JinJiang Hotels Development-A 4Q17operation:robust RevPAR growth and Vienna expansion continued

Robust RevPAR growth in 4Q17 driven by ADR increase
    Jinjiang-A reported its Dec-2017 monthly operational data. Domestic hotelsRevPAR growth in 4Q17 continued to be robust. Jinjiang and Plateno series bothenjoyed RevPAR growth of 6-8% yoy in 4Q17. Vienna's blended RevPAR growthseems flattish. In our view, this is mainly due to its fast expansion (c.40% of totalVienna hotels are newly-added, which are still in ramp-up period). To breakdown:
    RevPAR of Jinjiang series increased by 4.3%/5.7%/6.1% in Oct/Nov/Dec,mainly driven by ADR growth of 4.3%/2.7%/3.0%.
    RevPAR of Plateno series increased by 9.1%/7.9%/6.7% in Oct/Nov/Dec,mainly driven by ADR growth of 14.6%/12.9%/11.9%.
    RevPAR of Vienna series increased by -1.1%/2.0%/1.7% in Oct/Nov/Dec,mainly driven by ADR growth of 1.4%/1.2%/2.2%.
    Midscale hotels expansion driven by Vienna
    Jinjiang added 191 hotels in 4Q17 to reach a total hotel number of 6,694 in 2017-End (vs. 6,503 in 9M17). Jinjiang is upgrading its products aggressively to midto-upscale hotels, mainly through the Vienna brand (99 hotels added in 4Q17),just like China Lodging's strategy for more mid-to-upscale hotels and the Hantingupgrade. Management had guided previously that c.15% of hotels are midscale.
    In addition, 50-60% of the hotel portfolio pipelines are midscale. The Vienna brandled the midscale hotel market expansion with c.300 hotels added in 2017 to reach754 hotels as of 2017-End (vs. 464 hotels in 2016-End).

Wangsu Technology Alert:False alarm

No white knight, expect speculators to retreat
    In response to recent news articles suggesting Tencent taking a 10% stake inWangsu (Sina 26th Jan), Wangsu announced on 28 January that the companyhas not had any discussions with Tencent around this topic nor has thecompany received any such offers from Tencent. While we see some rationalethat Tencent may be interested in a strategic stake in Wangsu, given thestrong wording from Wangsu, such possibilities may be slimmer than what themarket may be hoping for (as reflected by the recent rally in its share price).
    Without a white knight and with competition in the CDN market continuing tobe intense and the stock trading on FY17 PE of 40x, we retain our SELL.
    Tencent would be a useful ally
    Notwithstanding the news, we think Tencent would be a useful ally to Wangsudue the following: 1) the two can cross-sell into each other’s client base andimprove their product offerings, 2) the two combined would have strongerpurchasing power when negotiating bandwidth pricing with the telecomoperators, 3) industry competitive dynamics may be improved if the twoindustry heavyweights were to join forces, and 4) the ability to leverage offeach other’s resources, particularly in security software and the overseasnetwork PoPs.
    What could deter the deal from happening?
    We also see a few deterrents for such deal from happening which make usshunning away from the stock despite the appeal of potential M&A: 1) Wangsudoes not yet have a strong cloud offering and hence would not directly bolsterTencent’s cloud capabilities, 2) earnings visibility in the CDN market remainslow and current valuation of Wangus is not cheap, 3) Wangsu may want toremain independent given a significant portion of their customers are internetcompanies and siding with one internet giant could result in customer attritionof those from the other camps, 4) potential difference in personalities andstrategic directions between founders of the two businesses.

Baosteel Co.,Ltd.Alert:Real alpha in the Chinese steel sector;Buy re-iterated

FY17 preliminary results beat consensus and DB estimates.
    Baosteel announced its 2017 full year preliminary results after market close onJanuary 25. The company estimated 2017 full year NPAT to be from RMB19.1to 19.8bn. This beats both DB and Bloomberg consensus, achieving c. 135%FY17 DBe and 117% Bloomberg 2017 full year estimates. The preliminaryresults should be viewed positively by the market and potentially trigger streetanalysts to further upgrade their estimates into 2018.
    Supply-side structural reform and Baowu synergy drove profit growth.
    The supply-side structural reform in 2017 significantly improved the supply anddemand dynamics of steel sector in China. The synergy from Baowu mergerand Zhanjiang project also increased the company’s productions and profitswith strong cost advantage compared to industry peers. We believe that themerger synergies will likely continuously be realised and are likely to lead tostrong profitability of Baosteel in coming years.
    Positive supply and demand dynamics, maintain Buy.
    Based on the preliminary results, the implied 2017 ROAE is c.12-13%,increased by c. 6 percentage points from last year. We believe furtherimprovement into 2018 is still highly likely due to the impacts from ChinaSupply Side Reform and synergies from the Baowu merger. That makesBaosteel's current valuation at 1.1x 2018DBe BVPS not demanding in our view.
    Meanwhile, from recent Baosteel's communications with investors, we don'trule out the possibility of cash dividend pay-out increase resulting from thecompany's strong free cash flow yield. Overall, we deem Baosteel as the realalpha of Chinese steel sector. Buy reiterated.

Wangsu Technology Alert:FY17profit guidance inline but some positives emerging

Profit guidance inline with DB forecast
    Wangsu’s profit guidance of a 32-40% decline in FY17net profit (midpoint -36%) was broadly inline with our forecast of a 35% reduction. Both revenueand net profit saw improvement QoQ. While seasonally 4Q is a strongerquarter due to timing of iPhone upgrades etc, company also indicated thatgross margin has improved QoQ due to improving product mix (from growth inhigher value security and web acceleration services).
    Some easing in industry competition
    Our recent channel checks suggest that most CDN providers are barelybreaking even and have limited room for further price declines. As a resultcompetitive intensity has eased somewhat in 2H17with the rate of pricereduction not as severe as the first half. Wangsu continues to charge premiumpricing vs peers however given their better service quality and more stablenetwork. It is uncertain what premium customers would be willing to place onservice quality and hence there is still risk that Wangsu’s pricing will convergecloser to that of its peers. As such despite these positive signs, given the stockis still trading on 33x FY17PE and still limited earnings visibility, we retain theSELL.

Sunway Alert:Access China conference highlights

Connector BU (CBU) – multiple projects from iPhone
    Sunway highlights multiple growth drivers for CBUs, include:
    Penetrating into Lightning connectors: Sunway's Lightning connector hadbeen qualified by Apple, with shipments to start in 2018. Initially, it willserve as the third suppler (after Hon Hai and JAE), but Sunway is confidentit will gain shares in long run. Every new iPhone comes with threeLightning connectors in the box (one for power adapter cable, one for earpod cable, and one for audio adapter cable).
    Rising dual cam penetration on iPhone: Sunway expects all three newiPhones in 2H18will have dual cam (vs only two models with dual cam in2H17). Their camera related mechanical parts (dual cam supporting framesand VCM cases) will benefit from rising dual cam penetration
    Rising market shares in iPhone EMI shielding cases: Sunway got into thisbusiness since late 2015, and expects to win more EMI shielding case slotsin 2018or gain higher market shares in current slots.

Hikvision Alert:DB Access China conference highlights

Maintain BUY and TP of CNY43.
    Hikvision attended DB's Access China Conference 2018 in Beijing on 10January 2018. We summarize the key takeaways in this note. Maintain BUY.
    Solid growth outlook with management guidance of 20-30% growth.
    Management maintained its prior guidance of 20-30% sales growth each yearin 2017/2018.The growth will stem from both the domestic and overseasmarket as the company continues to expand market share. Hikvision notedthat the rising network transmission bandwidth with the lowering price fordata transmission will continue enabling product upgrades with higherresolution and better image quality for the recorded image/video. Currently, weforecast Hikvision's revenue to grow 28%/27% in 2017/2018, respectively.
    Long term GPM target of over 40%; DB expect margin stabilization.
    Following years of margin decline, 1-3Q2017 GPM has reversed the trend.
    Management attributed to a) improving product mix with less contributionfrom low margin HDD sales, b) earlier payment discount to its suppliers, c)higher margin associated with AI products. We expect 4Q17 GPM to trenddown, as with historical pattern, given the rise in the low margin constructionrevenue before the year ends. Compared to management's long term grossmargin target of over 40%, we expect Hikvision's GPM to stabilize at 44% in2018/19, driven by rising contribution from solution business and AI products.
    AI: focus on applications with its "AI cloud" framework.
    Much discussions focused on Hikvision's exposure to AI and the competitivelandscape. The company believes the high price tag for AI-equipped productsremains the hurdle for a widespread adoption. In addition to algorithm,Hikvision focuses on the AI applications with a complete product line fromfront-end camera to back-end recorders/servers. The management's strategy inits "AI cloud" targets edge cloud to filter unnecessary data and provide fasterresponse given amount of image/video that each camera collects and the loadon the data transmission network. Currently, the AI equipment were sold in acomplete solution for mostly the public safety and transportation projectswithin the domestic China, to increase efficiency. On its AI exposure in theoverseas market, Hikvision won a smart city project in Singapore in 2017. Weestimate that AI products only has single digit contribution to Hikvision but therising adoption of AI will be both revenue and profit accretive.
    Valuation and risks.
    Hikvision remains one of the top buys in the Asian hardware space. Wereiterate our BUY rating with target price of CNY43, which is based on 30xFY2018E PE, supported by 34% profit CAGR in 2017-2019, and 36% averageROE. Risks: market share loss, weak demand in industry project orders.

Wuliangye Yibin:Don't leave the party too early;reiterating Buy

Entering secular growth cycle
    After Wuliangye's 130% share price hike in past 12month, market has increasingconcerns on whether there is still upside. Our view is positive. We expect thecompany to enter a secular growth period in 2018-19, and its earnings to growat 29% CAGR in 2018-20, driven by management’s strong incentives for growthand expanding high end liquor market after Moutai raising price. We revise upour target price to Rmb98, implying 27x 2018P/E. We reiterate Buy.
    Management has strong incentive to drive sales and improve efficiency
    During 1218distributor meeting, Wuliangye management indicates to achievegross sales of Rmb40bn in 2018and Rmb60bn in 2020(vs Rmb30bn in 2017E).Management will invest in channel penetration, brand building and productsstreamlining to drive sales growth. Helped by completion of management sharesincentive schemes and strong support from Wuliangye group, we believe thecompany could achieve its target.
    Moutai’s price hike to release more market for Wuliangye
    On Dec 29, Moutai announced to raise ex-factory price by 18% to Rmb969/bottle,and set retail price at Rmb1499/bottle. As a result, the ex-factory price gap ofMoutai over Wuliangye expands from 10% to 30%. We believe Wuliangye is thebiggest beneficiary of the price hike, helped by the expanding high end liquormarket room released by Moutai.
    We reiterate Buy; revising up TP to Rmb98
    We are revising up our earnings forecast by 13%-42% for 2018-2020to factor in abetter volume growth, mix upgrade, and margin expansion, and revise up targetprice by 40% to Rmb98based on DCF model. We are changing our valuationmethodology from EV/EBITDA to DCF as we believe DCF model can incorporatelong-term growth and solid cash flow. Downside risk: channel de-stocking inhigh-end liquor sector; food safety; worse than expected macro FAI slow down.

Hengrui Medicine:Pyrotinib P2data better than Kadcyla

Pyrotinib data much better than T-DM1and lapatinib
    The PFS benefit (HR=0.374) surprised us despite previous qualitative commentsfrom Hengrui management. We believe it is highly likely Pyrotinib would be thegolden standard in 2L Herceptin relapsed HER2positive BC in China. To us,this is the second meaningful oncology clinical study from China ever, as trialdesign followed a reasonable treatment paradigm that is NOT full of Chinesecharacteristics. After data release at SABCS, we have higher conviction thatpyrotinib will be approved by CFDA based on P2data.
    Among trastuzumab relapsed patients, HR was 0.374while mPFS hasnot been reached in PC arm, vs. 7.1m in LC arm. The baseline PFS dataseemed to be in line with historic data (6.4m from EMILIA, 7m from S Gori2016). The yet-to-be-reached mPFS should be more than 21m, accordingto the data release.
    EMILIA study showed a PFS benefit of 9.6m for T-DM1vs. 6.4m for LC,with a HR of 0.65. Our surprise came from a gap of 21m vs. 9.6m. If thesedata could be repeated in a P3study, pyrotinib would become a goldenstandard in 2L BC.
    Previous studies indicated that TTP (from 1L Herceptin treatment) couldbe a predictive marker for PFS/OS benefit second-line HER2inhibitors.In this study, prior treatment of trastuzumab is associated with a longermPFS (7.1m vs. 5.6m for trastuzumab naive) for LC arms; data were alsoconsistent in PC arms. In our view, this should raise a serious questionfor Chinese regulators regarding the relevance of clinical data from thosestudies, specifically designed for Chinese patients today, who did notfollow NCCN treatment guidelines.
    The additional questions include whether pyrotinib could be used in1L BC, or adjuvant setting, or used off-label in GC. For the first twoquestions, we believe further data are required. That being said, for GCsetting, despite the failure of T-DM1(GATSBY study, 2L GC) and lapatinib(EGF110656, 1L GC), we gained reasonable confidence that pyrotinibmight work based on impressive P2data.

Kweichow Moutai:How much Moutai is stored in channels now?

Restocking cycle to continue; revising up TP to Rmb745.
    We estimate Moutai’s current channel inventory equals six months of Moutai'sreal consumption, indicating there is still room for distributors and high-wealthindividuals to fill up their warehouses. More importantly, this would leavemanagement time to deal with the channel stocking problem. Meanwhile, weidentify three possible catalysts that might trigger channel de-stocking, andbefore these catalysts are triggered, we expect less risk of a strong de-stocking.
    We are revising up Moutai’s TP to Rmb745 and we maintain Buy.
    Current channel inventory equals six months of real consumption.
    We think Moutai’s strong sales recovery from 2016 has been mainly driven byboth channel restocking and a consumption upgrade. Therefore, it is importantfor investors to gauge the water line in the channels. Based on historical channelinventory movement, Moutai’s ex-factory supply, and Moutai’s real consumptionpattern, we estimate that currently there are 12,000 tons of Moutai in distributors'and investors' warehouses, representing six months of real consumption in 2017.
    Compared with the peak level of 12 months in 2012, this implies there is roomfor channels to stock up (Figure 1).
    Three catalysts that could trigger channel de-stocking in next 12 months.
    Distributors are building up channel stocking because they expect the retail priceto continue to go up. Therefore, whenever such an expectation weakens, thecycle could turn from restocking to de-stocking. We identify three events thatmight lead to weakened expectation: 1) Moutai strictly implements a fixed pricee-commerce policy; 2) Moutai raises its ex-factory price at an inappropriate time;and 3) the retail price rises to Rmb2000 suddenly, which is the peak level in the lastcycle. Before these catalysts happen, we believe risk-reward remains attractivefor a Buy on the stock.
    Maintaining Buy.
    Moutai's management is undertaking several measures, including implementingprice guidance, increasing supply and implementing an e-commerce policy, tostabilize the retail price. We expect these measures to push distributors to releasechannel inventory gradually (instead of suddenly). We are revising up our TP toRmb745 based on the DCF method (factoring in 9.5% WACC and 2% TG). Wereiterate Buy. Downside risk: sudden channel de-stocking.

CITS:Top pick and our conviction Buy

Consensus may not fully capture company's growth, short term and long term
    We raise our target price for CITS by 37.5% to RMB55, from RMB40.Management has publicly guided that its duty-free business is likely to seegrowth of over 60% yoy for FY2017. Also, we believe consensus hasn’tfactored in profit from Beijing Airport, the potential opening of a downtownduty-free store and the consolidation of duty-free in Shanghai Airport. Given itsrobust and sustainable growth, high barriers to entry and attractive valuation,CITS has become our conviction Buy for 2018.
    Profit from BCIA should be higher than the consensus estimate
    We expect RMB6.6bn duty-free sales from BCIA (T2& T3) in 2018. We believethe market is overly concerned with the high concessionaire rate from BeijingAirport: 1) during the transitional 12m, CITS will pay the original concessionairerate agreed with Sunrise, and 2) there is still room for GM improvement, giventhe size-up (CITS’ duty-free GP margin was only c.45% vs. Dufry’s 60% in2016). We estimate RMB623m profit contribution for 2017and RMB349m for2018. We believe this has not been factored into WIND/Bloomberg consensus.
    Haitang Bay’s robust growth may continue all the way to 2020
    We have grown more confident on Haitang Bay duty-free sales after our recentchannel checks. We expect duty-free sales to hit RMB6.55bn in 2017, yoygrowth of 43%, and to grow another 28% in 2018. Our channel check foundthat there are two new additions of luxury hotel resorts (new supply of 800-1,000rooms) in Haitang Bay every year to meet the strong demand fromdomestic travelers. We also believe Atlantis and Haichang Ocean Park, two inprogresstheme parks could add another 5-6m travelers to Haitang Bay. Allthese incremental travelers should benefit duty-free sales’ long-term growth.
    Two more significant catalysts may double current profit – not priced in yet
    We believe the current share price hasn’t fully factored in two near-mid-termcatalysts: a downtown duty-free store and consolidation of duty-free businessin Shanghai Pudong/Hongqiao Airports. These two events are likely to bring afurther c.RMB1.2bn in earnings to CITS, which is 35% on top of our 2018E.
    Valuation and risks
    Our TP of RMB55implies a forward PER of 24x on our 2018earningsforecasts, which we believe is very attractive, given that the duty-free businessis protected and enjoys barriers to entry in China. We derive our TP based onDCF (8.1% WACC, 9% cost of equity, beta of 0.9and 3.0% TGR, unchanged).Key downside risks include 1) unfavorable government policy, 2) ecommercecompetition, 3) delays in lifting shopping quota, and 4) competition from OTAs.

ZTE-A and -H:Caution,speed bump ahead;initiating ZTE-H with Hold,ZTE-A with Sell

Leverage to 5G and market share gains mostly priced in.
    ZTE is well leveraged to grow in telco capex from 5G build-out starting in 2020.
    That said, current global appetite for large 5G capex is limited; while there isstronger political support for 5G tech in China, with limited applicationopportunities, we expect Chinese telcos to tread a middle path in the 5G buildout.
    Short term, global telco capex is set to fall 5-7% p.a., although ZTE'scompetitors struggle with profitability, providing some room for share gains.
    With ZTE's share price doubling YTD against a tough market backdrop, upsidepotential appears mostly priced in; Hold ZTE-H and Sell ZTE-A.
    Limited applications to support a widespread 5G rollout.
    Global telcos have expressed reservations about 5G, which likely reflect acombination of: 1) failure to monetize 4G, 2) reduced profitability and 3) limitedviable applications requiring nationwide 5G. For many applications, e.g., videostreaming and IoT, existing technology suffices; for others, e.g., robotics, needscan mostly be met by regional 5G rollout. For most global telcos around theworld, we expect 5G networks to be deployed like islands in a sea of 4G.
    Stronger political support in China should see ZTE better placed.
    There is stronger political support for a 5G build-out in China, with thegovernment aiming to make the nation a networking powerhouse. Hence,Chinese telcos spend on 5G capex will likely be more than their internationalpeers. Our bottom-up build suggests a total 5G capex in China of ~RMB1.5trnto be spent from 2020 (twice the estimated 4G spend), which would lead toc.RMB1.9trn in total capex spending between 2020 and 2024. This would drivea 30% lift in ZTE’s China carrier revenue in 2020 and a further 15% in 2021.
    Opportunities in the near term, but it is a tough environment.
    In the near term, operating conditions for equipment vendors remain tough,with our global team expecting a 6-7% p.a. decline in telco capex (ex US) overthe next two years. Issues at its major competitors present some opportunitiesfor share gains for ZTE, i.e. teething integration issues and potentiallyexcessive pricing discipline at Nokia and poor profitability at Ericsson. We haveassumed a 2-3ppt p.a. market share increase for ZTE in the Asia Pacific andEMEA regions over the next three years to reflect these. In China, we seelimited opportunities for ZTE to gain further material share prior to 5G, given itsalready dominant position with a 30-35% market share in wireless equipment.
    Many of these factors are priced in, with close to no upside potential for ZTE-A.
    While ZTE has put the litigation issues in the US behind it, significant executionrisks remain, given the competitive threat posed by Huawei. With ZTE-Htrading in line with its peers (albeit expensive vs. its own long-run average12mth PE), and with ZTE-A valuation already implying a bullish scenario ofshare gain, margin lift and significant capex blowout in China (leaving little freecash flow for the telcos), we rate ZTE-H a Hold and ZTE-A a Sell.
    Valuation and risks.
    PT based on mid-point of SoTP and DCF valuations (WACC 8.7%, TGR 1%).
    Upside risks: 1) keen 5G applications and 2) govet push to drive 5G spending.
    Downside: 1) share loss and 2) delays in formalizing 5G. See pp. 36–7.

Yili:3Q17earnings beat;reiterating Buy on continued sales recovery

Strong sales growth on recovering sector growth and market sharegains. We estimate the industry retail growth recovered from low singledigit in 3Q16 to high single digit in 3Q17, helped by less price discounton more balanced supply. Meanwhile, Yili's market share in Ambient/chilled products/IMF expanded from 31%/15%/5.7% to 34%/16%/6%respectively (Figure 1).
    Selling expense/sales ratio declined 100bps yoy to 21.9%, helped byeasing of competition within a more balanced supply environment.
    G&A expense declined 150bps yoy to 6.2% from a high base, as Yiliincurred incremental G&A for some one-off event (i.e. internal propertymaintenance).
    SG&A expense savings was partly offset by 102bps yoy decline in grossmargin, due to rising raw milk and packaging prices.
    Improving inventory turnover indicates that 4Q growth to remain strong.
    Inventory days improved from 31.9 days in 3Q16 to 30 days in 3Q17. Given theproduction date is an important decision factor when consumers choose brandsin retail ends, the shorten inventory days indicate improving fresh level of theproducts, which should help to drive its sales growth in 4Q17. The improvinginventory days also indicate a more balanced supply and demand market.
    We expect the recovery trend to continue with an under supply environment.
    We believe Yili's growth recovery from 2Q is mainly driven by more balancedsupply from 2017. After three years capacity reductions for upstream dairy farmsfrom 2014, raw milk supply is becoming more balanced with demand from 2017.
    During the over supply environment, smaller dairy players could source raw milkat a heavy discount compared with large brands, but during the under supply environment from 2017, smaller players need to pay a premium instead. This helpslarge players such as Yili and Mengniu to gain market share.
    Reiterating Buy.
    We are revising up our earnings forecast by 2-4% in 2017-19E, mainly to factorin higher-than-expected sales driven by Yili's market share gains. We revise upour TP by 13% to Rmb31.6 based on a DCF approach, factoring in a 9.5% WACC(3.9% RFR, 5.6% ERP, 1.0 beta, debt-free structure) and 2% terminal growth. Wereiterate Yili as our top pick among our A share coverage. Downside risks: higherthan-expected raw material price increase, food safety incidents and worse-thanexpectedcompetition.

Joyson Electronics:3Q17a small beat on cost discipline;new business gaining momentum

Mild profit growth with SG&A cost control offsetting weak margin
    3Q17revenue grew 9.3% YoY to RMB6.3bn. However, gross profit declined 20.5%YoY to RMB0.9bn in 3Q17with 5.6ppt YoY gross margin deterioration due toincreasing revenue contribution from lower margin segments such as BMS andADAS (auto safety and interconnection system). Together with 1) 17.2% YoY dropin SG&A expenses (SG&A ratio declining to 11.1% of revenue in 3Q17vs. 14.6% in3Q16) and 2) one-off disposal gain of the remaining stake in industrial automationbusiness, but partially offset by 43.1% YoY increase in finance cost, 3Q17netprofit increased by 71.1% YoY to RMB271.1m. On a 9M17basis, Joyson's netprofit of RMB886.7m was up 1.2x YoY and accounted for 78% of our previousfull-year FY17earnings forecasts and 75% of Bloomberg consensus. Therefore,we consider the results slightly above our expectation.
    Deutsche Bank view - auto safety and ADAS gaining momentum
    Joyson is on track to consolidate the KSS and PCC businesses acquired last year.According to the company, the two segments further recorded new contract winsfor active safety products and interconnection system. We raise our FY17-19Erevenue by 2.7-3.0% and net profit by 2.8-4.0% to reflect stronger revenue growthfrom new businesses and lower SG&A cost ratio, partly offset by lower grossmargin assumptions. Maintain Buy on our optimistic view for the growth potentialof KSS in active safety and ADAS market in China. Our TP is set at 30x FY18E P/E(from 27x, given the sector re-rating over the past few months), ~15% below itsmid-cycle P/E of 36x. This is justified, in our view, since we expect the companyto deliver a 37.5% EPS CAGR in FY16-19E. Key downside risks: 1) weaker-thanexpectedauto sales; 2) failure to consolidate KSS/TS or improve profitability; 3)future capital raising to fund potential acquisitions.

Tuopu:3Q17slightly below on FX;maintaining Buy on potential from IBS

6% profit YoY with strong top-line growth offset by margin and FX。
    3Q17gross revenue edged up 25.8% YoY to RMB1.2bn, likely driven by strongorders from local brands OEM customers, such as Geely, SAIC Roewe, andGAC Trumpchi. Gross profit rose 20.0% YoY to RMB324.2m with a 1.3ppt YoYgross profit margin contraction, mainly due to product mix deterioration with lesscontribution from shock absorber and intelligent braking segments, in our view.Together with a flattish SG&A to sales ratio in 3Q17, offset by FX losses (due toRMB appreciation vs. USD) and lower other operating income, 3Q17net profitincreased only mildly, 5.8% YoY to RMB164.1m.。
    On a 9M17basis, Tuopu's net profit of RMB551.1m was up 30.1% YoY andaccounted for 70% of our full-year FY17forecast and 67% of the Bloombergconsensus FY17estimate. Therefore, we consider the results as a slight miss toboth our and consensus expectations.。
    Deutsche Bank view – Buy on growth potential from ADAS。
    We believe Tuopu will continue to benefit from the rapid growth momentumat its key OEM customers and expect Noise, Vibration and Harshness (NVH)parts to remain the company's major revenue contributor. In addition, we remainoptimistic on the growth potential of Intelligent Braking System (IBS) and ElectricVacuum Pump (EVP) products.。
    Our target price is set at a target 26x FY18E P/E (unchanged), near with its midcycleP/E of 28x. Key downside risks: weaker-than-expected auto sales volume;
    failure to record new order awards for IBS/EVP products; and unexpected increasein raw material prices.。

Dahua:3Q17results missed on rising expense and non-ops

3Q17EPS of RMB0.16
    Dahua reported 3Q17EPS of RMB0.16, which was 12% below the DB forecastof RMB0.18on rising selling expenses and higher finance costs. We maintainour Buy rating and TP of CNY27.5.
    Higher selling expense and non-op loss impact on 3Q17profit
    Dahua’s 3Q17revenue and gross profits were in line with the DB forecast, but3Q17operating profits were 9% below, at RMB359m, -49% QoQ/+72% YoY,mainly due to a higher selling expense ratio, at 15%. Moreover, the non-opprofits were below our forecast, as the recurring income from the VAT taxreturn was offset by a surge in finance expense from forex losses. While 3Q17pre-tax income was 24% below the DB forecast, on rising expenses and lowernon-op, Dahua incurred a tax credit of RMB28m, as with the RMB32m taxcredit in 3Q16. 3Q17net income was 12% below the DB forecast at CNY461m,-34% QoQ/+28% YoY, for EPS of CNY0.16. For 1-3Q17, net profit registeredCNY1.4bn, within management guidance of CNY1.3-1.5bn
    2017full-year guidance on profit growth at 20-40%
    Management gave 2017full-year guidance of annual profit to grow 20-40%YoY, with the range of net profit at CNY2.2bn-2.6bn. We note that the newguidance is lower than the raised 25-45% guidance for 1-3Q17profit growthgiven out in August 2017. The lower guidance could potentially be a reflectionof the lower non-op income. As we enter the peak season in 4Q17, we expectrevenue to grow 26% QoQ/59% YoY, while operating margin recovers fromscale. Our 2017full-year profit forecast of RMB2.5bn, for EPS of RMB0.87, isat the high-end of management’s guidance.
    Positive 2018outlook with accelerated profit growth
    We expect the strong revenue growth momentum to sustain into 2018as thecompany continues to expand market share with rising total solution projects.In addition, the AI applications and future PPP projects are catalysts to driveDahua’s growth outlook. In particular, Dahua has indicated participation inAlibaba’s “City Brain” project in providing infrastructures such as front-endsensors, back-end storage and access platforms. We expect OPM to sustain atthe 2017level of 12%, with a rising solution contribution and increasing scale.
    Valuation and risks
    As the 3Q17miss was mainly due to the rising selling expense and lower nonopincome, we lower our 2017earnings by 7% but leave our 2018forecastunchanged. We remain positive on Dahua and our TP is unchanged atCNY27.5, based on 22x FY2018E PE, supported by accelerated profit growth of38%/43% in 2017/2018and ROE expansions. Risks: market share loss andweak orders from solution projects.

Tonghua Dongbao:Another decent quarter

Solid growth from insulin franchise; reiterating Buy
    Tonghua Dongbao (THDB) reported sales/core profit of RMB671m/239m in 3Q17,vs. our estimates of RMB673m/214m, respectively. These represent YoY growthof 14%/31% in 3Q17, vs. 33%/32% in 1H17for revenue and core profit. Givensteady performance of insulin franchise, the overall revenue growth was slowerdue to higher base in 3Q16, where the company had one-time revenue from realestate business and transfer of assets. We note robust profit growth was alsodriven by margin expansion and continued efficiency improvement. Importantly,insulin glargine filed for production in October, with estimated launch in 2H18and meaningful contribution in 2020.
    Smooth ramp-up of insulin franchise; insulin glargine launch expected in 2H18
    According to the company, insulin products achieved sales of RMB537m in 3Q17vs. RMB447m in 3Q16, representing 20% YoY growth. Insulin needles and teststrips registered growth of over 30% and a bit under 20% respectively in 3Q17, vs.30%/20% in 2Q17. Management expects Gansulin 40R to reach RMB100m salesin 2017and 30R to maintain 15% full-year growth. For third-generation insulin,THDB filed production approval for insulin glargine on October 10, expectinglaunch in 2H18and meaningful contribution in 2020. The company is on trackwith insulin aspart and has selected hospitals to conduct clinical trials for 30R.Additionally, insulin detemir received IND approval on October 20. Managementsuggested that insulin aspart 30R would be the next focus after the launch ofinsulin glargine, as currently the two take up 90% of insulin market in China.
    Expecting stable margins ahead
    GM/OPM stood at 75.7%/43.9% in 3Q17vs. 72.8%/40.0% in 3Q16. Managementattributed the hike to slower recognition of expense items from 1H17.Improvement in OPM was mainly driven by 198bps of savings on sellingexpenses. Management guided for stable margins ahead, with 1-2% ASP cutsfrom provincial tenders.
    Raising price target to RMB25.4from RMB23.7; risks
    Our PT is based on 45x 2018E EPS (vs. 42x previously), due to sector re-ratingand regulatory progress of third-generation insulin products. The A-share peersare trading at 36x (vs. 28x previously) with 24% growth in 2018E (vs. 21% forTHDB). In our view, the premium is justified by sustainable growth of the insulinfranchise, ramp-up of CDMP and a compelling risk profile. Key risks: larger-thanexpectedASP erosion, growth slowdown and product launch delays.

Baosteel Co.,Ltd.Alert:Synergy starts to surface;Buy reiterated

9M17 results beat consensus and DB estimates.
    Baosteel announced its 9M17 results after market close on October 27. For thefirst three quarters, the company has recorded revenue at 252.1bn and NPATat RMB 11.7bn. The result beats both DB and Bloomberg consensus, achieving80.7% FY17 DBe and 82.8% Bloomberg 2017 full year estimates. Meanwhile,for 3Q17 alone, Baosteel’s NPAT was RMB5.5bn, 130% up QoQ. We believethe results should trigger street analysts to upgrade their estimates.
    Strong cost reduction; Wugang turnaround and synergy starts to surface.
    The company’s sales volume in 3Q17 came at 11.5mt, down 4% QoQ.
    Baosteel’s products 3Q17 GP/t increased by RMB 317.5/t QoQ. The cost ofgoods sold in 3Q17 decreased by 8.0% QoQ. Baosteel reported a costreduction of RMB17.2bn in 3Q17 alone or RMB55.4bn for 9M17(compare toFY2015 cost level) and might overachieve its full year cost reduction target ofRMB60bn. Meanwhile, the company also reported that its newly acquiredWugang assets have turned around to be profitable with 3Q17 NPAT atRMB855m. Meanwhile, the merger synergy also start to surface and contributeRMB770mn of profits.
    Outlook remains positive, maintain Buy.
    Winter pollution measures in northern China will likely keep 4Q17 steel D/Stight and Baosteel's operations being all in southern China are among thebeneficiaries. We also believe the good profitability of the steel industry willlast into 2018 as we explains in our report: 2018 should be just as good;conviction Buy, published on September 5, 2017). Baosteel is currently tradingat 11.8x 2017DBe NPAT and 1.1 PBx. With upcoming synergy to be deliveredand great profitability to be maintained, we think the valuation isundemanding. Buy re-iterated.

Kweichow Moutai:3Q17result strong beat;reiterating Buy

Around 70% yoy volume growth for mainstream Moutai (DB estimates).To recap, Moutai indicated on August 28that it supplied 6,200tons ofliquor (including 5,600tons of "Feitian Moutai" and 600tons of otherSKUs) between August 15and September 30, to meet the strong demandduring National Holiday and Mid-Autumn Festival, implying 70% yoygrowth.
    Strong growth of super premium Moutai. We estimated that most of 600tons of other SKU are super premium Moutai. This drives mix-upgrade formainstream Moutai.
    Strong growth of mass market Moutai products. According to news fromMoutai website, mass market Moutai sales increased over 200% yoyin the first 9months. This is a result of Moutai's "133" brand strategy(one core brand, three strategy brands - Huamao, Wangmao, Laimao,and three key brands - Hanjiang, Renjiu and Wangzi). Meanwhile, thenumber of domestic distributors increased by 634YTD to 2,965, mainlyfor penetration of mass market Moutai.
    Net margin expanded 440bps yoy on operating leverage
    Moutai's gross margin was stable at 75% in 3Q17, as the impact from lowermargin mass-market products was offset by high margin customized Moutai.Selling expense ratio increased 20bps yoy to 3.2%, due to increasing A&P expensefor its "133" brand strategy and "5+5" channel strategy (5core markets and 5potential markets). G&A expense ratio declined 480bps yoy , mainly helped byoperating leverage.
    Increasing transparency in revenue recognition
    Moutai booked most ex-factory shipments as revenue in 3Q17. This is differentfrom market's and our expectation that it would allocate the shipments into salesand advances from customer accounts. Therefore, advances from customers were stable at Rmb17bn on Sep 30(vs Rmb18bn on June 30). This partlycontributed to the results beat in 3Q. We believe this implies increasingtransparency and improving cooperate governance for the company.

Hengrui Medicine:Patient enrollment completed for pivotal cHL study,earlier than expected

The company believes its PD1has a balanced efficacy and AE profile,which is not much different from marketed compounds. In addition,Hengrui is very well positioned for future combo therapy as it hasthe largest oncology drug offerings. We believe this would be a keydifferentiating element in its PD1program, which will lead to commercialsuccess of the drug.。
    We estimate that Hengrui's PD-L1has largely completed doses escalatingin the ongoing Australia P1study.。
    IDO IND approval is expected in the near term.。
    Hengrui believes different disease etiologies between Chinese and USpatients are likely to contribute to different response rates. In addition tolower response rates in melanoma and NSCLC, different ORR might beobserved in liver, esophageal and gastric cancers.。
    Out of 4ongoing P1US studies, pyrotinib in NSCLC with HER2mutationsis likely to be the priority as risk-reward appears appealing. We believeif meaningful POC data were to be obtained, fast track and orphan drugstatus would be likely.。
    SHR3162, a PARP inhibitor, will enter a P2study in ovarian cancer soon,according to the company. The study may enroll patients who received1/2/3previous lines of therapy, not just 2L and above.。

Robam Alert:3Q17,looking beyond the short-term volatilities,investment case intact

We interacted with investors after the earnings release, key concerns byinvestors and our takes:
    3Q17revenue growth decelerated to 23% YoY (vs. 1H17of 27%):management attributed the deceleration to(1) e-commerce product pricehike that impacted volume and(2) property market slowdown. Despite theslowdown, Robam management is confident in a rather sustainable 25-30% YoY revenue growth in 2018. We believe the 2018growth target isachievable (DBe 28% YoY). We see signs suggesting Robam fares betterthan our expectation amid tier-1-city property slowdown: we estimate thatRobam delivered a high-single digit ppt YoY sales growth in tier 1cities in3Q17, vs. over 10% decline in property transaction. The resilience is drivenby(1) new embedded kitchen appliances and(2) market share gain viadecorated houses, in our view.
    Gross margin declined by 5ppt YoY in 3Q17: Robam management attributethis to wage hikes and accounting changes (Robam started in 4Q16todeduct part of its marketing-related OPEX directly from sales). We noteRobam’s 3Q17EBIT margin expanded by 50bps YoY. More importantly,our channel checks continue to suggest a healthy pricing environment forRobam and Fotile (private). We thus have confidence in a mild grossmargin uptrend for Robam in the next 3years.
    3Q17operating cashflow declined: according to management, the shortfallin operating cash flow YoY can be explained by(1) change in paymentterms by one of Robam’s major e-commerce platforms (explaining 2/3ofthe shortfall) and(2) higher raw material stock taken amid hiking rawmaterial prices.
    Positive investment case intact
    We like Robam for (1) healthy industry pricing environment,(2) Robam’s abilityto penetrate into lower tier cities and(3) new embedded products drivinggrowth. On these three fronts Robam have been sustainably delivering. Wewill continue to monitor the volatilities in gross margin and cash flow butremain comfortable with Robam’s investment case.
    We fine-tuned our model by slightly raising 2019and 2020forecast whileincrease target price by c. 14%, all reflecting more resilient growth.

Dr.Peng Group Alert:Dr.Peng to acquire 49%of Citic Network

A positive step in the long run but negative in the short term
    Dr. Peng announced today that it would look to acquire 49% of Citic Networks’ shares for RMB1.34bn. It came through after a failed attempt by Citic Telecom to acquire the asset due to concerns around foreign ownership. While the deal brings Dr. Peng closer to an integrated fixed broadband provider, restrictions remain around full private ownership of backhaul assets in China with no clear sight of when such rules could be relaxed. Without full operational control, the deal is likely to result in a near-term earnings drag for Dr. Peng and with its top-line growth remaining sluggish, we retain our SELL rating.
    Limited impact on the major operators
    Given Dr. Peng only has 14m fixed broadband subs, representing only 4% of the market, we see a limited competitive threat to the major operators even if Dr. Peng is able to improve its backhaul capabilities via the deal.
    Citic Networks’ losses continue
    Citic Networks is the only backbone operator in China outside of the major telcos with 32,000km of fiber backhaul connecting the capital cities of almost all provinces in China. It reported a RMB104m loss after tax in FY16 with the trend continuing in 1H17. It was also loss making in FY14 and FY15.

Hikvision Alert:10bn investment plan paves the way for future growth outlook

RMB10bn investment for the next four years。
    Hikvision’s board of directors has decided to invest RMB10bn capex to build 4R&D centers and 2industrial bases in five cities in the next four years. Wemaintain BUY rating on Hikvision.。
    Building new R&D centers and production bases。
    The four R&D centers will cost RMB6.5bn and be deployed in the cities ofXi’an, Wuhan, Chengdu and Hangzhou. The construction period for eachproject will take ~ 40months and be completed during 2H21-1H22. Combinedwith Hangzhou R&D center, its R&D network will cover the mid-westernprovinces in China and utilize the local science and education talents to furtherstrengthen its R&D team. The two production bases will cost RMB4bn and bedeployed in Chongqing and Wuhan. The completion of production bases willhelp Hikvision leverage local labor resources and increase capacity.。
    Focus on the R&D talents and increasing capacity。
    We expect these R&D centers to strengthen its core competence in videosurveillance and develop the innovation businesses (such as industryautomation and automotive applications) with new applications. The newproduction bases will increase capacity and vertical integration capability asthe company grows in size. We expect upside to our current capex forecastbut should be manageable given Hikvision’s 2017E profits of RMB9.5bn andnet cash position of RMB9.2bn at the end of 2Q17.。
    Valuation and risks。
    We believe the investment plan is in sync’s management’s strategy in securingits leadership in the video surveillance sector while diversifying into newgrowth segments. Our TP of RMB34.5is based on 25x 2018E EPS, which issupported by 34%/36% ROE and 28%/33% earnings growth in 2017/2018,respectively. Risks: market share loss and weak demand.。

O-Film Alert:Highlighting 3D sensing as new growth driver

Positive growth outlook, but fairly priced.
    We held a field trip in Shenzhen and met O-Film for a business update. O-Filmexpects it can maintain high growth in 2H17 and 2018, driven by dual camera,Apple businesses, fingerprint sensor and 3D sensing module. 3D sensingdraws most of attention from investors. O-Film expects to see small volumeadoption from Android clients in 2018, and a bigger ramp in 2019. Trading at26x PER (or 0.8x PEG), which is fairly priced, despite the high growth. Hold.
    3D sensing module – targeting at both iPhone and Android.
    For iPhone, O-Film targets to be the 3rd supplier for 3D sensing module by2018 (incumbent suppliers are LG Innotek and Sharp) by leveraging its opticalalignment expertise and the long-term relationship of supplying front CCM foriPhone (via the acquisition of Sony's Guandong CCM factory). For Android, OFilmis currently working with three Chinese OEMs on front-facing 3D sensingprojects for 2018 launches, based on Structured Light (SL) technology. OFilm'sSL 3D sensing algorithm comes from its strategic partner, Mantis Vision(in order to bypass iPhone's patent portfolio). ASP of O-Film's total 3D sensingsolution (a front cam + a 3D sensing TX module + a 3D sensing RX module)will be USD15-20. The adoption rate will be low in 2018, but O-Film is positiveon the demand in 2019, with more Android OEMs to play catch-up game.
    Compact camera module (CCM) – dual cam to lead the growth.
    O-Film generated RMB700-800mn sales (10% of CCM sales) from dual cam in1H17 and expects this to grow to RMB3bn-4bn in 2H17 (or 30%+ of CCMsales). O-Film estimates the dual cam penetration on China smartphones willreach ~20% in 2017 and will surge to 40%+ in 2018. ASP of dual cam CCM is~RMB100-120 (vs company average of ~RMB40), with GPM at 15%-20% (vssinge cam's 10%-12%). For high-end dual cam (optical zoom type), O-Filmmade some initial breakthrough, by serving as the back-up supplier for HuaweiP/Mate series and OPPO R series in 2H17. O-Film didn't expect to see severeprice competition on dual cam in 2018, given the ongoing spec upgrades.
    Touch panel (TP) and fingerprint module (FPM).
    TP for Android phones has become a cash cow business to O-Film. The keybreakthrough in TP is getting into iPad supply chain (as the 3rd supplier,following GIS and TPK) since late 1Q17. It supplies ITO film and TP assemblyfor 9.7” and 10.5” iPads. O-Film expects to gain more shares in coming years,given it is the only TP assembler with in-house ITO film capability. O-Filmexpects FPM to see mild revenue growth in 2017, with strong shipmentgrowth (50%+) offset by sharp ASP decline (~30%). O-Film is banking on thetechnology migration (from capacitive-type to ultrasonic or optical-type FPM)to mitigate ASP erosion. O-Film could commence production of optical FPMfor Vivo in late 2017 and ultrasonic FPMs for Huawei and Xiaomi in 2018. ASPof capacitive/ultrasonic/optical FPMs are RMB20-30/40-50/50+, respectively.

Gemdale Corp:Low visibility for sustainable growth,Sell

Growth in sales not translating to bottom-line growth; maintaining Sell
    We maintain Sell, raise FY17-19E earnings by 30-50%, and increase TP by 8%to RMB10.06after factoring faster sales (lifting FY17/18E sales by 24%/75%),better margins (28-30%), new land acquisitions, and 1H results. We believe itscurrent landbank (33msqm) is not enough to sustain sales growth and expectsales to start dropping from FY18E. In addition, we expect more JV projects(only 57% attributable saleable resources), leading to only 9% earnings CAGRin FY17-19E despite gross sales growth. Its slow growth does not justify thevaluation. Gemdale trades at a 19% NAV discount and 8.3x FY18E PE (higherthan Vanke-A with 7.1x PE and 19% NAV discount, but 30% earnings CAGR).
    Unsustainable sales growth and more land acquisitions needed
    In 1H17, Gemdale turned more aggressive in the land market, acquiring GFA of4.45msqm of land, equivalent to 68% of its FY16GFA sold. We estimate thatits current gross landbank of 33mqm can support RMB141bn sales in FY17E(+36% yoy) but more land acquisition is required to sustain its sales in 2018E(estimated RMB135bn sales based on current landbank, -4% yoy).
    Single-digit earnings growth due to increasing JV projects
    Although we expect Gemdale to have 63%/36% sales growth in 2016/2017E,only 55%/42% is attributable. Hence, we expect earnings CAGR of only 9% inFY17-19E, despite gross margin expansion to 28-30% (vs. 25% in 2016).
    High valuation vs. A-share peer
    Gemdale is trading at a 19% NAV discount and 8.3x 2018E PE, which is higherthan the peer average of a 40% NAV discount and 7.1x FY18E PE. Gemdale isdelivering 9% earnings CAGR and 7-8% dividend yield for FY17-19E, while itsA-share peer, Vanke-A, is trading at 7.1x 2018E PE, but delivering 30%earnings CAGR and 4-7% dividend yield.
    Good results, margin improvement to be sustained
    Gemdale reported stronger-than-expected 1H17results: 1) revenue decreasedby 1% yoy to RMB12.7bn; 2) gross margin improved by 8.7ppt to 28.7%; 3)together with the increased contribution from associates and JV, attributableprofit was up 48% yoy and core net profit was up 51% yoy to RMB1.07bn; 4)gearing increased to 41% (28% at end-2016); and 5) no interim dividend wasdeclared. Management guided that the improved margin (~30%) could bemaintained for FY17/18E.
    Valuation and risk (see p.3for details)
    Our revised target price of RMB10.06is based on a 30% discount to revisedNAV of RMB15.3/share. Currently, the ticker is trading at a 19% NAV discount,8.3x FY18E P/E and 1.3x FY17E P/B. Upside risks: 1) better-than-expected salesand margin expansion; and 2) fast and good-quality land acquisitions.

SAIC Motor Alert:1H17in line;Hold on mild growth outlook

6% earnings growth on rising SG&A ratio and soft JVs contribution
    SAIC Motor released its 1H17results after market close on 29August. Thecompany’s 1H17net revenue grew by 13.0% YoY to RMB393.0bn, on the backof 5.8% growth in vehicle sales volume to 3.2m units during the period.Meanwhile, SAIC’s 1H17gross profit grew by 18.6% YoY to RMB51.6bn with62.3bps YoY gross profit margin improvement, possibly due to decent sales fornew local brand models such as Roewe RX5SUV, Roewe i6, MG ZS, andBaojun 510, in our view. However, with 1) 21.1% YoY increase in SG&Aexpenses and 2) only 3.7% YoY increase in profit contribution from itsJVs/associates, 1H17net profit only increased 6.0% YoY to RMB16.0bn. On aquarterly basis, SAIC’s 2Q17net profit reached RMB7.7bn, implying an 8.0%YoY growth (-6.8% QoQ due to seasonality), on 8.9% YoY increase (8.3% QoQdrop) in vehicle sales. 2Q17JVs’ earnings was down 3.9% YoY on 5.6% salesgrowth at Shanghai-Volkswagen (SVW) and SAIC-GM (SGM).
    Deutsche Bank view – stable earnings growth outlook; Hold on valuation
    SAIC’s 1H17net profit accounts for 45% of DBe and 44% of Bloombergestimates. We consider the results in line as 1H15/1H16net profits account for47-48% of full year net profits. Going forward, we expect 2H17E salesmomentum to further ease on a higher base, but we still expect stable salesand earnings growth with more new SUV rollouts going forward. All in all, weenvision a stable earnings growth trajectory for SAIC, with full-year growth inSVW and SGM, driven by new models, and strong Roewe local brand sales.This should support the company’s generous dividend payout. We have a Holdrating on SAIC on fair valuation, and have our target benchmark at 9.0xFY17/18E P/E, which is about one standard deviation above the company'shistorical trading average. This is justified, in our view, as we expect SAIC toachieve a three-year EPS CAGR of 8% in FY16-19E.

NavInfo Co.,Ltd.:1H17missed on lower revenue contribution from IoVs and Jiefa

1H17missed on slower revenue; margin expansion at navigation offset by Jiefa
    1H17revenue expanded 16.8% YoY to RMB833.8m, driven by the consolidationof revenue from Jiefa Technology (AutoChips). Gross profit grew 16.9% YoYto RMB625.1m in 1H17with a stable 75.0% gross margin. The 4.3% marginexpansion in navigation segment and 5.6% margin expansion in Internet ofVehicles (IoVs) were offset by the inclusion of lower margin Jiefa business (60.4%in 1H17). Together with 3.8ppt drop in SG&A expenses ratio, but partially offsetby a 1.3x jump in finance costs, 1H17net profit increased by 54.9% YoY toRMB121.3m (38% of FY17DBe and 32% of consensus). Excluding non-recurringitems (mainly RMB5.7m government subsidy and RMB3.8m investment gains),1H17core net profit grew 61.6% YoY to RMB114.2m, with 3.8ppt improvementin core net margin.On a quarterly basis, 2Q17revenue grew 27.1% QoQ and 19.7% YoY. Grossmargin deteriorated 7.1ppt QoQ (0.9ppt YoY) to 71.8%. 2Q17net profit increasedby 42.1% QoQ (57.4% YoY) to RMB71.2m.
    Deutsche Bank view - slower ramp-up of auto chips business; maintaining Sell
    We consider 1H17net profit a miss due to lower revenue contribution fromInternet of Vehicles and Jiefa Technology. Gross profit margin was better thanexpected while net profit margin was in-line. Maintain Sell on worse-thanexpectedrevenue and net profit contribution from Jiefa Technology/IoVs andexcessive valuation.
    We cut our FY17-19E revenue by 13.7-14.7% to reflect weaker revenue growthof Jiefa and FY17-19E net profit by 11.1-12.6% to factor in Jiefa's weaker-thanexpectedgross margin, partly offset by further margin expansion at navigationand IoVs segments. We expect NavInfo to deliver 15.9% FY16-19revenue CAGR,driven mainly by acquisition of Jiefa. Our TP is set at 45x FY18E P/E (unchanged),c.60% below its mid-cycle P/E of 108x. This is justified, in our view, since weexpect the company to deliver a 43.1% net profit CAGR in FY16-19. Key upsiderisks: 1) less-than-expected competition in in-dash navigation market; 2) strongerthan-expected auto sales volume; 3) faster-than-expected development in theIoVs and ADAS businesses; and 4) a more efficient consolidation of Jiefa Tech.

Hengrui Medicine:Expecting growth acceleration in 2018

Solid growth delivered in 2Q17.
    Hengrui registered sales/core profit of RMB3.2bn/766m in 2Q17, representingYoY growth of 22%/21%. This suggests mild acceleration from 19%/17% growthachieved in 1Q17. Export growth was below 20% in 2Q17, according to themanagement. We highlight the near-term catalysts for Hengrui: 1) export growthacceleration in 2H17/2018, driven by new products launches in the US; 2) weexpect apatinib to add another leg of growth following NRDL implementation,starting from 3Q17 and 3) three potential blockbuster launches in 2019, including19K, pyrotinib and nab-paclitaxel. We reiterate Buy on rich pipeline and earningsgrowth visibility.
    Domestic growth in line with expectation; ASP erosion.
    Growth in the oncology/anesthetics/contrast agents segments stood atsub-20%/20%+/30%+ in 1H17 vs. 36%/19%/30% in 2016. We attribute the solidperformance to fast ramp-up of contrast agents Ioversol/Iodixanol, while cancerdrugs recorded growth moderation due to tender ASP pressure and law of largenumbers. Management indicated that price renegotiation at the hospital levelaffected 1H17 results.
    On margins and pipeline progress.
    GM came in at 86.4% in 2Q17, down from 87.7% in 2Q16, primarily due to ASPpressure in drug tenders. Nevertheless, OPM expansion was recorded despitethe GM contraction, from 26.6% in 2Q16 to 27.6% in 2Q17. Managementattributed the margin expansion to lower selling and promotion expenses andadmin cost savings. R&D expenditure was 12.3% in 2Q17 vs. 9.3% in 2Q16,as more late-stage trials were initiated. Management indicated that near-termpipeline priorities are pyrotinib and camrelizumab. The majority of its potentialblockbusters are in the phase 3 stage, including pyrotinib P3 for mBC, apatinibP3 for NSCLC/LC and camrelizumab for EC/LC.
    Raising target price to RMB60.5 from RMB58.5; risks.
    Our RMB60.5 target price is based on 43x 2018E EPS vs. the 42x we usedpreviously. We believe the multiple is justified, as its A-share peers are trading at29x 2018E EPS, with 14% growth in 2019 (vs. the 27% we model for Hengrui).
    We believe the premium is justified, given the superior pipeline, upside potentialfrom exports and potential earnings growth acceleration driven by blockbusterlaunches. Key risks include product launch delays and price cuts.

Baosteel Co.Ltd.Alert:Stably moving and waiting for synergy to realize;Buy re-iterated

1H17results should be in-line with consensus
    Baosteel announced its 1H17results after market close on August 24. In 1H17,the company has recorded revenue of RMB170.1bn, RMB 8.51bn for operatingprofit, and NPAT of RMB 6.2bn. The company’s bottom line reached 42.1%FY17DBe and 48.1% Bloomberg 2017full year estimates. We believe the1H17results is in-line with consensus but disappointed DBe as a result oflower-than-expected GP/t.
    2Q17GP/t down RMB325/t, but our full year forecast remains intact
    The company’s shipment volume in 2Q17came at 12mt, up 12% QoQ. 2Q17.ASP dropped RMB350/t QoQ, in line with market price movement for flat steelproducts. Baosteel’s steel products 2Q17GP/t dropped by RMB325/t QoQ,which compressed GPM to 10.4% in 2Q17from 16.3% in 1Q17. With QTDHRC spread (as a proxy for steel plate profitability) already improved byc.RMB400/t, we remain comfortable with our FY17NPAT estimate ofc.RMB14bn given the optimistic profitability outlook for 2H17. Our FY17DBeNPAT is currently 12% above Bloomberg consensus.
    Outlook remains positive, maintain Buy
    We expect profitability improvement in 3Q17for Baosteel due to upcomingpeak demand season driven by seasonal recovery in auto production.Meanwhile, winter pollution measures will likely keep 4Q17D/S of steel markettight (Details in our report: Undervalued structural changes, reiterating Buy forsteel sector, published on 18July 2017). These will likely play out to be thecatalysts to let Baosteel’s profitability remain upbeat. Thus, we maintain ourBuy rating for Baosteel.

Huayu Automotive Alert:1H17profit a small miss on gross margin and SG&A

6% profit growth on 12% revenue and 17% JV contribution YoY
    Huayu released 1H17results after market close on 24August. The company’s1H17gross revenue edged up by 11.5% YoY to RMB68.4bn, achieving 51% ofour FY17E revenue forecast. The revenue growth was likely driven by growthand new model launches from key OEM customers and good momentum onoverseas business, according to the company. Meanwhile, Huayu’s 1H17gross profit grew 12.7% YoY to RMB9.4bn with 15.2bps YoY gross profitmargin improvement. Together with 17.4% YoY growth in profit contributionfrom its JVs/associates, but partially offset by 16.5% YoY jump in SG&Aexpenses, 1H17net profit increased by 5.5% YoY to RMB3.2bn, achieving 45%of our FY17E profit estimate and 49% of consensus.
    On a quarterly basis, 2Q17revenue increased by 24.5% YoY to RMB36.8bnand JVs/associates income grew by 33.9% YoY to RMB1.1bn. Offset by 24.5%YoY growth in SG&A expenses due to increasing overseas sales, 2Q17netprofit increased by 11.8% YoY to RMB1.8bn.
    Deutsche Bank view – attractive valuation with expanding overseas sales
    We raise our FY17-19E revenue by 2.1-6.2% to reflect slightly better-thanexpected1H17revenue growth. However, with lower margin assumptions andJV earnings contribution, we adjust down our FY17-19E earnings forecasts by2.5-6.1%. Our TP is based on 10.5x FY18E P/E (unchanged), about 10% belowHuayu’s mid-cycle P/E of 12x. This is justified, in our view, as we expect Huayuto deliver a 12.0% FY16-19E three-year net profit CAGR. We think that theexpanding overseas sales of its interior trim subsidiary Yanfeng should providean additional growth driver. Maintain Buy on attractive FY18E P/E of 9.2x and5.8% dividend yield. Key downside risks: weaker auto sales; inability to acquirenew customers; and unexpected increase in raw material prices.

Tinci Alert:1H17results in line,maintain Hold

1H17 results in-line with DBe but missed Bloomberg estimates.
    Tinci announced its 1H17 results after market close on 21 Aug 2017. Thecompany generated revenues of RMB935m in 1H17, reaching 46% FY17 DBeand 38% Bloomberg 2017 full-year estimates. Tinci delivered NPAT of RMB373m in 1H17, accounting for 47% FY17 DBe and 28% Bloomberg 2017 fullyearestimates. The interim results were in line with DBe while missingBloomberg consensus.
    Electrolyte GPM improvement sequentially backed on vertical integration.
    Although ASP of Electrolyte in 1H17 suffered from c.10% drop HoH, Tinci stillmanaged to deliver sequential gross margin improvement from 41.7% in 2H16to 43.5% in 1H17. With 6000t/a liquid LiPF6 new capacity ramping-up in thereporting period, Tinci will add c.16000t/a incremental Electrolyte volume. Thecompany currently has economies of scale of being the largest electrolytemaker in the world (c.20% global market share), and cost advantage on theback of self-owned LiFP6 production lines. We believe that 1H17 earningscontribution from Electrolyte segment slowed down as expected, but weexpect profitability to stabilize in 2H17-2018, thanks to strong electric vehiclesand energy storage systems related demand.
    Maintain hold on demanding valuation.
    The company is currently trading at 38x 2017 forward PE vs. our bottom-linegrowth forecast at c.20% in 2018-2019E. We believe the share price has runahead of the fundamentals; maintain Hold on demanding valuation. Majorupside/downside risk: significant China EV subsidy policy changes.

Joyson Electronics:1H17beat on one-off;core profit dragged down by rising costs

Stronger revenue offset weaker margins
    1H17revenue expanded 1.2x YoY to RMB13.1bn, driven by RMB8.5bncontribution from full-period KSS/PCC consolidation (65% of revenue) but partlyoffset by 7.3% YoY drop in HMI segment due to sales decline at one major OEMcustomer. Meanwhile, gross profit grew 93.3% YoY to RMB2.3bn in 1H17with2.5ppt YoY gross margin deterioration. The margin contraction was mainly due to1.8ppt YoY margin dip from HMI and 0.6ppt drop from KSS. Together with 1.1xYoY jump in SG&A expenses and 53.0% YoY increase in finance cost, but partiallyoffset by RMB320.3m one-off disposal gain (before-tax) of industrial automationbusiness, 1H17net profit increased by 1.5x YoY to RMB615.6m (62% of FY17DBeand 53% of consensus). Excluding after-tax disposal gain of RMB220m, 1H17core net profit grew 61.5% YoY to RMB395.6m, with 1.1ppt deterioration in corenet margin.
    On a quarterly basis, 2Q17revenue was flattish QoQ (+73.0% YoY). Gross margindeteriorated 1.1ppt QoQ (2.3ppt YoY) to 17.4%. 2Q17net profit increased by96.1% QoQ (2.3x YoY) to RMB407.7m.
    Deutsche Bank view - consolidation of KSS on track; maintaining Buy
    With the sequential recovery in gross margin of auto safety segment (1H1717.5%vs. 2H1614.7%), Joyson is on track to consolidate KSS albeit at a slower-thanexpectedpace. The segment recorded USD1.3bn new contract wins in 1H17,including USD130m for active safety. Maintain Buy on our optimistic view on thegrowth potential of KSS in active safety and ADAS, a market in China that weestimate could grow to c.USD11bn by 2020.
    We raise our FY17-19E revenue by 1.4-8.9% to reflect stronger revenue growthand FY17E net profit by 13.8% to include the one-off gain from disposal ofindustrial automation business. Our FY18-19E net profit estimates are revisedup by only 0.8-3.4% to factor in lower margins. We expect Joyson to deliver27.7% FY16-19revenue CAGR, driven mainly by KSS acquisition. Our TP is setat 27x FY18E P/E (unchanged), 25% below its mid-cycle P/E of 36x. This isjustified, in our view, since we expect the company to deliver a 36% EPS CAGRin FY16-19. Key downside risks include 1) weaker-than-expected auto sales; 2)failure to consolidate KSS/TS or improve profitability; 3) future capital raising tofund potential acquisitions.

Tianqi Lithium Alert:Mismatch of D/S balance vs demanding valuation;Sell maintained

1H17results beat DBe but in-line with Bloomberg consensus
    Tianqi Lithium announced its 1H17result after market close on 17August2017. The company delivered revenue of RMB2.4bn in 1H17, accounting for57% FY17DBe and 50% Bloomberg 2017full year estimates. NPAT for 1H17amounted to RMB924m, achieving 65% FY17DBe and 48% Bloomberg 2017full year consensus. 1H17results beat DBe due to slower-than-expectedlithium carbonate ASP drop, while in line with Bloomberg consensus.
    Strong supply response let risk of price correction high in coming weeks
    YTD Australian lithium import into China has gone up strongly 26% YoY, whileYTD China EV production also enjoyed 30% YoY uplift (but EV batteries onlyaccount for c.20-30% of total lithium demand). As per our Australian researchteam (report: “Mt. Marion site visit - Proving the point” dated 8August 2017),spodumene concentrates from Wodgina (Mineral Resources) could have soldinto China, equivalent to c.80ktpa LCE, which will likely impact the lithiumcarbonate price some time in 2H17. With big supply responses to high lithiumcarbonate prices, we expect D/S of lithium carbonate will likely be loosenedand correct lithium carbonate prices over coming quarters.
    Mismatch of D/S balance vs. demanding valuation; Sell maintained
    The company is currently trading at c. 34x 2017E consensus PE. With a highrisk of lithium carbonate price correction in coming quarters due to strongsupply responses, we believe this high valuation is not justifiable, especiallywhen Tianqi might not be able to have volume growth in 2018E. We re-iterateour Sell rating.

Spring Airlines Alert:1H17in-line;encouraging sign of yield recovery

Yield bottomed out in 2Q17; 25% 1H17profit decline due to increase in cost
    Spring reported 1H17gross revenue growth of 28.1% YoY to RMB5.1bn on theback of 29.1% passenger traffic (RPK) growth, while passenger yield remainflattish. However, operating expenses increased 42.4% YoY mainly due to 1)higher fuel cost amid rising fuel price; 2) increasing marketing and advertisingexpenses; and 3) higher staff wages, according to the company. Together with1) RMB1.1m investment income (vs. investment loss in 1H16) and 2)RMB655.1m non-operating income (+8.6% YoY) mainly from route subsidies,the airline’s 1H17net profit declined by 25.2% YoY to RMB554.0m.
    On a quarterly basis, 2Q17gross revenue grew 33.8% YoY to RMB2.5bn on32.0% YoY RPK increase and with encouraging sign of yield recovery of c.1%YoY during the quarter. However, with 42.8% YoY jump in operating expensesand 15.2% YoY decline in non-operating income, 2Q17net profit dropped32.9% YoY to RMB250.7m.
    Deutsche Bank view – worst is behind; pax yield to pick up in 3Q17E
    As Spring’s 1H17profit accounted for 55% of our full-year earnings estimateand 48% of consensus, we consider the results in-line. We maintain Buy as weexpect the airline’s yield to bottom out in 3Q17with load factor staying atc.90%. We believe Spring Airlines will be a key beneficiary of China’s LCCdevelopment, which is still in its infancy stage at the moment with only 9%penetration. Our target price is set at a target 3.5x FY18E P/BV (unchanged).We believe this is justified vs. sustainable ROE of about 15-16%. Downsiderisks include 1) excessive new capacity on international routes, 2) slower-thanexpecteddemand growth in the North Asia and ASEAN routes, and 3)competition in domestic and regional routes.

Hengrui Medicine:Updates on middle/late-stage pipeline

Multiple catalysts ahead; late-stage pipeline represents 17% market cap by DBe.
    We update pipeline progress following the meeting with Chairman Sun. Majorcatalysts are: 1) approval of 19K and Abraxane generic by YE17; 2) resubmissionof retagliptin in the near term; 3) clarity on pyrotinib development, includingan earlier submission of marketing approval; 4) updates on clinical progressfor camrelizumab; and 5) phase 3 data release on Incyte's ECHO-301. We alsohighlight potential upside from additional US IND approval and clinical progressof its novel compounds in the US. Our NPV analysis indicated the pipeline valueis RMB9.2 per share. This comprehensive report includes key ongoing clinicalstudies for all mid/late study compounds, as well as competitors' studies.
    Camrelizumab as the largest driver; IDO inhibitor provides significant upside.
    We have updated our peak sales for camrelizumab to RMB5-6bn in China andincreased the probability of success to 75-85%, based on the strong ORR datafrom the phase 1 study. Four registration trials are being conducted at present.
    We expect Hengrui to get the first domestic PD-1 approval, with safe data fromsufficient number of patients required by the CFDA. Additionally, we expect INDapproval for its IDO inhibitor from CFDA in the near term, following US INDapproval in May. We believe it would be significantly positive to the IO franchiseand we forecast RMB3-4bn peak sales for the IDO inhibitor.
    DB proprietary patient-based PD-1/PD-L1 model.
    Our model indicates that the addressable market for PD-1/PD-L1 would beRMB19bn in China in 2017 and RMB29bn in 2030, representing a CAGR of 15%.
    NSCLC and GC are likely to be the largest indications due to a large patient baseand unmet medical need. Our model is based on 14 tumor types, including theapproved indications and major indications being investigated. Among domesticnames, we identified six companies that are conducting late stage studies fortheir PD-1/PD-L1 with Hengrui being the leader.
    Valuation and risks.
    Our current valuation for the late stage pipeline represents 17% of the market cap,vs. 15% as of our first attempt in September 2016. Our TP of RMB58.5 is basedon 42x 2018E EPS. We believe 42x is justified, as A-share peers are trading at 29xwith 18% EPS growth in 2017 (vs. the 24% we model for Hengrui). We believethe premium is justified, given the top China pipeline, major upside from exportsand the potential earnings growth acceleration driven by blockbuster launches.
    Key risks include product launch delays and price cuts.

Hengrui Medicine:Updates on middlelate-stage pipeline

Multiple catalysts ahead; late-stage pipeline represents 17% market cap by DBe
    We update pipeline progress following the meeting with Chairman Sun. Majorcatalysts are: 1) approval of 19K and Abraxane generic by YE17; 2) resubmissionof retagliptin in the near term; 3) clarity on pyrotinib development, includingan earlier submission of marketing approval; 4) updates on clinical progressfor camrelizumab; and 5) phase 3data release on Incyte's ECHO-301. We alsohighlight potential upside from additional US IND approval and clinical progressof its novel compounds in the US. Our NPV analysis indicated the pipeline valueis RMB9.2per share. This comprehensive report includes key ongoing clinicalstudies for all mid/late study compounds, as well as competitors' studies.Camrelizumab as the largest driver; IDO inhibitor provides significant upsideWe have updated our peak sales for camrelizumab to RMB5-6bn in China andincreased the probability of success to 75-85%, based on the strong ORR datafrom the phase 1study. Four registration trials are being conducted at present.We expect Hengrui to get the first domestic PD-1approval, with safe data fromsufficient number of patients required by the CFDA. Additionally, we expect INDapproval for its IDO inhibitor from CFDA in the near term, following US INDapproval in May. We believe it would be significantly positive to the IO franchiseand we forecast RMB3-4bn peak sales for the IDO inhibitor.
    DB proprietary patient-based PD-1/PD-L1model
    Our model indicates that the addressable market for PD-1/PD-L1would beRMB19bn in China in 2017and RMB29bn in 2030, representing a CAGR of 15%.NSCLC and GC are likely to be the largest indications due to a large patient baseand unmet medical need. Our model is based on 14tumor types, including theapproved indications and major indications being investigated. Among domesticnames, we identified six companies that are conducting late stage studies fortheir PD-1/PD-L1with Hengrui being the leader.
    Valuation and risks
    Our current valuation for the late stage pipeline represents 17% of the market cap,vs. 15% as of our first attempt in September 2016. Our TP of RMB58.5is basedon 42x 2018E EPS. We believe 42x is justified, as A-share peers are trading at 29xwith 18% EPS growth in 2017(vs. the 24% we model for Hengrui). We believethe premium is justified, given the top China pipeline, major upside from exportsand the potential earnings growth acceleration driven by blockbuster launches.Key risks include product launch delays and price cuts.

Pinggao Electric Alert:1H profit drop manifests continued margin pressure;Stay cautious

1H results disappoint; retaining Hold.
    Pinggao’s 1H17 results came in below expectation. A 35% net profit drop despite revenue growth (+18%) manifests continued margin pressure. While the valuation multiple looks undemanding at 13x FY17E PE, we stay cautious on Pinggao since its margin is yet to bottom out and UHVAC project outlook lacks visibility. A potential UHV order contraction along with margin contraction would drag earnings CAGR down from 30% in FY15-17 to a mediocre 5% in FY17-19, on our forecasts. Hold.
    Still on a margin downward trend; difficult to achieve full-year growth .
    In 1H17, total revenue rose 18%, primarily driven by higher UHVAC GIS shipment volume (18 vs. 14 in 1H16). However, NP dropped 35% yoy, with a worse-than-expected GPM contraction by 10ppt to 21%. This is mainly squeezed by falling ASP (by c.10% for both UHV and EHV products) and rising raw materials (primarily aluminum, steel, copper, etc.). We believe the margin contraction trend is yet to reverse, considering: 1) a further raw material price spike in 1H yet to be reflected on the books, 2) continued pricing pressure amid shrinking tender size, 3) sales mix shifting to low-margin mid-low voltage products. We recognize it could be challenging to catch up in 2H and achieve a NP growth this year (consensus/DBe: +16%/12%).
    1H order update: UHV/EHV (-), distribution grid (+) .
    For UHVAC projects, there was only one equipment tender opened in 1H, namely Suzhou-Nantong 1000kV UHVAC GIL (Gas-insulated transmission line), from which Pinggao received orders of Rmb861m. This represents a 50% market share, with the rest going to Shandong Electrical Engineering & Equipment Co. In addition, West Beijing - Shijiazhuang 1000kV AC line was approved in July. However, since it is only a Rmb3.5bn size expansion project (vs. >Rmb20bn for others), order contribution to Pinggao, if any, would be insignificant. Mid-low voltage distribution grid equipment order is the silver line, with order intake up >40% yoy to >Rmb1bn, in line with industry trends.
    UHVAC project outlook lacks visibility .
    As we argued in Emerging UHV risks, shrinking upside; dg Pinggao and XJ Electric (8 June), China’s UHV transmission project approval outlook is turning less visible going forward, in light of large-scale power capacity delays and the government’s promotion of distributed energy. It is in particular uncertain for cross-region UHVAC projects, whose safety issue remains controversial. The high-margin UHVAC GIS has already contributed as much as 40%/>50% of Pinggao’s GP/NP, which is critical for its profitability. A potential high-margin UHV order contraction along with fierce competition may turn the product mix less favorable. This would likely more than offset rising distribution grid products sales as well as exports in the near term.

Tonghua Dongbao:Growth acceleration due to inventory build-up

Solid growth from insulin franchise; reiterate Buy
    Tonghua Dongbao (THDB) reported sales/core profit of RMB616m/199m in 2Q17,representing YoY growth of 40%/31% respectively. We highlight the revenuegrowth acceleration in 2Q17, compared with 25%/34% YoY growth in 1Q17. Thegrowth acceleration was primarily due to inventory build-up from newly-signeddistributors. As for insulin glargine, THDB is in the final stage of data collection,with production filing expected in August according to management. We expectthe volume boost from NRDL inclusion to start in 4Q17. Reiterate Buy on highearnings visibility/ sustainability, and near-term catalysts.
    Solid ramp-up of 40R sales, while 50R lagged
    We estimate that insulin products achieved sales of RMB470mn in 2Q17 vs.
    RMB359mn in 2Q16, representing 31% YoY growth. Insulin needles and teststrips delivered over 30%/ 20% growth respectively, in 2Q17, suggesting growthmoderation vs. 38%/ 56% achieved in 1Q17. The slowdown in test strips wasdue to device compatibility and configuration issues of Bionime blood glucosemonitors. THDB's dual-product strategy started to bear fruit for Gansulin 40R, butyielded little results for 50R this quarter. As for flagship 30R, 20% growth couldbe maintained. Management estimated total sales of 40R to surpass RMB100mnin 2017.
    Expecting stable margins ahead, operating efficiency improved
    GM/OPM contracted to 74.5%/39.8% in 2Q17 compared with 76.4%/44.2% in2Q16. Management attributed the margin decline to low margins from real estateinvestment disposal. THDB guided stable margins going forward, with limitedASP erosion expected from provincial tenders. CCC days returned to 650 daysin 1H17, down from 897 days in 1H16, suggesting the conclusion of inventorydestocking issue.
    Lowering PT to RMB23.7 from RMB25.8; risks
    Our target price is based on 42x 2018E EPS. We believe the multiple is justifiedas its A-share peers are trading at 28x with 18% growth in 2018 (vs. the 21% wemodel for THDB). In our view, the premium is justified by its growth sustainabilityof the insulin franchise, ramp-up of CDMP and a compelling risk profile. Key risks:larger-than-expected ASP erosion, growth slowdown and product launch delays.

Aier Eye Hospital:Positioning for stable growth

Key takeaways from dbAccess China healthcare service tour
    Chairman Chen attended the briefing and articulated near/mid/long operationalpriorities. For the near term, Aier is targeting three objectives: 1) the integrationof four acquired ex-China assets; 2) the opening of 200facilities by YE17vs. 180now; and 3) meeting the RMB100m sales target for 15-17facilities that openedin the 2014/2015period in provincial capitals. For expansion in prefecture-levelcities, management cautioned that a reasonable length of time is required to allowa meaningful revenue ramp-up as establishing an RIDS takes time.
    More growth drivers than expected; old pony with new tricks
    Chairman Chen anticipates 30% growth in the next 5-10years, driven by M&Aand organic growth. The company sees substantial growth opportunities ahead,including prefecture/county level growth in the mid/long term, and growth inmature/sub-mature hospitals with mid-teen/more than 20% growth respectivelyin the mid term. For example, the oldest flagship hospital, Changsha Aier Hospital,has a target of RMB300m in 2017, vs. RMB233m / RMB212m in 2016/2015,respectively. The growth acceleration was mainly driven by increased investmentin equipment and personnel. Management also indicated that Aier is largerthan the top 2-9competitors combined, while capital, talent and its first-moveradvantage remain key to its competitive edge.
    Key statistics review for 1Q17and 2016
    For cataract surgery, we expect growth to pick up in 2Q17from a low base in2Q16as the company was affected by the Putian incident. As a reminder, revenuegrowth in 1Q17, 4Q16, 3Q16, and 2Q16was 26%/33%/3%/10% respectively. Weestimate that organic growth for 1Q17would be 14% excluding new hospitals.Additionally, volume/ASP growth in 2016was 14%/8% vs. 49%/-6% in 2015, asper our estimates. For excimer surgery, volume/ASP growth was 20%/13% in2016vs. 18%/11% in 2015. The ASP growth was ascribed to service mix changetowards high-end procedures. On volume, the growth was driven by VFLS and ICLwith 100% and 50% growth respectively. We highlight VFLS and ICL accountedfor 45%/13% of sales within excimer surgery in 2016vs. 29%/11% in 2015.
    Maintaining price target of RMB28.7; risks
    Our TP is based on 25x EV/EBITDA on 2018EBITDA, in line with the approachwe use for hospital companies. We believe 25x is justified as its Asia peers aretrading at 18x with 16% growth in 2019(vs. the 29% we model for Aier). Key risksinclude delays in geographical expansion and slower ASP/volume growth.

Huace Film&TV:Expect more earnings from TV drama to be recognized in 2H17

1H17core earnings down 8% yoy mainly due to margin decrease in TV drama
    Huace Film&TV announced its 1H17results. Although the company’s 2016topline increased by 13% yoy to RMB1,75bn, its core earnings (non-recurring itemsmainly include government subsidies) decreased by 8% yoy to RMB225m. Webelieve that this is mainly due to the significant margin decrease because someof the TV drama revenue/profit recognition will be delayed in 2H17. We maintainour Buy rating for Huace with a target price of RMB14.8.
    Top line up 13% yoy mainly driven by TV drama and talent agency business
    Total revenue increased 13% yoy to RMB1.75bn, which is attributable to: 1) theTV drama production top line increasing by 39% yoy to RMB1.44bn, and 2) thetalent agency top line increasing by 621% yoy to RMB46m. 1H17Chinese movies'weak performance has resulted in a 19% yoy drop in the company’s film businesstop line. The company also shift their film strategy to distribution instead ofproduction. In addition, we saw significant growth of its talent agency and onlinegaming business. However, since total gross margin decreased to 25% in 1H17from 34% in 1H16and SG&A expenses increased by 38% yoy in 1H17, core netearnings dropped by 8% yoy.
    We believe earnings will lean more on 2H17
    Since more revenue/profit will be recognized in 2H17, we are confident on our TVdrama revenue growth estimate of 20%. The company disclosed that there will bemore than 11TV drama's revenue recognition in 2H17. Looking at the full year of2017, management seems to be confident of delivering earnings of RMB 650m,as guided in its previous stock incentive plan.

Kweichow MoutaiAlert:2Q17earnings in line;reiterating Buy

Net profit growth accelerate in 2Q17
    Kweichow Moutai reported 1H17 results with sales increased 33.1% toRMB24.19bn and net profit increased 27.8% yoy to RMB11.25bn, in line withour forecast at 11bn. Gross margin declined 2.3ppt to 89.6% in 1H17, mainlydue to faster sales growth form lower-end sub-brands. Management increasedmarketing efforts on lower end brands and its SG&A/sales ratio increased1.7ppt YoY to 14.1% in 1H17.
    In 2Q17, revenue/NPAT was up 33%/31% yoy, accelerated from +33%/+25%yoy in 1Q17. According to our channel check, Moutai's main products are stillshort of supply even in traditional slack season post Chinese New Yearholidays. We believe this is driven by industry demand recovery anddistributors' channel re-stockings with expectations of retail price hikes. As aresult, the advance from consumers is largely stable at Rmb17.8bn by end-2Q17, which is only 6% lower than 1Q17 even within a slack season.
    Maintaining Buy
    We reiterate Buy on Moutai due to its high earnings visibility backed byindustry demand recovery and channel restocking. Our TP at Rmb550 is basedon DCF approach (factoring in 9.5% WACC and a 2% terminal growth rate).
    Main downside risks: shorter-than-expected restocking cycle; governmentpolicy changes; food safety incidents.

Dahua Alert:1H17preliminary results in line

1H17 EPS of CNY0.34 in line; government grant accounting re-classification
    Dahua announced preliminary 1H17 EPS of CNY0.34, +36%YoY. 1H17 revenue growth momentum accelerated to CNY7.5bn, +51%YoY, driven by shipment growth with market share gains.1H17 operating profits were significantly higher than DB forecast at CNY1.1bn, as Dahua re-classify the recognition of government grant and impacts the operating profits, following the revision in #16 of the corporate accounting principal. 1H17 net profits of CNY983 mn, +39%YoY, was in line with DB forecast of CNY994mn. We maintain BUY on Dahua.
    Positive 2017 outlook with accelerated profit growth
    We expect the strong revenue growth momentum to sustain into 2H17 as the company continues expanding market share with the rising contribution of total solution projects while continuing to expand its overseas market share. We also expect opex ratio to decline given the increasing revenue scale. Currently, we expect 2017 profits to grow 45%, for EPS of CNY0.9, driven by revenue growth of 38% and operating margin expansions (without taking into account the impact of government grant re-classification).
    Receipt of bid-winning notice on the Shache PPP tender
    Dahua has issued an announcement in receipt of the bid-wining notice on the PPP tender by Shache country in Xinjiang with a total amount of CNY4.3bn. Following our report “Accelerating growth from AI” dated July 24, 2017, we have incorporated the potential contribution from this PPP project in our earnings forecast.
    Valuation and risks
    We maintain Buy on Dahua with target price of CNY27.3, based on 22x 2018E PE and supported by profit growth of 45%/36% and ROE of 28%/30% in 2017/18, respectively. Dahua share price has appreciated 77%YTD but we expect the share price outperformance to continue driven by its accelerated profit growth and ROE expansions. Risks: market share loss and weak orders from solution projects.

Dahua:Accelerating growth from AI

Potential winner of a PPP project
    Dahua has submitted a bid for a PPP tender by Shache country in Xinjiang for asafe city project, which includes infrastructure as well as a public video sharingplatform. The Xinjiang government has announced that Dahua is the toprankedbidder and is likely to win this 10-year project (1year of constructionand 9years of operation), for a total amount of CNY4.3bn. Winning this PPPproject will be positive to Dahua’s growth outlook as we model this project tocontribute to 4%/12% of revenue in 2017/2018, respectively. While the bid isnot final, we have factored in the potential contribution to our earningsforecast. We maintain Buy.
    Video surveillance rides on the AI trend
    We have been highlighting that the video surveillance sector will ride on thefuture AI and deep learning trends with increasing video analytics applications.Surveillance cameras equipped with AI capability would be able to detectpotential public safety issues and alert officers more efficiently. Apart fromcrime monitoring, these AI-based surveillance systems can be used to improveemergency services and disaster response rates; to monitor traffic and toimplement smart manufacturing. Following the partnership with nVidia andIntel (Movidius), Dahua has introduced AI video surveillance products forvarious applications. Although the current contribution is limited, we expectthe AI products to further strengthen its suites of solution offerings andbecome its key growth drivers.
    Accelerated profit growth
    In addition to Dahua’s continual market share gain and rising contribution fromits solutions, the AI applications and potential PPP project should furtherpropel Dahua’s growth outlook, and we expect revenue growth to accelerateto 38%/36% in 2017/2018from 32% in 2016. The rise in revenue scale shouldalso enable Dahua to reverse the increasing opex ratio trend in 2013-16. Weexpect the opex ratio to decline from 27% in 2016to 26%/25% in 2017/2018,respectively. Our new 2017/2018EPS are CNY0.9/1.2, respectively.
    Valuation and risks
    We maintain Buy on Dahua and raise the TP from CNY19.4to CNY27.3on ourincreased 2017/2018earnings forecasts by 6%/14%. We also lift our target P/Emultiple from 20x 2H17-1H18to 22x 2018E due to its accelerated profitgrowth and ROE expansion. We now expect profit growth to accelerate to45%/36% in 2017/2018due to AI applications and the potential PPP. Thestrong profit growth should also enable ROE to expand from 24% in 2016to28%/30% in 2017/18, respectively. Risks: market share loss and weak demand.

Hikvision:Growth outlook on track

In-line 1H17 EPS of CNY0.36; maintaining Buy
    Margin improvement offset by rising opex ratio Hikvision reported its 2Q17 results and held a conference call on July 24, 2017. 2Q17 profit was broadly in line with the DB estimate at CNY1.8bn, up 22% QoQ/24% YoY, for EPS of CNY0.2. 1H17 EPS amounted to CNY0.36, up 26% YoY. Management expected 1-3Q17 profits to grow in a range of 15-35% YoY. We maintain our Buy rating.
    Margin improvement offset by rising opex ratio
    In addition to 2Q17 revenue growth at 29% YoY due to continued market share gains, Hikvision delivered 2Q17 GPM of 43%, a significant improvement from 37% in 2Q16 and flat vs. 1Q17. We have been highlighting the stabilizing margin due to management efforts and improving product mix. However, the expenses ratio rose, which we attribute to the rising R&D investment for the innovation businesses and overseas business expansions. Non-op contribution was lower due to CNY88mn forex losses and slower growth in VAT tax return.
    Growth across all product segments with stronger overseas business
    In terms of 1H17 product breakdown, front-end equipment remains the largest revenue contributor at 52%, up 25% YoY. The “innovation” business (which consists of Ezvits, auto and robots products) grew the strongest at almost three times YoY from a low base. On geographical breakdown, the overseas business (30% in 1H17) continued to lead the growth at 38% YoY due to share gain, while GPM expanded to 50% with rising solution/project contribution (from 20% in 2016 to 30% in 1H17).
    2H17 outlook remains positive
    Hikvision is positive on the 2H17 outlook driven by the domestic business recovery, particularly in public safety and transportation, while being cautious on overseas business with growth deceleration due to unstable economies. Management expects GPM to sustain into 2H17 and we attribute this to improving product mix and mild competition. However, opex ratio should rise vs. 2016 on an increase in R&D expenses for new businesses, while selling expenses is on the rise to set up overseas offices to target the project/solution business. Currently, we expect 2017 revenue/profit to grow 28%/28% as higher GPM is being offset by the rising opex ratio with 2017 EPS of CNY1.04.
    Valuation and risk
    We maintain BUY and raise our TP from CNY27.3 (50% stock dividend issued on our prior TP of CNY41) to CNY34.5, as we raise 2017/18/19 earnings estimates by 4%/12%/12% to reflect a stronger growth outlook and roll over valuation from 25x 2H17-1H18 to 25x 2018E PE. Our target multiple of 25x remains unchanged and is supported by 34%/36% ROE and 28%/33% earnings growth in 2017/2018, respectively. Risks: market share loss and weak demand.

China Vanke:Positive acquisition of GLP;maintaining Hold on fair valuation

Acquisition of 21.4% of GLP at SGD3.38/share
    After market close on 14July, Vanke announced that Nesta (a consortium inwhich it owns 21.4%) had entered an agreement with GLP for potentialprivatization at SGD3.38/share (25% premium to GLP’s 12July closing). Theattributable consideration to Vanke is SGD3.4bn, and Vanke can appoint twodirectors (out of 11) to the board, but is not entitled to the FY17dividend. Thedeal is pending approval from GLP’s shareholders and the Court, and GLP willbe delisted from SGX-ST if successful (expected to finalize by 14Apr 2018). Weare positive on the deal due to the potential synergies on its logistics propertybusiness.
    Positive on the deal for providing synergies to its logistics property business
    Although we estimate the deal will only lift Vanke’s FY18-19F core profits by~2%, we are positive on it, considering GLP owns a total of 17.5m completedlogistics properties in China with another 11.2m sqm under development. Webelieve its brand equity should provide synergies to Vanke’s existing business,potentially making it one of the largest logistics property operators in China(Vanke now owns 27logistics properties with 2.2m sqm GFA). Also, webelieve the price is fair, given that Vanke is acquiring at 1.3x of GLP’s FY17book value of USD1.85/share (equal to SGD2.54/share).
    GLP is the largest logistics property operator in China
    GLP owns a portfolio of 55m sqm of logistics properties, including 28.7m sqmin China (17.5m sqm completed and 11.2m sqm under development) and26.3m sqm in Japan, the US and Brazil (23.6m sqm completed and 2.7m sqmunder development). GLP is also one of the largest real estate fund managersin the world, with AUM of ~USD39bn. Bloomberg consensus expects it toachieve USD1.0-1.1bn revenue and USD315-382m core net profits in FY18-19.
    Valuation and risks
    We raise our TP by 12% to RMB25.42(based on a 10% discount to end-2017FNAV of RMB28.24) after factoring in this deal, the acquisition of GuangdongInternational Trust’s assets (mostly located in Guangzhou), and June landacquisitions. It is trading at 8.7x FY18F P/E and at a 13% discount to NAV.Downside risks include: 1) Baoneng Group selling its shares on the secondarymarket, and 2) a failure to acquire quality sites to sustain growth; while upsiderisks are better-than-expected sales and margin expansion.

Cangzhou Mingzhu:Major beneficiary of strong EV growth in China,Buy reiterated

1H17 results in line with both DBe and Bloomberg consensus
    Cangzhou Mingzhu announced its 1H17 results after market close on 18 July 2017. The Company posted revenue of RMB1.63bn in 1H17, achieving 54% FY17DBe and 51% full year Bloomberg consensus. It delivered 1H17 NPAT of RMB284.9m, accounting for 49% FY17DBe and 46% full year Bloomberg consensus. 1H17 results are in line with both DBe and Bloomberg consensus.
    Major beneficiary of strong EV growth in China, Buy reiterated
    We believe Cangzhou Mingzhu should be the major beneficiary of strong EV growth in China, as the Company is aggressively expanding separator capacity three-fold till 2019 to catch up with strong demand from EV battery supply chain at a CAGR of 30%, aiming to increase its global separator market share from 4% in 2016 to 6% in 2019. This accounts for c.25% of gross profit in 2017, rising to 41% by 2019E and underpins our positive outlook on the Company. Supported by recent strong momentum of China EV shipment (up 48% YoY in June), reiterating Buy.

Kstar Alert:Positive 2Q17preliminary results on faster overseas growth

Ensured China UPS demand which bodes well for local king and ODM.
    Kstar reported stronger 2Q17 operating results thanks to 1) organic integratedUPS demand in China, and 2) faster UPS market share gain in emergingcountries. The company is confident of delivering 20%+ earnings CAGR in2017-2019E propelled by continued UPS strength and PRC governmentsupport. The positive statement echoes our thesis that leading local UPSbrands is gaining market share from international brands (Emerson, APC) inChina (especially in 10kVA+ above segment). We also see rising outsourcingrate from international brands to qualified ODM (eg. Voltronic, Buy, TWD525)as a cost effective way to compete local kings. We believe Kstar (leading localbrand) and Voltronic (leading ODM) will both benefit from the trend, reiteratingBuy rating on both names.
    Recovered 2Q17 momentum stemming from faster overseas expansion.
    Kstar released positive 2Q17 preliminary results. 2Q17 earnings of RMB99mn(+98% QoQ, +52% YoY) on revenue of RMB677mn (+70% QoQ, +49% YoY).
    Operating profit of RMB106mn (+78% QoQ, +62% YoY) was 40% higher thanour and consensus estimates. Management attributes the strength to strongeroverseas UPS sales. Kstar is promoting its own brand UPS in emerging regionsproactively since 2016. By leveraging its high cost/performance product, thecompany is gaining market share in in Africa and South East Asia aggressively.
    Integrated UPS strength + promotion from government.
    Kstar enjoys strong integrated UPS growth driven by robust IDC setup inChina. The company indicates that 10+kVA UPS may claim for 60-70% of totalon-line UPS sales in 2017 vs. 45% in 2016. Kstar also received governmentsubsidies and tax benefit in 2Q17 (close to RMB10-15mn) for their 20-50kVAon-line UPS development. As the largest PRC UPS brands, which is gainingmarket share aggressively in domestic market, Kstar is also benefiting fromgovernment’s promotion of localized UPS manufacturing.
    Valuation and risks.
    Our target price of RMB16.4 is still based on 30x 2017E P/E, or 1.0x PEG (vs.
    regional peers’ 20-30x P/E, or 1.0x PEG). Risk: weaker-than-expected ChinaUPS demand, price competition, weaker EV proliferation.

Robam Alert:dbAccess Consumer Day.Key takeaways

Three-year growth targets reiterated; 2Q17update
    Management reiterated its 2017-19targets, including
    (1) a sales CAGR of 25%,
    (2) a net profit CAGR of 30% as well as
    (3) built-in products to reach 20% of itssales (vs. 10% in 2016). Management has strong ambitions for built-inproducts (microwaves, ovens, steam ovens, dishwashers and water purifiers)and it set a 10-year target for embedded products to account for 50% of itssales.
    For 2Q17, management expects sales growth to track in line with its 25%
    growth target. The gross margin should not be significantly impacted by hikingraw material costs, thanks to Robam’s raw material reserves as well as a ~5%hike in its wholesale price (on 1April 2017). We note that raw materialsrepresent 80% of Robam’s cost of goods sold.Cooling tier-1city property could have an impact, but lower tiers remain strongManagement stated that it normally takes 9-12months for the government’sproperty control measures to take effect. Approximately 80% of demand forRobam’s products comes from new flats. As a result, management estimatesthe tier-1city slowdown could have some impact on its revenue in 4Q17and1Q18. That said, tier-1cities represent 17% of Robam’s sales, with tier-2andbelow accounting for 45% and 38%, respectively.
    Plans to enhance competitiveness and marketing efficiency
    Management attributes Robam’s premium ROE to its strong pricing power,thanks to its first mover advantages in the high-end kitchenware market andtechnology leadership. To widen its lead, Robam plans to focus more onproduct innovation and increase R&D spending from 3% of sales now to 5% inthe next three years. Robam believes its emerging competitors (Midea andHaier) have not yet established premium branding and lag in productinnovation.Robam also plans to nimbly reallocate its marketing resources by focusing lesson TV commercials and shifting to online/digital. With higher returns onmarketing expenditure, management hopes to keep marketing expenses incheck.
    Channel reform and e-commerce ASP upgrade
    Finally, Robam plans to reform its wholesaler network to introduce a moresophisticated level of coverage and branch into lower-tier cites. Its ecommerceASP tends to be lower than it is for its off-line channel. Thecompany plans to reduce the gap in ASP in order to eventually promote high-ASP built-in products online.

Wangsu Technology:Not easy fighting off giants...Downgrade to Sell

Near-term bleak while the long-term outlook is more uncertain than ever.
    While Wangsu’s -31% year-to-date performance (vs. ChiNext’s -6%) hassomewhat reflected the competitive intensity that the company is facing, ourchannel checks suggest that such pressures have worsened into the year, withunit pricing on new deals down ~50% vs. FY16(vs. cost declines of 10-20%).With the cloud players using low CDN pricing as a lead-in to sign up enterprisecustomers, we find it difficult to see such cut-throat competition easing in thenext 1-2years and fear that the current environment may result in long-termdamage to Wangsu’s franchise. With the stock trading on 30x FY17NPAT, wesee further downside potential to the current share price. Downgrading to Sell.FY17likely to be a forgettable year.
    We forecast Wangsu’s gross margin will deteriorate 9ppts this year withcustomers increasing the frequency at which they request a review of theirCDN pricing terms, and unit pricing declining 50% year to date on newcontracts. Meanwhile, the recently-acquired CDNetworks and other businessessuch as cloud and security are unlikely to make material contributions nearterm, with Wangsu still bedding down the acquisition and our channel checkssuggesting limited presence of Wangsu’s cloud business. Our forecasts are 20-40% below Bloomberg consensus over the next three years.Tempering our long-term favorable view of Wangsu.
    We are toning down our long-term favorable view of Wangsu, as margin onCDN products may be permanently lower with the large cloud providers usinglow CDN pricing as a lead-in to sign up cloud customers. Furthermore, withthe product cycle shortening, the company’s return profile could bepermanently lower than in the past and we fear that talent retention maybecome increasingly difficult, given the challenging environment and weakshare price.Valuation and risks.
    We value Wangsu based on the mid-point of our peer-based P/E valuation andDCF. Risks relate to market share, tax rate, regulation, and margins, see pages9-10.

CITS Alert:Secured eight years’duty-free license for T2&T3of BCIA;lifting TP;Buy

CITS has acquired 51% of Sunrise, and secured both T2& T3duty-free of BCIA.
    We reiterate our Buy rating on CITS and raise our TP to RMB 37from RMB32.5. CITS announced that it has acquired a 51% stake in Sunrise China for aconsideration of RMB 38.8m at a 1x PB. Sunrise China is the sole duty-freeoperator of Beijing Capital International Airport for T2and T3. CITS alsoannounced that Sunrise has extended its license to operate T3, and CITS(subsidiary: China Duty Free Group) has won the license to operate T2for thenext eight years. Sunrise will be consolidated into CITS for 2H17.Incremental earnings for CITS will start in 2H17, raising our TP to RMB 37.
    Sunrise’s duty-free revenue was RMB 4.4bn and net profit was RMB 377m in2016. We assign 15% growth for the duty-free sales of BCIA in 2017E andconsolidate 2H17earnings to CITS. Although the concessionaire rate forbidding for BCIA seems high, we believe the margin improvement will bedriven primarily by the following: 1) Sunrise and CITS will have mutual benefitfrom each other’s competitive advantages: CITS has higher negotiation powerin the tobacco channel while Sunrise’s competitive edge is in operatingcosmetic products; and 2) economy of scale: CITS’ total duty-free sales willincrease by almost 40% after consolidating Sunrise. As a result, CITS will havemore negotiation power over its duty-free suppliers.Outlook thereafter? T4of new BCIA and Shanghai HQ/PD airport?
    We believe winning the BCIA airport is a milestone for CITS to expand itsfootprint in all the primary airports in Greater China. Since the merger of CITSwith China Travel Group, we observe that CITS has been more aggressive andfocused more on its duty-free business. With the new BCIA under constructionand Shanghai Pudong/HongQiao airport’s duty-free license to expire next year,we are confident that CITS will be active in winning the duty-free businessthere.Valuation and risks.
    We believe CITS’ valuation is very attractive at 23x/20x on our 2017/18earnings forecast, as duty-free is a policy-protected and high-barrier-to-entrybusiness in China. CITS’ valuation is lower than average retail/travel peers in Ashares. Our TP of RMB 37converts to a forward PER of 25x on our 2018earnings forecast. We derive our RMB 37TP from a DCF-based valuation(8.1% WACC, 9% cost of equity, beta of 0.9and 3.0% TGR, unchanged). Keydownside risks include: 1) unfavorable government policy, 2) e-commercecompetition, 3) delay in lifting shopping quota, and 4) competition from OTAs.

Yili :Top 5questions from investors during Europe NDR

A quality growth stock
    Sales growth remains good in near-term Yili attended Deutsche Bank’s global consumer conference in Paris and also visited investors in the UK last week. We summarize investors’ top 5 questions on page 2. Investors generally agreed on the good growth potential for China’s dairy sector and were impressed by Yili’s strong execution capability. We think Yili is a good proxy for investing in China’s consumption trade-up trend in nutritional products. We reiterate our Buy rating.
    Sales growth remains good in near-term
    Management expects sales growth in 2Q17 to improve vs. 1Q17 (it was 3% yoy in 1Q17), helped by stabilizing competition and a lower base (it disposed of Youran farm in April 2016). Meanwhile, major raw material costs, i.e. packaging and sugar, are also stabilizing in 2Q17 vs 1Q17, albeit partly offset by less use of low-cost raw material inventory. We forecast gross margin to be stable vs. 1Q17. For the full year, management maintains its guidance at 7% sales growth and 6.5% PBT decline (on lower government subsidy income).
    Multiple drivers to achieve Rmb100bn sales in long-term
    In the long term, management maintains its target of achieving Rmb100bn sales and becoming a global top five dairy company. Firstly, it expects to achieve higher-than-peers growth in basic dairy products. Secondly, the major driver will come from plant-based milk (it will launch soy milk in 2H17), organic milk (it is bidding for US Stonyfield), and chilled yoghurt. Thirdly, it is also open to entering the non-dairy healthy food category. On EBIT margin, Yili is already higher than most global peers, but it thinks there is still expansion potential through better product mix and the launch of high-margin categories.
    We reiterate Buy
    We like Yili for its experienced management team, strong distribution network, and good track record in new product launches. We expect it to achieve higher-than-peers growth through gaining market share, category expansion and M&A. We reiterate our Buy on Yili with TP of Rmb22, based on DCF model, factoring in 9.5% WACC (3.9% RFR, 5.6% ERP, 1.0 beta, debt-free structure) and 2% TG.. Key downside risks: higher-than-expected raw material increases, food safety incidents and worse-than-expected competition.