1

Yum Cha 飲 茶 September 20, 2017

TALKING POINT: Relief to toy makers

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index

28,051.4

(0.4)

HSCEI

11,125.7

(0.6)

Shanghai COMP

3,356.8

(0.2)

Shenzhen COMP

1,995.6

(0.4)

Gold

1,311.1

0.3

BDIY

1,398.0

0.9

Crude Oil, WTI(US$/BBL)

49.5

(0.9)

Crude Oil, BRENT(US$/BBL)

55.1

(0.6)

HIBOR, 3-M

0.8

0.7

SHIBOR, 3-M

4.4

(0.0)

RMB/USD

6.6

0.1

DATA RELEASES DUE THIS WEEK

Toys“R”Us finally filed for bankruptcy after the rumour came out on 7 Sept 2017. According to news flow, Toys”R”Us plans to keep its 1,600 Toys“R”Us and Babies“R”Us stores open across the world. The vast majority of Toys”R”Us stores are profitable, but the Company suffered from financial pressure from a huge amount of debt (US$5bn) and keen competition from online stores such as Amazon. Toys“R”Us reported that same-store sales dropped 4% YoY last quarter, resulting in a net loss of US$164m. Concern about Toys“R”Us’s financial position has put pressure on the shares of toy makers, including Mattel, Hasbro, Jakk and Spin Master, as Toys“R”Us is one of the major customers of those toy companies. It seems that Toys“R”Us’s filing for bankruptcy is a relief for the sector, as shares of US-listed toy makers rebounded last night. We also noticed that shares of VTech [0303.HK] were under pressure earlier, which, in our view, was partly due to share corrections of its peers, given concerns trigged by news flow on Toys“R”Us. Shares of VTech may rebound as the concerns fade. Toys“R”Us’s Chapter 11 filing is likely to disrupt distribution of toy makers’ products, but it is not expected to have any impact on demand for toys. Other channels, such as Amazon, will gain market share and see a pick-up in distribution. Although it may create short-term uncertainty, it is not a demand issue. Trading at a mid-teen FY18 PER, VTech’s valuation doesn't look excessive.

RESEARCH NOTES

Analyst: Mark Po, CFA

Source: Bloomberg, CGIS Research

0.4

0.6

0.8

1

1.2

1.4

1.6

01/17 02/17 03/17 04/17 05/17 06/17 07/17 08/17 09/17

VTech Playmates Hasbro Mattel Hang Seng

TMT SECTOR UPDATE - We visited some A-share listed TMT names for an update on industry

developments, especially on hot topics in the sector. We highlight iFlytek [002230.CH] and Fujian

Newland Computer [000997.CH] in this report because a) iFlytek is the leading and only listed

company which focuses mainly on natural language process (NLP) technology, and Fujian New-

land is the market leader in the electronic payment industry; and b) currently, artificial intelligence

(AI) technology is a very hot topic, and these two companies are actively developing AI-related

strategies. We believe these two companies can provide some information and guidance on the

future development of the AI and mobile payment industries in China.

SOUTHBOUND STOCK CONNECT UPDATE - The past two weeks saw net Southbound buying

after a marked slowdown in inflows in August. We previously argued that last month’s slowdown

was a temporary phenomenon, as H-shares continued to trade at 30% discount to A-shares. The

net buying was mainly in large banks and smaller insurance firms. We saw profit taking in com-

modity plays and China property stocks. The new favourites of Stock Connect investors include

Health & Happiness Inc, Digital China, and the IPPs. The top reductions include IGG, and the

steel and metal companies.

2

COMPANY NEWS

Analyst: Mark Po

We visited some A-share listed TMT names for an update on industry developments, especially on hot topics in the sector. We highlight iFlytek [002230.CH] and Fujian Newland Computer [000997.CH] in this report because a) iFlytek is the leading and only listed company which focuses mainly on natural language process (NLP) technology, and Fujian Newland is the market leader in the electronic payment industry; and b) currently, artificial intelligence (AI) technology is a very hot topic, and these two companies are actively developing AI-related strategies. We believe these two companies can provide some information and guidance on the future development of the AI and mobile payment industries in China. iFlytek is the largest provider of speech technology in China, with a

domestic market share of over 80%, and it is the only listed company in

the Chinese speech technology industry. The Company engages

mainly in the research and development (R&D) of intelligent speech

and language-related technologies and focuses on Chinese Text to

Speech (TTS), multilingual TTS, TTS services, TTS chips, and

Distributed Speech Synthesis (DDS). The Company introduced the

market’s first IoT development platform that enables voice-recognition

cloud services in Chinese.

1H 2017 financial results: In 1H 2017, the Company's revenue was RMB2.1b, up 43.79% YoY, which was mainly due to the development of education-related products, big data services and supporting software. Net income attributable to shareholders was RMB107m, down 58.9% YoY, which was mainly because a) the Company continued to increase its investment in AI applications, developing core technology, channel construction and industrial layout; R&D expenses were RMB358m, up 63.75% YoY; marketing expenses were RMB414, up 66%; and operating and administrative expenses were RMB147m in 1H 2017, up 61.97% YoY; and b) the Company recorded RMB117m in non-recurring losses in acquiring Xunfei Jiecheng, a controlling subsidiary of iFlytek. Key Company takeaway: During the Company visit, management showed us the various applications of the Company’s intelligent speech-related products. The Company’s major products are a) smart education, b) an automobile speech interaction system, c) the DingDong smart speaker, which it co-developed with JD.com, and d) the Easy Trans 600. For smart education, the Company combines AI technology and big data analysis, and the Company is developing personalized education services. Currently, the Company's smart education services cover over 75m teachers and students. In 2016, iFlytek launched a joint venture with New Oriental Education & Technology Group Inc. to develop smart education products in China. Its automobile speech interaction system allows users to implement rich applications using natural speech, such as navigation instructions, POI recognition and search in China, speech calling, speech text message sending, and speech information and news search. The Easy

Trans 600 (离线功能) is a self-developed real-term translating machine

for Chinese-English and Chinese-Uighur. Recently, the Company released a new version of Easy Trans 600, which can be used without an internet connection. Customers can purchase it from major e-commerce platforms. The DingDong smart speaker, which was co-developed by JD.com and iFlytek, uses voice interaction to do tasks

Sept. 20, 2017

Source: Bloomberg, Company Data, CGIS Research

[iFlytek Co. Ltd ]

such as checking traffic conditions and playing music. DingDong can recognize Mandarin, Cantonese and some Basic English. The voice recognition is powered by iFlytek. The Company continued to launch new products: a) Development platform: It had 3.7m developers, up133% YoY, and 2.8m applications, up 41%YoY, and the daily service volume reached 3.7b people, up 54% YoY. b) Automotive speech interaction: Sales of its intelligent voice package and intelligent voice assistant products in the first half of the year equalled the total sales in 2017; revenue increase 127% YoY and gross profit increased 52% YoY. c) Mobile Internet and intelligent hardware: Xunfei Input reached over 500m users, and the average daily penetration rate of voice functions was 12.7%. The Company sold 60,000 Easy Trans 600s in 1H 2017, and the DingDong smart speaker accounted for over 80% of total speaker sales on JD.com. d) Client service industry: Intelligent customer service revenue increased 56.02% YoY, and the gross margin was up 55.83% YoY. e) Education business: Zhixue.com generated over RMB30m in revenue in 1H 2017. f) Medical services: The Company started a partnership with the Chinese Academy of Medical Sciences and Peking Union Medical College in a bid to leverage artificial intelligence (AI) technology in medical research and development. Smart education business: Currently, the Company focuses

Analyst: Mark Jiang

Key Financials

(in Rmb m)2015 2016 2017E 2018E

Rev enue 2,478.1 3,290.2 4,653.9 6,297.2

Gross Prof it 1,200.0 1,647.3 2,356.5 3,205.5

Gross Margin % 48.4 50.1 50.6 50.9

Net Prof it 425.3 484.4 528.4 766.5

Net Margin % 17.2 14.7 11.4 12.2

EPS (Basic) 0.34 0.37 0.40 0.56

ROE (%) 8.5 7.3 6.7 9.0

Div idend Yield (%) 0.21 0.21 0.20 0.30

PER (x) 143.42 125.73 112.66 80.65

PBR (x) 10.01 8.67 7.89 7.21

Capex (m) (890.0) (1,065.0) (475.3) (560.6)

Free cash f low (m) (357.5) (765.7) 717.3 996.2

Net cash/(net debt) (mn) 2,321.2 1,620.8 1,445.0 1,095.7

0

2000

4000

6000

8000

10000

12000

14000

0

10

20

30

40

50

60

70

19-Sep-16 19-Nov-16 19-Jan-17 19-Mar-17 19-May-17 19-Jul-17 19-Sep-17

(RMB million)(RMB)

Turnover (RHS) Price (LHS)

TECHNOLOGY INDUSTRY UPDATE – Key takeaways from Company visits in China

3

COMPANY NEWS

mainly on technology applications in the education industrywhich accounts about 30% of the Company’s total revenue. In 1H 2017, revenue generated from smart education products and services was RMB565m, up 57.71% YoY. It covers over 12,000 schools in 32 provinces in China. One of iFlytek’s major smart education products is the Changyan intelligent speech teaching aid system, which can satisfy the needs of English and Chinese in primary and middle schools by leveraging its proprietary, world leading, TTS technology and its intelligent oral language evaluation technology, the only one in the industry accredited by the State Language Commission of the PRC. Intelligent medical business: The Company is actively developing its AI-enabled medical business, which covers three major areas: a)

electronic medical records; b) a medical imaging system; and c) an intelligent medical assistant. Yun Yi Sheng, launched in 2016, is

iFlytek’s first electronic medical record product. Yun Yi Sheng can collect patient’s data, record doctors’ speech automatically, and save and manage all the records for future review. The medical imaging system helps doctors review images, point out critical areas, and reduce the chance of misdiagnosis. The Company’s intelligent medical assistant can help doctors increase their diagnosis accuracy based on big data analysis. In April, the Company partnered with Peking Union Medical College Hospital to apply AI and voice recognition technologies in medical education and research. In August, iFlytek announced that it would partner with An'hui Provincial Hospital to build a smart hospital with an AI-assisted clinical centre. Anhui’s healthcare regulator also said that the Company’s AI-enabled medical service will be extended to clinics and hospitals in 105 local counties. According to Company management, AI health care will become iflytek's core business in the future. As the Company was included in the MSCI index this March, and China’s State Council issued the “Next Generation Artificial Intelligent Development Plan” in July, we believe the AI industry has entered a critical period and expect the commercialization of iFlyek’s artificial intelligence technologies to accelerate.

Sept. 20, 2017

Analyst: Mark Po Analyst: Mark Jiang

4

COMPANY NEWS

Analyst: Mark Po

Fujian Newland Computer Co., Ltd provides bar code, financial

payment, mobile and other communications, traffic information and

internet finance services in China. Currently, the Company has five

major business segments: a) information identification technology and

related hardware; b) electronic payments and related hardware; c)

industry information; d) payment operations and value-added business;

and e) real estate business. The Company’s major products include

point of sale (POS) equipment for electronic financial payments, bar

code identification technology, cloud computing and big data services.

The Company also provides software services for the mobile

communication and expressway market.

1H 2017 financial results: In 1H 2017, the Company’s total revenue

was RMB2520m, up 59.18% YoY (excluding real estate business,

which was up 79.24%YoY), mainly due to the consolidation of Postar’s

revenue in the financial statement. Real estate business revenue was

RMB732m in 1H 2017, accounting for about 29% of total revenue.

Management mentioned that the Company will not be involved in the

real estate business after the sale of the current project. Excluding the

real estate business, payment operations and value-added business is

the largest segment of the Company’s major business. Revenue from

the payment operations and value-added business was RMB684m,

accounting for about 27% of total revenue. The Company’s net profit

attributable to shareholders was RMB428m in 1H 2017, up 81.65%

YoY (excluding its real estate business, which was up 150.85% YoY).

Key Company takeaway：Management mentioned that the goal of

the Company is to provide a one-stop service platform for offline

customers and that the development of intelligent equipment is

changing the entire industry. One of the Company’s major product is its

intelligent POS machine, which is an Android-powered smart terminal

equipped with a PaaS (platform as a service) platform. On the PaaS

platform, there are various SaaS (software as a service) applications,

such as traditional payment or QR code payment methods. As more

and more SaaS applications are offered on the PaaS platform, the

Company will be able to do more business intelligence development for

clients by passing through all kinds of data. Credit loans are currently a

major implementation. Management pointed out that the Company has

three major strategies based on the intelligentization of the industry. a)

At the hardware level, the Company has Newland Payment

Technology, which is China largest and world’s third largest vendor of

POS machines. At the hardware maintenance level, Beijing Yada, a

subsidiary of the Company, owns over 20 offline equipment

maintenance stations in most major cities; and above all the hardware

is the PaaS platform. On the PaaS platform, Newland provides three

core SaaS applications: a) payment operation software, provided by

Postar, which provides software support for various payment methods,

such as bank cards and QR codes; b) a loan service for small and

medium size merchants; and c) an O2O marketing service, provided by

Shanghai Yima, a subsidiary of the Company which focuses mainly on

O2O marketing, especially for QR code marketing. In addition to these

three self-developed core SaaS applications, the Company cooperates

with over 60 developers to develop various SaaS applications, such as

Sept. 20, 2017

Source: Bloomberg, Company Data, CGIS Research

[Fujian Newland-A]

ERP systems and operating management systems. Management

also talked about Pax Global [0327.HK]. Management said that

Newland had a larger market share and more customers in the

domestic market but that it still needed further development in

overseas markets.

Management mentioned that there will be a different stages of

return in next three years. a) In early stage, the payment

business will experience large growth. The Company acquired

Postar (ranked 18th in 2015 among 43 vendors with a national

merchant acquiring license) for RMB680m in cash. In 2016, the

Company accounted for about 0.53% of total merchant

acquisition business in China and management expects this to

reach over 1% this year. b) In the mid to long term, its online

financing business will be the major revenue booster. Currently,

it is very difficult for small and medium size merchants to get

bank loans. Usually, the cost of getting a loan from a bank is

about 30%, but it can be lowered to 20% if customers apply

through the Company’s platform. Also, usually it takes two to

three weeks to get a loan from a bank, but it takes only a few

seconds through the Company’s online platform.

Analyst: Mark Jiang

Key Financials

(in Rmb m)2015 2016 2017E 2018E

Rev enue 2,880.1 3,388.6 4,969.0 5,974.4

Gross Prof it 980.9 1,159.4 1,812.6 2,123.1

Gross Margin % 34.1 34.2 36.5 35.5

Net Prof it 335.1 461.3 692.1 806.6

Net Margin % 11.6 13.6 13.9 13.5

EPS (Basic) 0.37 0.50 0.72 0.84

ROE (%) 16.4 19.8 22.7 20.9

Div idend Yield (%) 0.39 0.31 0.44 0.33

PER (x) 55.30 39.04 26.53 22.32

PBR (x) 8.65 7.50 5.92 4.71

Capex (m) (44.8) (65.3) (168.0) (89.5)

Free cash f low (m) 780.6 1,057.2 768.0 812.0

Net cash/(net debt) (mn) 492.3 1,088.2 n/a n/a

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0

5

10

15

20

25

30

19-Sep-16 19-Nov-16 19-Jan-17 19-Mar-17 19-May-17 19-Jul-17 19-Sep-17

(RMB million)(RMB)

Turnover (RHS) Price (LHS)

5

Figure 1: Peer Comparison

Sources: Bloomberg, CGIS Research

Ticker Company PE EV/EBITDA

Price Market Cap 2016F 2017F 2018F 2016F 2017F 2018F 2015 2016F 2015 2016F 2015 2016F 2015 2016F 1M 3M 6M 12M YTD

Lcy US$m x x x x x x x x % % % % % % % % % % %

002415 CH Hangzhou Hikvision Digital-A 32.09 45,005 30.8 23.5 18.8 30.3 22.3 17.7 12.2 9.6 34.1 34.3 22.1 21.8 n.a 1.50 3.0 9.7 59.6 93.8 102.2

002236.CH Zhejiang Dahua Technology-A 23.66 10,422 27.3 20.9 16.2 28.9 22.0 16.9 7.6 6.5 24.8 26.4 14.5 14.7 n.a 0.56 -9.0 12.8 49.5 58.6 73.0

300367.CH Netposa Technologies Ltd-A 17.98 2,337 33.7 25.5 20.4 26.3 20.8 18.8 4.7 4.3 12.4 12.9 7.9 9.1 n.a 0.33 -7.1 -10.1 -10.3 -26.1 -10.3

603660.CH Suzhou Keda Technology Co -A 42.46 1,613 40.8 28.9 21.4 43.2 30.3 22.2 9.3 7.0 19.9 19.0 14.0 14.4 0.17 0.09 7.8 15.0 15.5 n.a 31.8

600728.CH Pci-Suntek Technology Co L-A 11.27 2,770 59.3 43.3 n.a n.a n.a n.a 6.0 n.a 5.3 n.a 3.0 n.a 0.00 n.a 14.8 54.4 21.7 16.8 33.1

300588.CH Xinjiang Sailing Informati-A 38.20 581 45.5 30.0 20.5 n.a n.a n.a 12.6 12.7 17.9 22.2 7.2 7.3 0.1 0.08 2.2 10.9 -16.7 n.a n.a

300033.CH Hithink Royalf lush Informa-A 61.68 5,039 29.3 24.3 23.1 31.4 27.3 n.a 12.1 9.4 47.7 30.5 31.4 21.1 n.a 1.1 8.7 0.8 -9.4 -4.6 -10.3

300059.CH East Money Information Co-A 14.56 9,489 60.7 42.4 38.1 62.0 40.7 35.4 4.8 4.6 6.8 6.3 2.1 3.5 n.a 0.2 6.4 16.2 9.9 -9.0 3.2

600570.CH Hundsun Technologies Inc-A 53.32 5,006 65.9 50.2 42.4 85.4 75.2 58.1 12.7 12.1 0.8 16.3 2.1 9.4 n.a 0.32 12.8 21.2 19.4 -6.3 13.1

002230.CH Iflytek Co Ltd - A 56.05 11,828 139.1 100.8 75.2 102.7 73.3 56.4 9.5 9.7 7.3 6.7 4.2 4.9 n.a 0.2 -6.6 74.2 66.8 91.4 106.9

002402.CH Shenzhen H&T Intelligent-A 10.46 1,320 49.1 35.2 26.3 n.a n.a n.a 7.4 7.1 11.6 14.8 9.9 9.9 n.a 0.83 2.9 11.6 -6.2 -8.2 2.1002139.CH Shenzhen Topband Co Ltd -A 12.11 1,252 36.1 25.2 17.9 n.a n.a n.a 4.6 3.8 10.8 11.2 7.1 7.0 n.a 0.99 7.8 15.9 27.4 31.4 37.7

300078.CH Hangzhou Century Co Ltd-A 14.88 1,827 47.4 35.9 30.0 33.8 28.3 23.0 6.0 5.3 11.3 11.0 7.9 8.6 n.a 0.5 -6.1 27.3 7.8 -6.3 3.4

300479.CH Synthesis Electronic Techn-A 30.26 736 73.8 54.5 40.1 57.3 44.3 34.3 12.1 10.8 5.1 15.2 4.2 13.8 0.2 0.43 14.8 35.7 18.3 0.6 18.3

002405.CH Navinfo Co Ltd-A 25.39 4,949 80.3 64.3 50.7 66.0 50.9 47.2 5.0 4.9 5.9 6.4 2.7 5.4 n.a 0.28 5.1 38.7 24.9 18.5 31.2

600718.CH Neusoft Corp-A 17.56 3,317 43.6 30.7 27.5 35.2 23.9 20.8 2.8 2.7 26.8 6.0 15.4 3.5 n.a 0.43 5.7 13.4 -10.5 2.6 -10.7

000997.CH Fujian New land Computer Co-A 23.52 3,353 32.8 27.9 22.0 24.9 23.0 16.8 7.4 7.3 19.8 22.7 12.2 9.5 n.a 0.4 -2.6 14.4 25.6 26.7 21.0

Average 52.7 39.0 30.7 48.3 37.1 30.6 8.0 7.4 15.8 16.4 9.9 10.3 0.1 0.5 3.6 21.3 17.3 18.7 27.9

3882 HK Sky Light Holdings Ltd 2.52 276 504.0 16.8 12.9 n.a 10.9 7.6 2.1 2.0 5.3 -1.5 3.7 -1.2 1.3 2.4 81.3 48.2 20.6 40.8 44.8

2382 HK Sunny Optical Tech 127.40 17,909 45.3 32.4 24.5 34.8 24.6 19.2 20.6 16.3 29.1 41.9 18.8 19.0 0.5 0.5 19.6 95.4 127.7 227.5 275.3

1415 HK Cow ell E Holdings Inc 3.67 391 8.0 6.5 6.3 4.5 3.8 3.7 1.3 1.1 9.8 15.3 8.7 8.7 2.7 3.0 14.7 29.7 53.6 19.2 88.2

732 HK Truly International Holdings 2.38 887 15.0 8.5 6.4 5.6 4.6 4.0 1.0 0.9 8.4 5.9 -0.2 0.1 2.1 2.7 -0.8 -15.0 -20.4 -33.3 -21.2

1478 HK Q Technology Group Co Ltd 13.06 1,834 25.1 17.6 13.9 17.4 12.5 10.2 7.0 6.0 13.7 26.4 9.1 9.3 0.3 0.7 -12.2 114.1 114.8 294.6 226.5

2018 HK Aac Technologies Holdings In 141.40 22,142 26.9 21.2 17.7 19.8 15.8 13.4 9.8 8.1 31.6 32.6 22.7 20.8 1.2 1.4 25.9 45.7 64.1 67.9 100.7

3777 HK China Fiber Optic Netw ork Sy 0.70 192 n.a n.a n.a n.a n.a n.a 0.4 n.a n.a n.a 3.8 n.a 0.0 n.a 0.0 0.0 0.0 14.8 0.0

877 HK O-Net Technologies Group Ltd 5.13 524 18.7 13.6 10.7 11.5 9.2 n.a 2.3 2.2 9.5 13.2 6.6 8.2 0.0 0.6 3.0 30.9 -25.8 19.3 41.7

1300 HK Trigiant Group Ltd 1.09 250 6.1 6.1 n.a n.a n.a n.a 0.6 n.a 7.4 n.a 5.2 n.a 3.5 2.7 2.8 -4.4 -10.7 -7.6 -3.5

941 HK China Mobile Ltd 81.15 212,920 12.2 11.5 10.9 3.4 3.3 3.1 1.4 1.4 11.5 11.6 7.2 7.2 3.7 6.3 -2.5 0.2 -3.3 -11.6 2.5

762 HK China Unicom Hong Kong Ltd 11.02 33,816 48.1 24.5 17.1 4.2 4.0 3.8 1.0 1.0 0.3 1.9 0.3 1.0 n.a 0.9 -7.7 -2.7 7.0 19.7 22.0

728 HK China Telecom Corp Ltd-H 3.92 40,654 13.3 12.0 10.9 3.4 3.2 3.1 0.8 0.8 5.8 6.2 2.9 3.2 2.8 3.1 5.4 3.7 3.2 1.0 9.5

1883 HK Citic Telecom International 2.31 1,049 9.0 8.9 8.7 6.9 6.8 6.6 1.0 1.0 11.4 11.4 5.1 5.4 6.0 5.9 0.9 -5.7 -7.2 -20.6 -0.9

700 HK Tencent Holdings Ltd 344.20 418,953 43.8 34.1 27.1 30.6 24.1 19.2 12.8 11.5 27.9 29.7 12.0 13.7 0.2 0.2 5.6 23.5 55.0 64.4 81.4

1357 HK Meitu Inc 11.90 6,500 n.a 46.0 25.4 n.a 38.6 17.2 7.4 7.6 n.a -6.8 -90.8 -6.1 0.0 0.0 -7.3 41.3 -33.9 n.a 41.7

Average 59.7 18.6 14.8 12.9 12.4 9.3 4.6 4.6 13.2 14.5 1.0 6.9 1.7 2.2 8.6 27.0 23.0 49.7 60.6

LITE US Lumentum Holdings Inc 59.35 3,651 19.7 16.7 16.0 12.8 10.9 10.1 5.9 6.0 -0.7 24.0 -10.5 10.5 0.00 n.a 14.1 -5.6 20.0 46.4 53.6

FNSR US Finisar Corporation 22.40 2,551 14.7 11.1 10.4 7.0 5.9 5.3 1.6 1.5 3.1 9.3 11.5 2.8 0.00 n.a -5.6 -18.8 -18.1 -22.1 -26.0

COHR US Coherent Inc 261.05 6,430 21.4 18.4 17.0 13.3 11.2 10.0 6.0 5.7 10.3 29.7 9.8 17.5 0.00 n.a 19.6 4.6 35.3 145.4 90.0

EMKR US Emcore Corp 8.65 233 16.3 13.8 n.a 9.3 8.1 n.a 2.0 2.0 6.8 12.4 5.2 n.a 17.34 n.a 0.0 -24.5 -2.8 68.9 -0.6

AAOI US Applied Optoelectronics Inc 66.29 1,280 12.5 12.0 10.7 8.7 7.1 n.a 4.1 4.2 15.9 n.a 22.8 n.a 0.00 n.a 3.4 4.9 30.6 200.9 182.8

ACIA US Acacia Communications Inc 45.83 1,798 24.9 18.2 14.2 15.6 10.6 8.7 3.7 3.6 43.0 15.5 32.7 12.2 0.00 n.a 4.6 1.6 -16.7 -59.9 -25.8

CIEN US Ciena Corp 22.34 3,188 12.8 10.9 9.6 8.0 7.5 7.0 3.4 2.9 10.5 29.7 4.8 4.6 0.00 0.00 -4.4 -13.8 -6.1 2.6 -8.5

INFN US Infinera Corp 8.53 1,264 n.a n.a 34.1 n.a 17.2 9.2 1.7 1.8 -3.1 -23.1 -10.6 -14.6 0.00 0.00 1.5 -26.3 -23.4 0.0 0.5

IPGP US Ipg Photonics Corp 183.17 9,859 27.4 24.6 n.a 16.0 14.6 n.a 5.4 4.8 18.5 20.5 17.7 18.1 0.00 n.a 10.4 26.9 50.8 123.7 85.6

NPTN US Neophotonics Corp 6.14 268 n.a 54.3 16.6 n.a 7.5 5.7 1.2 1.3 -0.1 n.a -6.9 n.a 0.00 n.a 10.0 -31.5 -33.0 -66.3 -43.2

VIAV US Viavi Solutions Inc 9.92 2,257 24.3 20.0 23.6 12.1 9.9 n.a 2.9 2.8 -11.1 8.0 8.8 2.2 0.00 n.a -1.7 -12.3 -7.3 33.7 21.3

OCLR US Oclaro Inc 9.39 1,584 12.7 11.5 10.6 8.4 7.4 n.a 3.1 2.7 5.4 19.6 25.0 14.7 0.00 n.a 12.9 -2.4 -1.8 3.2 4.9

ACIA US Acacia Communications Inc 45.83 1,798 24.9 18.2 14.2 15.6 10.6 8.7 3.7 3.6 43.0 15.5 32.7 12.2 0.00 n.a 4.6 1.6 -16.7 -59.9 -25.8

BABA US Alibaba Group Holding-Sp Adr 179.98 460,957 36.7 27.4 22.0 26.8 20.3 16.5 10.1 8.2 39.3 20.8 10.7 12.5 0.00 0.00 7.5 29.0 70.4 74.7 105.0

WB US Weibo Corp-Spon Adr 104.93 22,942 66.1 41.5 29.4 54.5 33.8 23.5 25.3 20.9 15.7 35.1 17.5 27.2 0.00 0.00 17.0 40.3 105.3 115.2 158.4

MOMO US Momo Inc-Spon Adr 36.90 7,275 23.5 17.0 12.6 17.8 12.5 9.6 9.0 7.8 26.4 37.1 33.3 30.0 0.00 0.00 -15.8 -2.1 5.4 57.1 100.8

YY US Yy Inc-Adr 76.71 4,743 13.3 11.1 9.8 9.9 8.0 6.8 4.6 4.0 36.5 35.0 24.6 20.4 0.00 0.00 4.1 34.4 50.4 42.4 94.6

SNAP US Snap Inc - A 14.92 17,862 n.a n.a n.a n.a n.a n.a 5.0 6.2 -51.9 -77.0 n.a -78.0 0.00 0.00 6.5 -16.6 -23.6 n.a -39.1

MSI US Motorola Solutions Inc 85.48 13,904 16.2 15.0 14.4 10.0 9.6 9.2 n.a n.a n.a -95.6 7.7 9.2 2.13 2.21 -2.2 -0.8 0.9 12.8 3.1

CSCO US Cisco Systems Inc 32.52 161,038 13.4 12.8 11.9 7.1 7.0 7.7 2.5 2.3 17.4 17.3 7.6 8.5 3.38 3.65 7.1 1.7 -5.0 4.8 7.6

Average 22.4 19.7 16.3 14.9 11.6 9.9 5.3 4.9 11.8 7.4 12.9 6.5 1.1 0.7 4.7 -0.5 10.7 38.1 37.0

P/B ROA Div yield Share Price PerformanceROE

6

Figure 2: iFlytek’s Easy Trans 600

Sources: CGIS Research

Figure 3: Newland’s intelligent POS machine

Sources: CGIS Research

Strategy Notes 20th Sept 2017

Stock Connect – Monthly Review

Analyst: Johnson Cheung (johnsoncheung@chinastock.com.hk: Tel 3698-6725)

The past two weeks saw net Southbound buying after a marked slowdown in inflows in August. We previously argued that last month’s slowdown was a temporary phenomenon, as H-shares continued to trade at 30% discount to A-shares. The net buying was mainly in large banks and smaller insurance firms. We saw profit taking in commodity plays and China property stocks. The new favourites of Stock Connect investors include Health & Happiness Inc, Digital China, and the IPPs. The top reductions include IGG, and the steel and metal companies. 1) Top Stock Connect Net Buying Still Skewed towards Large Caps As Figure 1 shows, the weighting of the Stock Connect positions is still heavily skewed towards HSBC, CCB, Tencent and ICBC, with the position in these four stocks amounting to over HK$225bn, almost 30% of the aggregate value of the entire Stock Connect Program. We find that Stock Connect investors slightly increased their exposure in large China banks and smaller insurance firms in the past two weeks. There was also some switching in the auto companies and profit taking in commodity stocks. Notably, China property stocks saw profit taking by Stock Connect investors. Figure 1: Top 30 Stock Connect Positions on 18

th September 2017

Bbg Share Price Value of China Connect Holding (HK$bn)

Rank Name Code (HK$) 18-Sep 31-Aug 31-Jul 30-Jun

1 HSBC HOLDINGS PLC 5 hk 76.65 71.4 68.4 67.5 58.0

2 CHINA CONSTRUCTION BANK-H 939 hk 6.67 61.4 61.5 61.4 61.4

3 TENCENT HOLDINGS LTD 700 hk 344.2 46.8 44.8 39.7 38.6

4 IND & COMM BK OF CHINA-H 1398 hk 5.81 46.4 43.4 41.4 34.4

5 SUNAC CHINA HOLDINGS LTD 1918 hk 37.6 36.9 37.9 37.0 34.6

6 GEELY AUTOMOBILE HOLDINGS LT 175 hk 22.7 19.5 19.6 19.7 20.6

7 CHINA MERCHANTS BANK-H 3968 hk 28.05 14.5 14.8 16.4 15.5

8 BANK OF CHINA LTD-H 3988 hk 3.98 14.3 15.4 15.4 15.8

9 NEW CHINA LIFE INSURANCE C-H 1336 hk 46.45 13.7 13.4 13.8 11.9

10 CHINA CITIC BANK CORP LTD-H 998 hk 5.13 13.0 12.3 12.0 11.6

11 FULLSHARE HOLDINGS LTD 607 hk 3.06 12.3 11.7 10.7 9.9

12 GUANGZHOU AUTOMOBILE GROUP-H 2238 hk 18.12 9.9 10.2 10.9 10.1

13 PING AN INSURANCE GROUP CO-H 2318 hk 62.3 8.7 8.8 8.2 6.9

14 CHINA EVERGRANDE GROUP 3333 hk 28.1 8.3 7.7 8.1 10.5

15 GREAT WALL MOTOR COMPANY-H 2333 hk 9.99 8.0 8.0 8.2 8.0

16 FOSUN INTERNATIONAL LTD 656 hk 16.64 6.8 6.1 5.2 4.8

17 CHINA OVERSEAS LAND & INVEST 688 hk 28.45 6.4 7.1 7.2 7.0

18 AGRICULTURAL BANK OF CHINA-H 1288 hk 3.57 6.3 6.2 5.7 6.2

19 CHINA TAIPING INSURANCE HOLD 966 hk 22.35 6.1 5.3 4.6 4.0

20 CHINA PACIFIC INSURANCE GR-H 2601 hk 34.25 5.9 6.2 6.4 5.4

21 CHINA SHENHUA ENERGY CO-H 1088 hk 18.7 5.9 6.6 7.1 6.5

22 AAC TECHNOLOGIES HOLDINGS IN 2018 hk 141.4 5.4 5.1 5.2 4.3

23 CHINA MOBILE LTD 941 hk 81.15 5.1 5.2 5.4 5.4

24 PICC PROPERTY & CASUALTY-H 2328 hk 13.78 4.9 5.1 6.1 6.2

25 SUNNY OPTICAL TECH 2382 hk 127.4 4.7 4.6 4.2 4.3

26 CHINA HONGQIAO GROUP LTD 1378 hk 7.05 4.6 4.6 4.6 4.6

27 SEMICONDUCTOR MANUFACTURING 981 hk 8.6 4.0 3.9 3.3 3.1

28 BANK OF COMMUNICATIONS CO-H 3328 hk 5.79 3.9 3.7 3.7 3.5

29 COUNTRY GARDEN HOLDINGS CO 2007 hk 14.24 3.8 3.4 3.6 4.8

30 CHINA MOLYBDENUM CO LTD-H 3993 hk 4.84 3.8 4.1 4.4 4.4 Sources: Bloomberg, HK Exchanges, CGIS,

Figure 2 lists the companies with the highest concentration of Stock Connect ownership. At the top of the list is Digital China, with a significant 8% of the company’s shares bought by Mainland investors in the past two weeks. Mainland investors remain interested in auto companies, small caps, and companies trading at a steep A-H discount. Figure 2: Top 30 Companies with the Highest Stock Connect Ownership 18th September 2017

Bbg Share Price Current stock Net change since (% of Market Cap)

Rank Name Code (HK$) Connect Holding 31-Aug 31-Jul 30-Jun

1 DIGITAL CHINA HOLDINGS LTD 861 hk 4.5 40.37% 8.37% 0.79% (0.21%)

2 GUANGZHOU BAIYUNSHAN PHARM-H 874 hk 20.45 31.54% 0.95% 2.56% 2.62%

3 TECH PRO TECHNOLOGY DEVELOPM 3823 hk 0.076 31.49% (2.67%) (0.40%) 31.49%

4 NANJING PANDA ELECTRONICS-H 553 hk 5.22 29.64% 0.25% 0.45% 0.60%

5 NEW CHINA LIFE INSURANCE C-H 1336 hk 46.45 28.41% 0.43% (0.34%) 3.70%

6 GREAT WALL MOTOR COMPANY-H 2333 hk 9.99 25.70% (0.03%) (0.73%) (0.11%)

7 GUANGZHOU AUTOMOBILE GROUP-H 2238 hk 18.12 24.56% (0.76%) (2.54%) (0.60%)

8 SHANDONG XINHUA PHARMACEUT-H 719 hk 7.66 24.53% (0.28%) 1.41% 3.39%

9 SUNAC CHINA HOLDINGS LTD 1918 hk 37.6 23.75% (0.65%) 23.75% 0.17%

10 SICHUAN EXPRESSWAY CO-H 107 hk 3.16 23.70% 0.54% 0.95% 1.28%

11 DALIAN PORT (PDA) CO LTD-H 2880 hk 1.39 21.86% 0.14% 0.24% 0.43%

12 ZIJIN MINING GROUP CO LTD-H 2899 hk 2.86 21.71% 0.05% 1.07% 3.62%

13 HUADIAN POWER INTL CORP-H 1071 hk 3.13 21.61% 1.39% 2.65% 3.80%

14 BEIJING JINGCHENG MACHINER-H 187 hk 2.67 21.46% (0.20%) (0.42%) (6.13%)

15 DONGFANG ELECTRIC CORP LTD-H 1072 hk 8.71 21.06% (0.35%) (1.74%) (3.11%)

16 SHANGHAI ELECTRIC GRP CO L-H 2727 hk 3.45 20.99% 0.30% 1.26% 1.46%

17 LUOYANG GLASS COMPANY LTD-H 1108 hk 4.51 20.45% 0.43% 1.85% 2.51%

18 FULLSHARE HOLDINGS LTD 607 hk 3.06 20.40% 0.96% 2.62% 4.09%

19 CHINA MOLYBDENUM CO LTD-H 3993 hk 4.84 19.91% (1.67%) (2.99%) (3.34%)

20 ZHENGZHOU COAL MINING MACH-H 564 hk 5.22 19.26% 1.00% 0.87% 0.17%

21 XINJIANG GOLDWIND SCI&TEC-H 2208 hk 9.24 17.90% 0.97% 6.98% 8.85%

22 CHINA CITIC BANK CORP LTD-H 998 hk 5.13 17.00% 0.96% 1.32% 1.75%

23 CHINA SOUTHERN AIRLINES CO-H 1055 hk 6.17 16.49% (0.61%) (2.03%) (3.69%)

24 BEIJING NORTH STAR CO LTD-H 588 hk 3.23 15.45% 0.06% 0.84% 1.16%

25 FIRST TRACTOR CO-H 38 hk 3.77 15.30% 0.01% 1.13% 2.32%

26 CHONGQING IRON & STEEL CO-H 1053 hk 1.51 14.96% (0.05%) (0.87%) (3.02%)

27 SINOPEC OILFIELD SERVICE -H 1033 hk 1.37 14.77% 0.14% (0.91%) 0.63%

28 TIANJIN CAPITAL ENVIRON-H 1065 hk 5.07 14.70% (0.41%) 0.85% 1.03%

29 SHANGHAI FOSUN PHARMACEUTI-H 2196 hk 31.55 13.92% 0.18% 1.22% 3.39%

30 DONGJIANG ENVIRONMENTAL-H 895 hk 10.52 13.83% 1.12% 3.63% 6.22% Sources: Bloomberg, HK Exchanges, CGIS,

2) Recent Stock Connect Net Buy and Sell as a % of Outstanding Shares Figure 3 lists the companies which saw the most dramatic buying by Stock Connect investors. The most extreme was Health & Happiness Inc, which saw Stock Connect investors buy more than HK$2bn, or 10% of the Company’s shares. There was also significant buying of Digital China shares. As we discussed, buying continued in pharmaceutical stocks, particularly Luye, and IPPs. The top reductions include IGG and the steel and metal companies. Mainland investors also took profit on China property stocks.

Figure 3: Top 20 Net Addition in Stock Connect Positions in September MTD Bbg Share Price Current Net Purchase since (% of Market Cap)

Rank Name Code (HK$)Stock Connect Holding 31-Aug 31-Jul 30-Jun

1 HEALTH AND HAPPINESS H&H INT 1112 hk 34.4 10.2% 10.24% (0.28%) 1.27%

2 DIGITAL CHINA HOLDINGS LTD 861 hk 4.5 40.4% 8.37% 0.79% (0.21%)

3 QINHUANGDAO PORT CO LTD-H 3369 hk 2.8 2.5% 2.54% 2.54% 2.54%

4 CHINA WATER AFFAIRS GROUP 855 hk 5.3 5.3% 2.29% 3.03% 3.54%

5 LUYE PHARMA GROUP LTD 2186 hk 4.2 11.3% 1.89% 2.94% 4.38%

6 VISION FAME INTERNATIONAL HO 1315 hk 0.5 9.2% 1.89% 4.42% 5.92%

7 HENGTEN NETWORKS GROUP LTD 136 hk 0.3 3.3% 1.78% 1.69% 1.66%

8 TRULY INTERNATIONAL HOLDINGS 732 hk 2.4 12.1% 1.66% 2.70% 2.94%

9 HUANENG POWER INTL INC-H 902 hk 5.0 12.2% 1.51% 1.48% 1.31%

10 HUADIAN POWER INTL CORP-H 1071 hk 3.1 21.6% 1.39% 2.65% 3.80%

11 SHANDONG CHENMING PAPER-H 1812 hk 14.1 12.4% 1.39% 2.23% 3.65%

12 COLOUR LIFE SERVICES GROUP 1778 hk 5.3 6.7% 1.36% 3.31% 4.84%

13 CHONGQING RURAL COMMERCIAL-H 3618 hk 5.1 6.9% 1.25% 1.22% 1.78%

14 UNIVERSAL MEDICAL FINANCIAL 2666 hk 6.5 6.0% 1.18% 2.56% 3.15%

15 SHENZHEN EXPRESSWAY CO-H 548 hk 7.6 13.7% 1.15% 2.55% 2.56%

16 DONGJIANG ENVIRONMENTAL-H 895 hk 10.5 13.8% 1.12% 3.63% 6.22%

17 CHINA JINMAO HOLDINGS GROUP 817 hk 4.3 4.5% 1.12% 1.26% 2.24%

18 CHINA TAIPING INSURANCE HOLD 966 hk 22.4 7.6% 1.00% 1.84% 2.60%

19 ZHENGZHOU COAL MINING MACH-H 564 hk 5.2 19.3% 1.00% 0.87% 0.17%

20 XINJIANG GOLDWIND SCI&TEC-H 2208 hk 9.2 17.9% 0.97% 6.98% 8.85% Sources: Bloomberg, HK Exchanges, CGIS,

Figure 4: Top 20 Net Reduction in Stock Connect positions in September MTD

Bbg Share Price Current Stock Net Selling since (% of Market Cap)

Rank Name Code (HK$) Connect Holding 31-Aug 31-Jul 30-Jun

1 TECH PRO TECHNOLOGY DEVELOPM 3823 hk 0.076 31.5% (2.67%) (0.40%) 31.49%

2 CHINA MOLYBDENUM CO LTD-H 3993 hk 4.84 19.9% (1.67%) (2.99%) (3.34%)

3 IGG INC 799 hk 10.86 7.5% (1.30%) (4.86%) (4.60%)

4 CHINA SHENHUA ENERGY CO-H 1088 hk 18.7 9.2% (1.23%) (2.03%) (1.02%)

5 TIAN GE INTERACTIVE HOLDINGS 1980 hk 5.6 3.5% (0.86%) (0.38%) (0.39%)

6 HUANENG RENEWABLES CORP-H 958 hk 2.57 6.3% (0.82%) (0.09%) 0.95%

7 CHINA EASTERN AIRLINES CO-H 670 hk 4.23 8.9% (0.81%) (0.95%) (1.21%)

8 GUANGZHOU AUTOMOBILE GROUP-H 2238 hk 18.12 24.6% (0.76%) (2.54%) (0.60%)

9 SUNAC CHINA HOLDINGS LTD 1918 hk 37.6 23.8% (0.65%) 23.75% 0.17%

10 ANGANG STEEL CO LTD-H 347 hk 7.08 1.1% (0.62%) 0.50% 0.65%

11 CHINA SOUTHERN AIRLINES CO-H 1055 hk 6.17 16.5% (0.61%) (2.03%) (3.69%)

12 GCL-POLY ENERGY HOLDINGS LTD 3800 hk 1.09 6.7% (0.60%) 0.42% 1.40%

13 TIANNENG POWER INTL LTD 819 hk 7.6 3.3% (0.55%) 0.01% 0.64%

14 CHINA TRAVEL INTL INV HK 308 hk 2.72 3.2% (0.51%) (0.75%) (0.84%)

15 HUAYI TENCENT ENTERTAINMENT 419 hk 0.36 1.3% (0.51%) (0.11%) 0.10%

16 CHINA HARMONY NEW ENERGY AUT 3836 hk 4.59 2.9% (0.50%) (0.83%) (0.23%)

17 TIANJIN CAPITAL ENVIRON-H 1065 hk 5.07 14.7% (0.41%) 0.85% 1.03%

18 QIANHAI HEALTH HOLDINGS LTD 911 hk 0.127 7.3% (0.39%) (0.65%) (0.80%)

19 CHINA OVERSEAS GRAND OCEANS 81 hk 5.95 1.6% (0.37%) (0.05%) 0.53%

20 DAH CHONG HONG 1828 hk 4 1.6% (0.37%) (1.56%) (1.70%) Sources: Bloomberg, HK Exchanges, CGIS,

Disclaimer

This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any

jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China

Galaxy International Securities (Hong Kong) Co., Limited (“Galaxy International Securities”) and/or its group companies to any registration or licensing

requirement within such jurisdiction.

This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International

Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly

or implied) is made as to their accuracy, correctness and/or completeness.

This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past

performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made

regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and

where necessary consult their own independent financial advisers prior to any investment decision.

Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this

report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings

Limited and any of its subsidiaries (“China Galaxy International”), directors, officers, agents and employees (“the Relevant Parties”).

All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy

International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this

report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this

disclaimer.

Disclosure of Interests

China Galaxy Securities Co., Ltd. (6881.HK; 601881.CH) is the direct and/or indirect holding company of the group of companies under China Galaxy

International.

China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this

report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies)’ market capitalization.

One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies)

mentioned in this report.

China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing

transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or

have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto.

China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in

issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or

investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in

this report.

Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this

report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies).

Analyst Certification

The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered

in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or

her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report.

Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and

Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this

report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an

officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered

in this report.

Explanation on Equity Ratings

BUY : share price will increase by >20% within 12 months in absolute terms

SELL : share price will decrease by >20% within 12 months in absolute terms

HOLD : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL