bus starter motors as much as they do in alternators • However, as the end users, fleet owners are capable of imposing influence on starter motor purchasing. Lightning is leveraging its strong relationship with major fleet owners and good reputation to persuade them to ask for Lightning’s starter motors at the very beginning “… Lightning is actively persuading bus fleet owners and let them appoint its starter motor products …” National Sales Director, Quanzhou Yida Electric Appliance Purchasing decision process in bus starter motor segment Fleet owners Minority Majority Make purchasing decision Leave to bus manufacturers Majority Minority Leave to engine manufacturers Make purchasing decision Make purchasing decision Good relationship with fleet owners and established reputation as a quality supplier are expected to help Lightning to gain share in the bus starter segment Source: L.E.K. interview and analysis DAB2\PRESENTATIONS\FINAL PRES\DAB2_DRAFT FINAL REPORT_V14.PPT