Both macro and micro data points suggest construction machinery is inflecting:

On the macro side, we see infrastructure and property construction ac tivities accelerating.

On the micro side, we see a wide range of product types recording yoy growth for the first time since the downcycle began in 2011, and machinery (mainly excavator) utilization hours is also improving.

We believe Lonking is the best option for investors looking to position for such a recovery (CL-Buy, 38% upside potential):

1) we prefer loaders and small-/mid-sized excavators to large excavators as large exactor demand is likely to remain weak due to weak mining FAI. Lonking generates 65% of its revenue from loaders and 11% from small-/mid-sized excavators; 2) we also prefer loaders to concrete machinery whose recovery will lag other equipment by 2-3 quarters in our view; 3) we like Lonking’s exposure to rollers/forklifts, which are seeing relatively strong sales rebounds (64%/32% yoy in April) due to less aggressive selling in 2010-11; 4) at 2014E P/E and P/B of 7.3X/0.8X, Lonking looks very attractively valued vs. construction machinery peer medians of 11.9X/1.1X.

While we remain cautious on mining equipment in general, we upgrade SANYI to Buy (30% upside potential) because: 1) we think its main product, roadheaders, will stabilize and recover ahead of other equipment; and 2) we expect costs savings of Rmb190mn in 2 013 (vs. 2012 net profit of Rmb500mn) thanks to the major restructuring undertaken by the company in 2012.

We cut 2013E/14E/15E EPS for our construction and machinery coverage by 26%/28%/21%, mainly from construction machinery compani es as we lower volume assumptions due to weaker-than-expected 1Q13 shipment data. We continue to use our Director’s Cut valuation framework ( EV/GCI vs. CROCI/WACC), but roll forward to 2014E estimates from 2013E along with ValRatio changes.