INDUSTRY OVERVIEW SOURCE OF INFORMATION

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1 This section contains information and statistics relating to the PRC economy and the industry in which we operate. We have derived such information and data partly from publicly available government and other third-party sources, which have not been independently verified by us, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED], any of the [REDACTED] or any of our or their respective directors, officers, representatives or affiliates, or any other party involved in the [REDACTED]. Our Directors have taken reasonable care in the reproduction of such information, which may not be consistent with other information compiled within or outside the PRC. We commissioned Frost & Sullivan, an independent market research firm, as an industry consultant to prepare an industry research report (the Frost & Sullivan Report ). We believe that the sources of the information in this section are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. Unless otherwise specified, the market and industry information and data relating to the global and PRC markets for machine tools and CNC high precision machine tools in this section and elsewhere in this document has been derived from the Frost & Sullivan Report. SOURCE OF INFORMATION We commissioned Frost & Sullivan to conduct analysis of the global and PRC machine tool and CNC high precision machine tool markets and other economic data and to prepare the Frost & Sullivan Report. We have agreed to pay a fee of approximately RMB1.1 million for the Frost & Sullivan Report, which will be paid prior to the [REDACTED]. Our Directors are of the view that the payment of the fee does not affect the fairness of conclusions drawn in the Frost & Sullivan Report. Frost & Sullivan is an independent global market research and consulting firm founded in 1961 and based in the United States. It offers industry research and market strategies and provides growth consulting and corporate training. The Frost & Sullivan Report includes both historical and forecast information on the PRC machine tool and CNC high precision machine tool markets and other economic data. To prepare the Frost & Sullivan Report, Frost & Sullivan undertook both primary and secondary independent research through various resources within the PRC machine tool and CNC high precision machine tool industries. Primary research involved interviewing leading industry participants. Secondary research involved reviewing company reports, independent research reports and data in Frost & Sullivan s own research database. Frost & Sullivan has adopted the following primary assumptions while compiling and preparing the Frost & Sullivan Report: (i) the social, economic and political environment in the PRC is likely to remain stable in the forecast period; and (ii) related industry key drivers are likely to drive the market in the forecast period. Frost & Sullivan has also obtained the figures for the estimated total market size from historical data analysis plotted against the macroeconomic data as well as the industry key drivers. Our Directors confirm that, after making reasonable enquiries, there have not been any material adverse changes to the market information set out in the Frost & Sullivan Report since the date of such report which may qualify, contradict or have an impact on the information contained in this section. AN INTRODUCTION TO MACHINE TOOLS Machine tools refer to machines that cut away surplus materials to leave a work piece of required shape and size, produced to an acceptable degree of accuracy and surface finish by cutting, milling, boring, grinding, drilling, shearing or other forms of deformation. 64

2 The following chart generally illustrates the segmentation of machine tools: Classification of Machine Tools Based on How the Material is Shaped Based on How the Selection/Movement is Controlled Metal Cutting Machine Tools Metal Forming Machine Tools Others Conventional Machine Tools CNC Highprecision Machine Tools A special processing method for processing metal or other rigid materials by cutting or grinding etc. Sub-categories include: turning-lathe, milling machine, grinding machine, etc. and CNC high-precision categories including precision automatic lathe, precision turret machines, precision grinding machines, precision machining centers, etc. Metal forming is a kind of pressure forming technology. It utilizes pressure to realize sheet metal or volume forming, or to achieve the separation, shear, bending and other stamping process. Sub-categories include mechanical press, hydraulic pressure machines, etc. and CNC high-precision categories such as precision thread and form rolling machine, etc. Others refer to machine tools used for processing nonmetal materials, including foundry machinery and woodworking machine. Conventional machine tools refer to the processing of materials in a traditionally controlled manner, i.e. without automation. Subcategories include conventional lathe, drilling machine, milling machine, etc. The automation of machine tools that equipped with numerical program control system. Subcategories include precision automatic lathe, precision turret machines, precision thread and form rolling machine, precision grinding machines, precision machining centers, etc. THE PRC MACHINE TOOL MARKET Despite influenced by the financial crisis of world economy in 2012 and its subsequent impact, the PRC machine tool industry has witnessed an overall growth since 2011 due to government policies aiming to advance new technology and expand mechanical industries, resulting in a high demand and revenue for the PRC machine tool market. According to Frost & Sullivan, the market size of the PRC machine tool industry by revenue and sales volume was expected to reach approximately RMB281.5 billion and 1,764,900 units, respectively in 2016, demonstrating a CAGR of approximately 1.7% and 1.2% in terms of both revenue and sales volume from 2011 to 2016, and are expected to reach approximately RMB313.4 billion and 1,928,500 units, respectively in 2021, representing a CAGR of approximately 2.2% and 1.8%, respectively from 2016 to The PRC CNC high precision machine tool industry An introduction to CNC high precision machine tools CNC high precision machine tools refer to machine tools that perform high precision work under the control of numerical program control system consisting of precise instructions on the methodology of the manufacturer, data handling, decoding as well as response to input. By reducing production time and human labour, CNC high precision machine tools increase the production efficiency and produce more products with higher precision than conventional machine tools. CNC high precision machine tools are primarily divided into the following major products: (i) precision automatic lathes, which removes material from a rotating work piece via the movements of various cutting tools and are typically used for the mass production of high precision small and long-axis bar components for IT and electronic products, office equipment, medical apparatus, consumer electronics products, automobiles, etc.; (ii) precision turret machines, which allow multiple cutting operations to be performed automatically and sequentially and are widely used for the production of plate-shaped or relatively large-diameter bar components for automobiles, pneumatic component manufacturing and metal processing, etc.; (iii) precision machining centres, which remove materials from rotating tools while the work piece remains relatively still and can be used in various components processing, including metal processing and automobile, IT and electronic equipment, etc.; (iv) precision thread and form rolling machines, which are designed to cold-work external screw thread on solid cylindrical blanks and are mainly used for mass production of processing complicated shape with no symmetry holes in rotary axis and are widely used for the construction and 65

3 automobile industries; and (v) precision grinding machines, which use grinding wheels to grind and polish the metal work pieces and are widely used in cars, internal-combustion engine, military industry, aerospace, general and precision machinery. Overview of PRC CNC high precision machine tool industry The market size of the PRC CNC high precision machine tool industry by revenue and sales volume was estimated to reach approximately RMB116.4 billion and 423,600 units, respectively in 2016, representing a CAGR of approximately 4.0% and 5.6%, respectively from 2011 to At a comparison, the market size of the PRC conventional machine tool industry by revenue and sales volume was estimated to reach approximately RMB165.1 billion and 1,341,300 units, respectively in 2016, representing only a CAGR of approximately 0.2% and 0.0%, respectively from 2011 to The chart below illustrates the life cycle of PRC CNC high precision machine tool industry: Stage Highlights Initial Formulation : China imported 113 technologies including 7133 CNC high-precision machine tools. The production level of CNC high precision machine tools increased from 692 machines in the 1980 to 1959 machines in 1985, a total of 2.83 times more : China began partnering up with foreign countries and exporting to the international market. Further Development From , China s annual production and consumption growth rate averages to 39.3% and 34.9%, respectively. In 2005, the amount of CNC high-precision machine tools exports reached 231 million USD. In 2006, 85,800 CNC high-precision machines were produced accumulating 334 million USD; In 2007, 123,300 CNC high-precision machines were produced. Steady Growth Over the recent years, China has made advancements in the technology, quality, and the production level of CNC high-precision machine tools. However, there is still a strong reliance on foreign technology. The gap of CNC ratio within production between developed countries and China will be further shrink. The competitive PRC markets as well the competitive non- PRC market will further drive the high precision manufacturing of many industries such as automobile and consumer electronics. There are several hundred sizes and varieties of machines, many options and many varieties of control system are available Future Time The charts below illustrate the historical and projected PRC CNC high precision machine tool market and conventional machine tool market in terms of revenue and sales volume from 2011 to 2021: Machine Tools Market Size Breakdown by Revenue (China), E Billion RMB E 2016E-2021E Conventional Machine Tools 500 Conventional Machine Tools 0.2% -0.6% CNC High-precision Machine Tools 400 CNC High-precision Machine Tools 4.0% 5.7% E 2017E 2018E 2019E 2020E 2021E 66

4 Machine Tools Market Size Breakdown by Sales Volume (China), E ( 000) Unit E 2016E-2021E Conventional Machine Tools 3,000 Conventional Machine Tools 0.0% -0.1% CNC High-precision Machine Tools CNC High-precision Machine Tools 5.6% 6.9% 2,000 1, , , , , , , , , , , ,000 1, , , , , , , , , , , E 2017E 2018E 2019E 2020E 2021E The chart below illustrates the sales ratio of CNC high precision machine tools within the PRC from 2011 to 2021: 40 % Note: Sales ratio of CNC high precision machine tools = CNC Machine Tools Sales Volume Machine Tools Sales Volume % 20.9% 22.9% 23.3% 23.6% 24.0% 24.8% 25.9% 27.4% 29.0% 30.7% E 2017E 2018E 2019E 2020E 2021E As illustrated above, going forward, due to the development of CNC technology and favorable government policies, the sales ratio of CNC high precision machine tools within the PRC, being the ratio of the total sales volume of the PRC CNC high precision machine tools divided by the total sales volume of the PRC machine tools, is expected to further increase to approximately 30.7% in 2021, much higher than the sales ratio of approximately 19.4% in According to Frost & Sullivan, the sales ratio of CNC high precision machine tools in the PRC was expected to reach approximately 24.0% in 2016, where such ratio in Japan, Germany, USA, South Korea and Taiwan in 2016 was expected to reach approximately 65.9%, 64.0%, 52.9%, 42.3% and 28.5% respectively. The sales ratio of CNC high precision machine tools demonstrates the overall technical capability and the technology advancement of a country. As such, although there is a growth in the PRC CNC high precision machine tool industry, the PRC CNC high precision machine tool industry is behind in terms of maturity of the CNC technology compared to the other developed countries, in particular, Germany and Japan. In other words, there are potential for the expansion of the PRC CNC high precision machine tool industry. 67

5 The chart below illustrates the sales ratio of CNC high precision machine tools in different countries: Sales Ratio of CNC High Precision Machine Tools (Global), 2016E Global Average 18.0% Japan Germany 65.9% 64.0% USA South Korea 42.3% 52.9% Switzerland 33.8% Taiwan 28.5% China 24.0% Note: Sales ratio of CNC high precision machine tools = CNC Machine Tools Sales Volume Machine Tools Sales Volume SELECTED KEY CNC HIGH PRECISION MACHINE TOOLS IN THE PRC Precision automatic lathe market The PRC precision automatic lathe market is expected to experience a continuous growth due to the advanced development of downstream industries, such as the automobiles and electronic products and the government policies that encouraged the export of machine tools produced in the PRC. Precision automatic lathe market accounted for approximately 1.4% of the overall PRC CNC high precision machine tool market in terms of sales volume in According to Frost & Sullivan, the revenue and sales volume of the PRC precision automatic lathe market was expected to increase from approximately RMB1.8 billion and 5,921.7 units in 2016, respectively to approximately RMB2.5 billion and 8,591.2 units in 2021, respectively, representing a CAGR of approximately 6.8% and 7.7% from 2016 to 2021, respectively. Precision turret machine market The PRC precision turret machine market accounted for approximately 13.3% of the overall PRC CNC high precision machine tool market in terms of sales volume in According to Frost & Sullivan, the revenue and sales volume of the PRC precision turret machine market was expected to increase from approximately RMB17.2 billion and 57,700 units in 2016, respectively to approximately RMB23.4 billion and 81,500 units in 2021, respectively, representing a CAGR of approximately 6.3% and 7.2% from 2016 to 2021, respectively. As the future expansion of the PRC machine tool industry will mainly focus on the improvement of CNC high precision machine tools, precision turret machine market is expected to have a positive outlook. 68

6 Unit/ Million RMB THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE AND THAT THE INFORMATION MUST BE READ The charts below illustrate the historical and projected PRC precision automatic lathe market and precision turret machine market in terms of sales volume and revenue from 2011 to 2021: Precision Automatic Lathe Market Size by Sales Volume and Revenue (China), E Million RMB E 2016E-2021E Sales Volume Revenue 12,000 Sales Volume 6.3% 7.7% 10,000 Revenue 5.6% 6.8% 8,000 8, ,000 4,000 4, , , , , , , , , , , , , , , , , , , , , , E 2017E 2018E 2019E 2020E 2021E Precision Turret Machine Market Size by Sales Volume and Revenue (China), E Billion RMB E 2016E-2021E Sales Volume Revenue 120 Sales Volume 6.2% 7.2% 100 Revenue 5.1% 6.3% E 2017E 2018E 2019E 2020E 2021E 18.1 SELECTED MAIN APPLICATION USES OF CNC HIGH PRECISION MACHINE TOOLS IN THE PRC According to Frost & Sullivan, PRC automobile industry is the largest industry for the application of the CNC high precision machine tools which was expected to account for approximately 35.1% of the revenue of the PRC CNC high precision machine tool industry in Further, with the trend of energy saving and emission control in the automobile market, the industry will require more CNC high precision machine tools. The market size of automobile industry in the PRC has increased from approximately RMB4,918.5 billion in 2011 to approximately RMB8,645.4 billion in 2016, representing a CAGR of approximately 11.9% from 2011 to The PRC automobile industry is expected to continue to grow at a CAGR of approximately 9.2% from 2016 reaching approximately RMB13,434.2 billion in Growth in the PRC automobile market is due to various factors, including increasing popularisation of passenger automobiles and trucks used in the infrastructure construction and logistics industries. 69

7 The consumer electronic product industry is the second largest industry for the application of the CNC high precision machine tools, which is expected to account for approximately 20.9% of the revenue of the PRC CNC high precision machine tool industry in According to Frost & Sullivan, the market size of PRC consumer electronic industry experienced significant growth from approximately RMB1,140.0 billion in 2011 to approximately RMB2,886.2 billion in 2016, representing a CAGR of approximately 20.4% from 2011 to 2016, due to the innovation and development of wireless communication, computer, smart phones and tablets. The market size of the PRC consumer electronic industry in terms of revenue is expected to continue to grow at a CAGR of approximately 14.1% from 2016 to 2021 and will reach approximately RMB5,586.5 billion in The pie chart below illustrates the breakdown of the PRC CNC high precision machine tool market by application in terms of revenue in 2016: Revenue of CNC High-precision Machine Tools by Application Segments (China), 2016E 3.1% 4.7% 5.9% 11.2% 35.1% 19.1% 20.9% Automobile Consumer Electronics National Defence and Aerospace Energy Equipment Ship Medical Apparatus Others PARTS AND COMPONENTS The core parts and components used in the manufacture of CNC high precision machine tools are: (i) main engine, which is the main part of CNC high precision machine tools and is used to cut or process materials; (ii) numerical control devices, which are the core of CNC high precision machine tools and perform various control functions, among which, CNC system panels is the most essential composing material of CNC high precision machine tools and has an average purchasing price ranging from approximately RMB50,000 to RMB100,000 from 2011 to 2015; (iii) actuating devices including principle axis actuating unit, feeding unit, principle axis dynamo and feeding dynamo; and (iv) other supplementary materials, including numerical control rotary tables and monitoring devices that ensure the successful operation of CNC high precision machine tools. The price of CNC high precision machine tools has been changing with the fluctuation of the prices of its raw materials, including steel and CNC system panels. 70

8 The chart below illustrates the fluctuations in the prices of steel from 2011 to 2016: Steel Steel is one of the major raw materials in the manufacture of CNC high precision machine tools. There was a steady downturn of the average price of steel from 2011 to 2016 due to oversupply of steel. There are different types of CNC system panels in the market and the average prices of which range from RMB50,000 to RMB100,000 throughout 2011 to According to Frost & Sullivan, fluctuations in the prices of the raw materials and the average price of CNC high precision machine tools of the raw materials were not significant. KEY BARRIERS TO ENTRY Key barriers to entry in the PRC CNC high precision machine tool market include: (i) advanced technology and design capacity; (ii) financial capacity and equipment; (iii) branding and market reputation; and (iv) management and organisation skills. Advanced technology and design capacity are the key to manufacture complicated CNC high precision machine tools which meet customers specific requirements. Financial capacities and equipment are essential for manufacturing CNC high precision machine tools, building a comprehensive sales network, training technology talents and managing customer relationship. Branding and market reputation are fundamental to win customers trust in respect of manufacturers product quality and stability, and are critical to be successful in this competitive market. Management and organisation skills are required in all aspects for the manufacturing business. AVERAGE PRICE OF THE PRC CNC HIGH PRECISION MACHINE TOOLS According to Frost & Sullivan, the average price of CNC high precision machine tools in the PRC slightly decreased from approximately RMB297,000 per unit in 2011 to approximately RMB280,000 per unit in 2015, and is expected to decrease to approximately RMB259,000 per unit in 2021 due to technology innovation and reduced reliance on import. There was no material fluctuation in the average price of CNC high precision machine tools in the PRC from 2011 to The average price of precision automatic lathe in the PRC decreased slightly from approximately RMB313,000 per unit in 2011 to approximately RMB303,000 per unit in 2015, and is expected to decrease to approximately RMB290,000 per unit in The average price of precision turret machine in the PRC also decreased slightly from approximately RMB314,000 per unit in 2011 to approximately RMB302,000 per unit in 2015, and is expected to decrease to approximately RMB287,000 per unit in According to Frost & Sullivan, overall speaking, the average price of CNC high precision machine tools is expected to have no significant change from 2016 to

9 COMPETITIVE LANDSCAPE The PRC CNC high precision machine tools market is led by a small number of domestic major players with the market highly fragmented. Our key competitors in the PRC machine tool market primarily include: (i) Dalian Machine Tool Group Corp., which primarily offers lathes, economic lathes, full capacity lathes, machining centres, transfer and unit machines that are used in automobile, vessel, aerospace, electricity engineering and textile industries and accounted for approximately 7.0% in the PRC CNC high precision machine tool market in terms of revenue; (ii) Shenyang Machine Tool Co., Ltd., which primarily offers CNC lathes, vertical machining centres and special lathes that are primarily used in automobiles, vessel, electronics, rail transport and engineering industries and accounted for approximately 3.9% in the PRC CNC high precision machine tool market in terms of revenue; (iii) Beijing Jingdiao Group Co., Ltd., which primarily offers CNC machines and CNC systems that are primarily used in the woodcarving and medical equipment industries and accounted for approximately 2.1% in the PRC CNC high precision machine tool market in terms of revenue; (iv) Qinchuan Machine Tool & Tool Group Share Co., Ltd., which primarily offers CNC high precision machine tools, plastic machinery and environmentally friendly materials, hydraulic and auto parts and CNC systems that are used in automobiles, aerospace, engineering and education industries and accounted for approximately 0.9% in the PRC CNC high precision machine tool market in terms of revenue; (v) Ningbo Haitian Precision Machinery Co., Ltd., which primarily offers CNC lathes and machining centres that are primarily used in aerospace, transport, engineering industries and accounted for approximately 0.8% in the PRC CNC high precision machine tool market in terms of revenue; (vi) Citizen (China) Precision Machinery Co., Ltd., which primarily offers automatic lathes and turning lathes that are primarily used in the precision instrument manufacturing and electronics, engineering industry and accounted for approximately 0.6% in the PRC CNC high precision machine tool market in terms of revenue; (vii) Yamazaki Mazak (China) Co., Ltd., which primarily offers, among others, CNC lathes and laser processing machines that are primarily used in automobiles, engineering and agricultural electronics and medical industry and accounted for approximately 0.6% in the PRC CNC high precision machine tool market in terms of revenue; and (viii) MAG(USA)-Group Corp., which primarily offers automatic and turning lathes that are primarily used in automobiles, energy, aerospace, mining and agricultural industry and accounted for approximately 0.6% in the PRC CNC high precision machine tool market in terms of revenue. OUR KEY ADVANTAGES OVER OUR COMPETITORS According to Frost & Sullivan, we have five key success factors: (i) our superior customer services in reducing delivery time and providing after sales services such as repair and maintenances to customers; (ii) our long-term and stable relationship with quality suppliers which enables us to receive better pricing and maintain cost advantages over our competitors; (iii) our professional management team that has management experience and in-depth knowledge of CNC high precision machine tool industry in the PRC and inherits the professional management heritage of over 70 years from Tsugami Japan; (iv) our Trademarks and Technology licensed from Tsugami Japan have enabled us to utilise the industry-leading technology of Tsugami Japan to meet customers increasing needs for CNC high precision machine tools. We are also able to achieve a CNC rate of 100.0% in terms of manufacturing, higher than the average rate of approximately 30.0% for most of the machine tool manufacturers in China; and (v) our strong sales and distribution network that not only covers the major cities and provinces in the PRC as well as Taiwan and other overseas markets through the Tsugami Japan Group. 72

10 FUTURE DEVELOPMENT Key drivers There are five key drivers of growth in the PRC CNC high precision machine tool market: (i) sustained growth of macro economy and industrial output value; (ii) rising and shifting demand from downstream industry on CNC high precision machine tools; (iii) evolutionary sales channel of CNC high precision machine tools; (iv) rising adoption of CNC system; and (v) adequate regulations support for CNC high precision machine tool industry. According to Frost & Sullivan, China s nominal GDP is expected to sustain a long-term growth with a CAGR of approximately 7.7% from 2016 to 2021 and reach approximately RMB105.7 trillion in Given the high correlation between the PRC CNC high precision machine tool market and the macro economy, the PRC CNC high precision machine tool industry is likely to be further strengthened. Secondly, as the CNC high precision machine tools continue to be applied to different industries including the electronic device, automobile and healthcare industries, the further development of these industries will stimulate the CNC high precision machine tools demand from end users. Thirdly, in order to lower the risk of default payment by selling through distributors, the manufacturers will expand the regional coverage of their business, thereby facilitating the development of the CNC high precision machine tools. Considering the sales ratio of CNC high precision machine tools is expected to exceed 30% by the end of 2021, there is a positive outlook for the development of the CNC high precision machine tool industry in the PRC. Finally, as the PRC government continues to adopt favourable policies that support and boost the development of the CNC high precision machine tool industry, such as encouraging the development of the manufacturing technology of machines tools and strengthening the competitiveness and demand of machine tools in the PRC, more business opportunities will be generated for the CNC high precision machine tool industry in the PRC. Industry development The PRC CNC high precision machine tool market is full of opportunities. Import of CNC high precision machine tools from Japan and Germany currently exceeds 60.0% of the total consumption of CNC high precision machine tools in the PRC in terms of sales volume, according to Frost & Sullivan, indicating the increasing demands for CNC high precision machine tools in China. China s economic restructure also drives the development of many downstream industries, such as civil industry and national defence industry, which in turn offers new opportunities for the development of CNC high precision machine tool market. Meanwhile, the PRC CNC high precision machine tool manufacturers also face the following challenges: (i) technological gap in numerical system between China and some developed countries such as Japan and Germany; and (ii) China s limited ability in research and development of some crucial components and parts in manufacturing CNC high precision machine tools, which results in overseas suppliers restrictive measures over China s procurement of crucial components and parts. The five main trends for the development of PRC CNC high precision machine tool market are: (i) high speed; (ii) intelligentalisation; (iii) high precision oriented; (iv) technology integration; and (v) product diversification. Firstly, PRC CNC high precision machine tool market has entered into a high-speed era. Manufactures need to shorten their delivery time by upgrading their automation level, while improving product quality. Further, the overall performance of CNC high precision machine tools can be improved by, among others, manufacturers innovation in CNC systems, neural network and evolutionary computation in the era of artificial intelligence technology advancements. Thirdly, production system for manufacturing industries shall be transformed from labour incentive to technology intensive in order to cope with the rising labour costs and the industry trend of energy saving and emission reduction, and as a result, the demand for high precision CNC high precision machine tools will be increased. Fourthly, the increasing application of CNC high precision machine tools with high technologies integrated can reduce the production time and increase productivity in mass production. Finally, CNC high precision machine tools are widely utilised in different downstream industries. With the rapid development of some downstream industries, such as IT and electronic products automobile and medical apparatus, there will be an increase in demand for the CNC high precision machine tools from such downstream industries. 73