1

Yum Cha 飲 茶 August 19, 2016

Source: Bloomberg

INDICES Closing DoD%

Hang Seng Index 23,032.2 1.0

HSCEI 9,654.7 0.1

Shanghai COMP 3,104.1 (0.2)

Shenzhen COMP 2,042.2 (0.1)

Gold 1,351.3 (0.1)

BDIY 682.0 (0.4)

Crude Oil, WTI(US$/BBL) 48.3 0.1

Crude Oil, BRENT(US$/BBL) 50.9 2.1

HIBOR, 3-M 0.6 (0.1)

SHIBOR, 3-M 2.8 (0.1)

RMB/USD 6.6 (0.0)

RESEARCH NOTES

KINGDEE [0268.HK; HK$3.00; BUY] - Kingdee International (Kingdee) reported a satisfactory set of 1H2016 results. Its 20.5% top-line growth in 1H2016 is very en-couraging, given the Company’s unexciting top-line growth in 2012-2015. Its cloud-related business accounted for 21.3% of Kingdee’s top line in 1H2016. We maintain the view that the market is turning more positive on Kingdee after its announcement of the disposal of several internet-related subsidiaries, as the profitability of the Com-pany will be less volatile. Despite the recent share price rally, we believe the market will continue to re-rate Kingdee, given its high exposure to cloud-related business and improvement in profitability. We forecast a gain of RMB130m from the disposal of the loss-making subsidiaries. Any share price weakness due to profit taking would provide a good re-entry opportunity. We also maintain the view that Kingdee will be one of the beneficiaries of Shenzhen-Hong Kong Stock Connect. We maintain our BUY rating with a new target price of HK$3.64 (based on 38x 2016E ex-disposal gain PER, higher than its historical average of 36x, but lower than its A-share listed peers).

CENTURY SAGE [1450.HK; HK$0.63; BUY] - Century Sage Scientific Holdings (CSS) reported 1H2016 results which showed the Company has resumed growth. We maintain the view that the market lost confidence in CSS, given poor manage-ment execution of M&A and weak 2015 results. However, the Applications Solutions and Equipment divisions will resume growth in 2016, owing to the completion of pro-jects rolled over from 2015 and the launch of new products. CSS has continued to invest in product development and new business opportunities, which should create growth potential in the medium to long term. It takes time for the market to regain confidence, however, so investors are unlikely to re-rate the Company in the near term. Expectations for CSS have been re-set, and any improvement in sentiment towards the Company will trigger upward share price movement. Maintain BUY with a target price of HK$0.96.

CHINA TRAVEL INTERNATIONAL [0308.HK; HK$2.35; NOT RATED] - Although China Travel International’s (CTI) 1H16 results were unimpressive, we believe further share price downside is limited, with a PBR of 0.85x and about HK$4.1bn in net cash (equivalent to 32% of its market cap). The Company’s share buyback also offers some downside protection. In the future, re-rating will depend on (i) expansion of China’s tourism business to offset weakness in its Hong Kong operations; and (ii) potential corporate action or cooperation with the parent company to explore new business opportunities. However, the timing of (ii) remains uncertain at the moment.

DATA RELEASES DUE THIS WEEK

SINGYES SOLAR [0750.HK; HK$3.85; HOLD] - Singyes pre-announced that its net profit in 1H16E would increase by more than 40% YoY, implying at least RMB312m. This is far better than our expectation as we had expected a decline in net profit this year. Singyes said the strong profit growth was driven by (1) increase in curtain wall and green building revenue, due to economic recovery; (2) increase in solar EPC revenue due to strong demand in China market; (3) increase in electricity income. We believe investors will react positively to the earnings surprise. The inter-im results will be announced on August 30.

SNIPPETS

2

Kingdee International [0268.HK]

Kingdee International (Kingdee) reported a satisfactory set of 1H 2016 results. Its 20.5%

top-line growth in 1H 2016 is very encouraging, given the Company’s unexciting top-line

growth in 2012-2015. Traditional ERP products resumed growth (6.2% YoY). This and its

fast-growing cloud-related business (138.3% YoY) are the major reasons for strong top-

line growth in 1H 2016. Its cloud-related business accounted for 21.3% of Kingdee’s top

line in 1H 2016. We maintain the view that the market is turning more positive on Kingdee

after its announcement of the disposal of several internet-related subsidiaries, as the prof-

itability of the Company will be less volatile. Despite the recent share price rally, we be-

lieve the market will continue to re-rerate Kingdee, given its high exposure to cloud-related

business and improvement in profitability. We forecast a gain of RMB130m from the dis-

posal of the loss-making subsidiaries. Any share price weakness due to profit-taking would

provide a good re-entry opportunity. We also maintain the view that Kingdee will be one of

the beneficiaries of Shenzhen-Hong Kong Connect. We maintain our BUY rating with a

new target price of HK$3.64 (based on 38x 2016E ex-disposal gain PER, higher than its

historical average of 36x, but lower than its A-share listed peers).

Investment Highlights

1H 2016 results. Kingdee’s 1H 2016 net profit was RMB135m, up 47% YoY, attribut-

able mainly to a tax reversal resulting from a delayed preferential tax rate qualification in 2H 2015. About RMB50m in income tax expenses booked in 2015 was reversed, as Kingdee has since qualified as a nationally important software enterprise, thus enjoying a preferential tax rate of 10%. The Company’s turnover was RMB913.2m in 1H2016, up 20.5%YoY from RMB757.9m in 1H 2015. Kingdee’s traditional enterprise resource planning (ERP) products resumed growth (6.2%) and its cloud business reported strong growth (138.3%) in 1H 2016. Its cloud business accounted for 21.3% of total turnover in 1H 2016. Operating profit declined by 21% YoY to RMB103m due to a 30% YoY increase in SG&A expenses and a 38% YoY increase in R&D expens-es, which was due mainly to increased investment in the cloud business and salary adjustments for staff. Operating losses from subsidiaries Kingdee CloudHub and Kingdee Health were about RMB33m and RMB10m, respectively.

Cloud computing remains a growth driver. In Jul 2016, Kingdee announced that it

would sell its stake in three loss-making internet businesses for a total consideration of RMB107.4m to allow it to focus on its core ERP business. The internet businesses being disposed of have not contributed much to Kingdee’s top line, according to man-agement. The Company’s target of 30% of its turnover to be cloud based remains unchanged, and management expects this to be 50% of turnover by 2020. The 1H 2016 results indicate that growth in the Company’s cloud ERP business is expected to remain strong in 2016 and beyond. Its cloud-based ERP business is still at the investment stage, so its profitability will continue to improve going forward.

Upward earnings adjustment. We revised upwards our net profit forecasts for 2016

by 54.9%. The upward earnings adjustment is due to the booking of a disposal gain

and higher turnover growth. Our 2017 earnings forecast remains unchanged.

Mark Po, CFA — Senior Analyst

(852) 3698-6318

markpo@chinastock.com.hk

Wong Chi Man, CFA — Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

TMT Sector-Software Solid 1H 2016 Results. Further Re-rating Expected

BUY

Close: HK$3.00 (Aug 18, 2016)

Target Price: HK$3.64 (+21.4%)

Share Price Performance

Market Cap US$1,138m

Shares Outstanding 2,855m

Auditor Pricewaterhouse-

Coopers

Free Float 73.3%

52W range HK$2.34-4.01

3M average daily T/O US$6.0m

Major Shareholding CEO, Mr Xu Shao

Chun (26.2%)

August 19, 2016

Source: Bloomberg, CGIS Research

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Turnover (RHS) Price (LHS)

Key Financials

(in RMB m)2013 2014 2015 2016E 2017E

Revenue 1,602.1 1,546.5 1,586.2 1,892.3 2,154.2

Change (yoy %) (9.3) (3.5) 2.6 19.3 13.8

Gross Profit 1,205.9 1,275.8 1,292.1 1,541.4 1,754.8

Gross Margin % 75.3 82.5 81.5 81.5 81.5

Net Profit 126.4 197.0 105.8 346.8 310.2

Net Margin % 7.9 12.7 6.7 18.3 14.4

EPS (Basic) 0.05 0.08 0.04 0.12 0.11

Change (yoy %) n.a. 54.3 (49.5) 211.4 (10.6)

DPS $0.000 $0.012 $0.000 $0.036 $0.033

ROE (%) 7.6 10.5 4.1 10.2 8.5

Dividend Yield (%) - 0.47 - 1.41 1.26

PER (x) 51.5 33.4 66.1 21.2 23.7

PBR (x) 3.7 3.3 2.3 2.1 2.0

FCF Yield (%) 0.91% 1.78% 1.68% 2.55% 4.02%

Capex (m) 220.2 234.6 250.0 266.6 284.5

Free cash flow per share 0.0 0.1 0.1 0.1 0.1

Net Gearing (%) 32.7 15.5 Net cash Net cash Net cash

3

Figure 1: Results highlights

Source: Company, CGIS Research

Figure 2: Key assumptions for KIngdee

Source: Company, CGIS Research

1H 2016 Results Highlights (RMB m) 1H 2014 2H 2014 1H 2015 2H 2015 1H 2016

Revenue 750 797 758 828 913

Cost of sales and services (144) (127) (158) (136) (189)

Gross profit 606 670 599 693 725

Other income and other gains and losses 98 136 104 179 131

Distribution and selling expenses (382) (403) (398) (457) (472)

Administrative expenses (185) (241) (176) (316) (283)

Finance costs (51) (23) (32) (32) (17)

JV & Associates 0 0 0 0 0

Profit before tax 87 140 98 66 84

Income tax expense (6) (20) (8) (49) 42

MI 1 (4) 1 (1) 10

Profit for the period 81 116 92 16 135

Owners of the Company 81 120 90 17 125

Gross margin (%) 80.9 84.0 79.1 83.6 79.3

Operating margin (%) 18.3 20.4 17.2 11.9 11.1

Net Margin (%) 10.8 15.1 11.9 2.1 13.7

2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F

Turnover (Rmbm)

Software 587.8 584.0 812.6 1,088.0 873.6 786.2 870.3 896.5 1,075.7 1,237.1

Computer & related products 14.9 12.7 18.1 78.6 51.0 56.1 56.1 56.1 56.1 56.1

Solution consulting and support services 92.5 165.0 253.7 346.6 354.2 357.7 375.6 409.4 491.3 565.0

Implementation services 180.0 235.1 352.3 509.3 486.8 402.1 244.5 224.3 269.1 296.0

YoY Change (%)

Software (0.7) 39.1 33.9 (19.7) (10.0) 10.7 3.0 20.0 15.0

Computer & related products (14.7) 42.1 335.0 (35.1) 10.0 0.0 0.0 0.0 0.0

Solution consulting and support services 78.4 53.7 36.6 2.2 1.0 5.0 9.0 20.0 15.0

Implementation services 30.6 49.9 44.6 (4.4) (17.4) (39.2) (8.3) 20.0 10.0

Gross margin (%) 78.9 78.1 76.5 70.1 65.0 75.3 82.5 81.5 81.5 81.5

Net margin (%) 20.7 21.3 18.9 7.2 (7.9) 7.9 12.7 6.7 18.3 14.4

Cost (Rmbm)

S,G&A (571.9) (739.0) (1,069.2) (1,652.9) (1,570.9) (1,265.9) (1,210.1) (1,347.2) (1,569.9) (1,671.0)

R&D Expenses (83.47) (90.58) (121.33) (168.72) (216.87) (205.04) (202.20) (234.82) (294.71) (292.42)

Financial Expenses (0.1) (0.8) (8.7) (12.4) (65.9) (110.7) (97.3) (94.3) (82.3) (84.5)

YoY Change (%)

S,G&A 29.2 44.7 54.6 (5.0) (19.4) (4.4) 11.3 16.5 6.4

R&D Expenses 8.5 33.9 39.1 28.5 (5.5) (1.4) 16.1 25.5 (0.8)

Financial Expenses 684.5 1,040.9 42.5 432.8 67.9 (12.1) (3.1) (12.7) 2.7

4

Figure 3: Earnings projection

Sources: Company, CGIS Research

Income Statement (RMB m) FY2013 FY2014 FY2015 FY2016F FY2017F Cash Flow Statement (RMB m) FY2013 FY2014 FY2015 FY2016F FY2017F

Revenue 1,602 1,547 1,586 1,892 2,154 Net Income 239 300 229 270 383

Growth yoy% (9.3%) (3.5%) 2.6% 19.3% 13.8% Depreciation & Amort. 220 235 250 267 285

Gross Profit 1,206 1,276 1,292 1,541 1,755 Change in Working Capital 66 72 17 59 73

Growth yoy% 5.1% 5.8% 1.3% 19.3% 13.8% Cash from Ops. 524 607 496 595 741

Selling General & Admin Exp. (1,266) (1,210) (1,347) (1,570) (1,671) Capital Expenditure (455) (470) (359) (377) (396)

Others Operating Expenses/Items 299 234 284 298 299 Sale of Property, Plant, and Equipment - - - - -

Operating Income 239 300 229 270 383 Change in Investing Acitivities (8) 56 (384) (38) (18)

Growth yoy% n.a. n.a. n.a. n.a. n.a. Cash from Investing (463) (415) (744) (415) (415)

Interest Expense (110.7) (97.3) (94.3) (82.3) (84.5) Net increase in bank borrowings (17) 273 (380) 47 40

Interest and Invest. Income 8.8 23.8 29.9 38.6 73.6

Income/(Loss) from Affiliates (0.1) (0.6) (2.2) (2.4) (2.5) Issuance of Common Stock 16 33 1,000 0 0

Other Non-Operating Inc. (Exp.) 0 0 0 130.0 0 Common Dividends Paid 0 0 (31) 0 (104)

Impairment of Goodwill - - - - - Special Dividend Paid - - - - -

Gain (Loss) On Sale Of Invest. - - - - - Other Financing Activities (100) (76) (75) (45) (22)

Gain (Loss) On Sale Of Assets - - - - - Cash from Financing (101) 230 514 2 (85)

Income Tax Expense (17) (25) (57) (7) (60)

Minority Int. in Earnings 7 (3) 0 0 0 Net Change in Cash (40) 423 266 183 241

Net Income 126 197 106 217 310

Growth yoy% n.a. 55.9% (46.3%) 227.9% (10.6%)

Balance Sheet (RMB m) FY2013 FY2014 FY2015 FY2016F FY2017F Ratios FY2013 FY2014 FY2015 FY2016F FY2017F

ASSETS Profitability

Cash And Equivalents 1,003 1,528 2,174 2,617 3,761 Return on Assets % 3.2% 3.2% 4.7% 2.1% 6.0%

Receivables 277 244 278 331 377 Return on Capital % 7.3% 7.3% 8.2% 4.8% 8.9%

Inventory 4 4 4 5 5 Return on Equity % 7.6% 7.6% 10.5% 4.1% 10.2%

Other Current Assets 296 327 618 450 518

Total Current Assets 1,580 2,103 3,074 3,403 4,662 Margin Analysis

Net Property, Plant & Equipment 760 774 789 805 821 Gross Margin % 75.3% 75.3% 82.5% 81.5% 81.5%

Long-term Investments - - - - - SG&A Margin % 79.0% 79.0% 78.2% 84.9% 83.0%

Other Intangibles - - - - - EBIT Margin % 15.4% 15.4% 20.9% 16.3% 16.3%

Deferred Tax Assets, LT - - - - - EBITDA Margin % 27.1% 27.1% 33.9% 30.0% 28.6%

Other Long-Term Assets 1,588 1,516 1,621 1,781 859 Net Income Margin % 7.9% 7.9% 12.7% 6.7% 18.3%

Goodwill

Accounts Receivable Long-Term Asset Turnover

Total Long Term Assets 2,348 2,290 2,410 2,586 1,680 Total Asset Turnover 0.4x 0.4x 0.4x 0.3x 0.3x

Total Assets 3,928 4,393 5,484 5,989 6,342 Fixed Asset Turnover 0.7x 0.7x 0.7x 0.7x 0.7x

Accounts Receivable Turnover 4.6x 5.4x 5.9x 6.1x 6.2x

LIABILITIES & EQUITY Inventory Turnover 407.0x 407.0x 393.9x 392.0x 392.0x

Accounts Payable 363 303 357 426 485

Accrued Exp. - - - - - Liquidity

Short-term Borrowings 420 546 244 290 331 Current Ratio 1.6x 1.7x 2.0x 3.3x 3.2x

Curr. Port. of LT Debt - - - - - Quick Ratio 1.3x 1.3x 1.7x 2.7x 2.8x

Curr. Income Taxes Payable - - - - - Avg. Days Sales Out. 63.0 63.0 57.7 63.9 63.9

Unearned Revenue, Current - - - - - Avg. Days Inventory Out. 0.9 0.9 0.9 0.9 0.9

Other Current Liabilities 169 181 318 349 385 Avg. Days Payable Out. 462.1 414.8 448.9 409.8 407.7

Total Current Liabilities 952 1,029 919 1,066 1,201 Avg. Cash Conversion Cycle -16.0 -16.0 -8.5 -13.3 -13.3

Long-Term Debt 1,155 1,291 1,213 1,213 1,213 Net Debt to Equity 33% 33% 16% Net cash Net Cash

Def. Tax Liability, Non-Curr. 66 74 106 116 128

Other Non-Current Liabilities 0 0 0 0 0 Growth Over Prior Year

Total Liabilities 2,173 2,395 2,237 2,395 2,542 Total Revenue (9.3%) (9.3%) (3.5%) 2.6% 19.3%

Common Stock 65 65 72 72 72 Net Income (190%) 55.9% (46.3%) 227.9% (10.6%)

Additional Paid In Capital - - - - - Payout Ratio % 0.0% 0.0% 0.0% 15.5% 0.0%

Retained Earnings 1,686 1,924 3,145 3,491 3,698

Treasury Stock - - - 0 0

Comprehensive Inc. and Other - - - - -

Minority Interest 4.5 9.2 29.6 29.9 30.2

Total Equity 1,755 1,998 3,247 3,594 3,800

Total Liabilities And Equity 3,928 4,393 5,484 5,989 6,342

5

Figure 4: Kingdee’s PER trend

Sources: Bloomberg, CGIS Research estimates

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Figure 5: Peer comparison

Sources: Bloomberg, Company, CGIS Research estimates for covered stocks;

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

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

HK Listed Software plays268 HK Kingdee 3.00 1,138 21.2 23.7 n.a. 3.3 4.0 10.1 2.2 2.2 4.1 10.2 14.0 11.6 0.0 1.4 24.0 23.0 8.3 -9.11297 HK Sinosoft 4.17 555 19.3 15.6 12.6 11.8 9.5 7.4 4.0 3.7 19.7 20.2 17.6 18.1 0.7 0.8 -5.0 1.5 18.5 5.3354 HK Chinasoft 3.65 1,017 19.6 16.6 13.5 10.3 8.7 7.1 2.0 1.8 9.8 9.7 4.8 5.3 0.0 0.0 20.5 32.7 35.7 27.6596 HK Inspur 1.62 188 n.a. n.a. n.a. n.a. n.a. n.a. 0.8 n.a. 0.0 n.a. 0.0 n.a. n.a. n.a. 8.0 23.7 23.7 10.2861 HK Digital China 6.61 1,003 18.2 16.3 15.6 17.3 16.7 14.6 0.8 0.9 7.6 5.9 1.9 1.7 n.a. 1.9 8.7 36.6 15.7 27.8856 HK VST 1.85 347 4.6 4.2 3.8 6.0 5.5 4.9 0.7 0.6 11.6 14.2 3.0 3.5 6.7 6.6 -13.1 -3.1 10.1 -21.61588 HK Chanjet 11.08 310 23.5 1896.1 31.6 n.a. n.a. n.a. 2.3 2.3 -6.9 -1.9 -6.1 -1.9 0.0 0.9 28.1 -5.0 -16.2 -30.82280 HK Hc International Inc 5.31 692 28.6 21.6 21.1 26.1 19.6 20.9 1.7 1.9 2.9 6.2 1.2 3.0 0.0 n.a. 11.8 20.7 37.6 30.5Average 20.7 285.2 17.1 14.1 11.9 10.8 1.8 1.9 6.1 8.7 3.1 4.9 1.2 1.8 10.4 16.2 16.7 5.0

A-share Listed Software plays000555 CH Digital China Information -A 32.68 4,521 63.5 47.7 35.6 51.3 39.2 28.8 9.2 7.1 11.3 12.0 5.1 5.9 n.a. 0.2 -12.5 12.0 8.5 18.3300253 CH Winning Health Technology-A 23.54 2,883 61.1 58.4 39.9 79.4 56.5 42.0 10.3 12.2 17.1 22.8 8.3 11.6 n.a. 0.5 -3.0 16.8 4.5 -20.3300166 CH Beijing Orient National-A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 13.6 14.4 10.2 11.5 n.a. n.a. n.a. n.a. n.a. n.a.600588 CH Yonyou Network Technology-A 25.38 5,602 90.6 63.3 49.4 89.8 69.3 72.8 7.0 6.4 6.8 7.2 2.6 3.5 n.a. 0.6 7.1 15.9 14.8 3.9300271 CH Beijing Thunisoft Corp Ltd-A 19.23 1,863 41.9 31.4 24.1 35.7 26.5 21.8 7.5 5.7 15.8 15.3 10.4 8.7 n.a. 0.4 -1.6 11.8 -5.0 -0.4600410 CH Beijing Teamsun Technology-A 11.28 1,523 53.7 31.3 n.a. n.a. n.a. n.a. 4.3 n.a. 2.2 n.a. 0.4 n.a. n.a. n.a. -5.4 15.7 -6.2 -42.1600718 CH Neusoft Corp-A 17.91 3,354 47.1 36.3 31.8 49.4 38.2 30.7 3.3 3.6 6.7 5.7 3.6 3.7 n.a. 0.5 -1.8 8.4 -15.4 -2.2000977 CH Inspur Electronic Informat-A 24.98 3,763 37.7 28.5 22.0 34.3 26.6 19.9 6.3 6.8 17.4 19.6 6.4 8.6 n.a. 0.3 4.9 18.2 10.7 -18.2300290 CH Bringspring Science And Te-A 15.67 759 71.2 48.2 36.4 61.2 40.6 29.3 5.9 3.9 7.9 6.7 6.1 n.a. n.a. n.a. -11.7 7.3 7.3 -3.7002063 CH Ygsoft Inc -A 13.60 1,211 53.3 35.3 27.2 62.6 40.9 29.5 4.8 4.5 7.4 9.4 4.5 n.a. n.a. 0.4 -7.4 13.0 -8.7 -39.8Average 57.1 41.6 33.0 58.9 42.7 35.2 6.2 6.2 10.6 12.6 5.8 7.9 n.a. 0.5 -2.4 13.4 0.2 -15.4

Overseas Listed Software playsSAP GY SAP 77.72 108,197 20.1 18.0 16.6 12.7 12.4 12.0 4.2 3.7 14.3 18.1 8.6 10.3 n.a. 1.6 8.4 12.7 12.2 23.4CRM US Salesforce.Com 76.32 51,707 79.7 58.2 46.9 29.9 23.2 18.9 9.3 9.1 -7.5 14.2 -0.1 5.9 0.0 0.0 -6.5 -2.0 23.7 5.2IBM US IBM 160.44 153,356 11.9 11.4 10.8 9.5 8.8 8.5 9.7 8.2 101.0 79.6 10.3 11.0 3.3 3.4 0.4 8.9 21.1 2.8ORCL US Oracle 41.21 169,898 14.8 13.7 12.6 9.2 8.9 8.5 3.6 3.6 20.8 23.4 8.0 6.0 1.5 1.4 -1.0 4.4 12.5 3.5Average 31.6 25.3 21.7 15.3 13.3 12.0 6.7 6.1 32.2 33.8 6.7 8.3 1.6 1.6 0.3 6.0 17.4 8.7

P/B ROE Share Price PerformanceROA Div yield

7

Century Sage Scientific Holdings [1450.HK]

Century Sage Scientific Holdings (CSS) reported 1H 2016 results which showed the Com-

pany has resumed growth. We maintain the view that the market lost confidence in CSS,

given poor management execution of M&A and weak 2015 results. However, the Applica-

tions Solutions and Equipment divisions will resume growth in 2016, owing to the comple-

tion of projects rolled over from 2015 and the launch of new products. CSS has continued

to invest in product development and new business opportunities, which should create

growth potential in the medium to long term. It takes time for the market to regain confi-

dence, however, so investors are unlikely to re-rate the Company in the near term. Expec-

tations for CSS have been re-set, and any improvement in sentiment towards the Compa-

ny will trigger upward share price movement. Maintain BUY with a target price of HK$0.96.

Investment Highlights

1H 2016 results highlights. CSS’s turnover was up 12.2% YoY to RMB291.0m in 1H

2016, net profit was RMB21.5m, up 28.9% YoY, and gross profit was up 6.4% YoY to

RMB84.5m. No interim dividend was declared in 1H 2016. Application solutions and equip-

ment turnover resumed growth of 11.5% and 62.8% YoY, respectively, in 1H 2016. The

Company’s blended gross margin dropped from 30.7% in 1H 2015 to 29.0% in 1H 2016,

mainly due to a decrease in the gross profit margin of the sports and events business

which was the result of a transitioning of its business model in the sports arena. CSS is

developing its “sports commercial operation business” aggressively in addition to its exist-

ing “sports broadcast technology services”. The Company subsidized some commercial

operations in 1H 2016. In 2H 2016, CSS will control the subsidy in phases and expects to

realize the benefits of its promotional efforts in sports events in the future.

Resuming growth in 2016. The projects delayed in 2015 will be realized in 2016 and will

benefit the top line in 2016. The ongoing HDTV and content upgrades by local TV opera-

tors remains the key driver of CSS’s application solutions business. New product launches

in 2016 will also support the Company’s top-line growth in 2016. .

Gefei Technology. CSS acquired a 49% stake in Beijing Gefei Technology Corporation

(Gefei Technology) in 2015. Gefei Technology is engaged mainly in research, development

and production of core infrastructure systems for broadcast television, media content crea-

tion and processing, and a series of video players, and monitoring and control software

systems. On 27 Jul 2016, the shares of Gefei Technology were approved to be quoted on

the NEEQ (stock code 838964). Gefei Technology has an extensive product line, further

enriching the Group’s product portfolio. Within several months following the acquisition,

Gefei Technology contributed to the Group’s profit as an associate.

Mark Po, CFA — Senior Analyst

(852) 3698-6318

markpo@chinastock.com.hk

Wong Chi Man, CFA — Head of Research

(852) 3698-6317

cmwong@chinastock.com.hk

TMT Sector 1H 2016 results in line with expectations. It takes time to restore confidence.

BUY

Close: HK$0.63 (Aug 18, 2016)

Target Price: HK$0.96 (+52.7%)

Share Price Performance

Market Cap US$82m

Shares Outstanding 1,000m

Auditor Pricewaterhouse-

Coopers

Free Float 18.0%

52W range HK$0.48-1.56

3M average daily T/O US$0.1m

Major Shareholding Chairman Mr Lo Chi

Sum (67%)

August 19, 2016

Source: Bloomberg, CGIS Research

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0.5

1

1.5

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Aug15 Oct15 Dec15 Feb16 Apr16 Jun16

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

Key Financials

(in RMB m)2013 2014 2015 2016E 2017E

Revenue 628.8 748.5 623.4 735.7 861.7

Change (yoy %) 10.7 19.0 (16.7) 18.0 17.1

Gross Profit 193.6 231.0 182.9 216.4 261.1

Gross Margin % 30.8 30.9 29.3 29.4 30.3

Net Profit 77.8 97.1 50.1 62.7 85.0

Net Margin % 12.4 13.0 8.0 8.5 9.9

EPS (Basic) 0.08 0.10 0.05 0.06 0.08

Change (yoy %) 21.96 24.82 (48.35) 25.09 35.53

DPS $0.000 $0.031 $0.005 $0.013 $0.025

ROE (%) 90.3 40.4 12.6 14.2 16.8

Dividend Yield (%) - 5.81 0.94 2.35 4.77

PER (x) 6.9 5.5 10.7 8.5 6.3

PBR (x) 5.6 1.4 1.3 1.1 1.0

FCF Yield (%) 7.64% -12.52% -0.66% 8.41% 5.24%

Capex (m) 8.3 9.5 9.6 10.4 11.3

Free cash flow per share 0.0 (0.1) (0.0) 0.0 0.0

Net Gearing (%) 4.5 Net Cash 35.1 25.0 14.9

8

Figure 1: Peer Comparsion

Sources: Company, CGIS Research

Ticker Company PE EV/EBITDA

Price Market Cap 2016F 2017F 2018F 2016F 2017F 2018F 2015 2016F 2015 2016F 2015 2016F 2015 2015

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

1450 HK Century Sage Scientific Hold 0.63 82 8.5 6.3 n.a. 7.4 5.3 n.a. 1.3 1.1 12.6 14.2 6.4 7.2 0.9 2.42008 HK Phoenix Satellite Television 1.79 1,154 n.a. n.a. n.a. n.a. n.a. n.a. 1.8 n.a. 20.3 n.a. 1.2 n.a. 0.6 n.a.1661 HK Wisdom Holdings Group 2.46 510 18.3 13.7 11.5 13.7 10.3 5.9 3.1 2.7 34.2 15.0 4.1 16.7 0.0 2.3623 HK Sinomedia Holding Ltd 1.67 117 n.a. n.a. n.a. n.a. n.a. n.a. 0.5 n.a. 27.3 n.a. 5.6 n.a. 6.4 n.a.511 HK Television Broadcasts Ltd 27.50 1,553 23.0 16.3 14.1 10.9 8.1 7.5 1.6 1.7 21.6 7.5 13.5 6.3 9.5 9.51993 HK Asiaray Media Group Ltd 2.66 151 n.a. n.a. n.a. n.a. n.a. n.a. 1.8 n.a. 146.9 n.a. -3.5 n.a. 5.5 n.a.205 HK Seec Media Group Ltd 0.10 83 n.a. n.a. n.a. n.a. n.a. n.a. 0.7 n.a. 4.2 n.a. -21.4 n.a. 0.0 n.a.1045 HK Apt Satellite Holdings Ltd 6.03 725 9.4 7.9 7.3 4.6 4.2 3.9 1.3 1.1 16.4 12.7 8.1 9.4 1.4 1.88 HK Pccw Ltd 5.12 5,088 18.3 16.0 13.9 6.5 6.2 5.9 3.4 3.5 21.0 22.9 2.8 2.2 4.9 5.4763 HK Zte Corp-H 11.86 8,824 11.4 10.6 10.8 8.9 8.7 8.8 1.1 1.1 6.2 10.3 3.0 2.9 n.a. 2.2552 HK China Communications Servi-H 4.20 3,751 9.8 9.3 8.7 4.3 4.1 4.0 1.0 0.9 10.6 9.8 4.2 4.3 2.8 3.3300182 CH Beijing Jetsen Technology-A 12.46 4,815 29.7 22.5 n.a. n.a. n.a. n.a. 3.4 n.a. 15.8 n.a. 11.8 n.a. n.a. n.a.Average 17.1 13.8 11.0 8.2 6.9 6.0 1.8 1.8 29.5 13.0 2.7 7.0 3.4 4.1

Div yieldP/B ROE ROA

9

COMPANY / INDUSTRY NEWS

Analyst: Wong Chi Man, CFA (cmwong@chinastock.com.hk; Tel: 852 - 3698 6317)

CHINA TRAVEL INTERNATIONAL [0308.HK; HK$2.35; NOT RATED] – LIMITED DOWNSIDE; WAITING FOR CATALYSTS

Market Cap: US$1,651m; Free Float: 39.8%

CHINA TRAVEL INTERNATIONAL (0308.HK; NOT RATED) Summary. Although China Travel International’s (CTI) 1H16 results

were unimpressive, we believe further share price downside is limited,

with a PBR of 0.85x and about HK$4.1bn in net cash (equivalent to

32% of its market cap). The Company’s share buyback also offers

some downside protection. In the future, re-rating will depend on (i)

expansion of China’s tourism business to offset weakness in its Hong

Kong operations; and (ii) potential corporate action or cooperation with

the parent company to explore new business opportunities. However,

the timing of (ii) remains uncertain at the moment.

Hong Kong operations see initial signs of stabilization. The Com-

pany’s core net profit dropped 37% year-on-year (YoY) in 1H16 to

HK$226m, mainly because of the weakness of Hong Kong operations

and FX loss. According to management, they saw initial signs of stabili-

zation for the Hong Kong hotel business in the last one to two months,

although it is still too early to draw a conclusion. For the travel agency,

travel document and related operations, since the impact of policy

change began in 2H15, a further sharp revenue decline in 2H16 on

YoY basis seems unlikely. Meanwhile, the Company recorded about

HK$25m FX loss in 1H16 (1H15: FX gain of HK$17.9m) because the

Company needs to keep some RMB deposits for operations. Therefore

management does not rule out the possibility that it will continue to

record FX loss in 2H16.

Trying to secure at least one acquisition in 2H16. As the Hong

Kong business is unlikely to show a strong turnaround in the near term,

the Company will continue to expand its China business to mitigate the

impact. It investigated a number of new potential investment targets

such as projects of Pingyao, Mount Wutai, Datong in Shanxi, Guang-

yuan in Sichuan and Zhangye in Gansu, which are in the process of

cooperative negotiation. Management said the Company will strive to

complete at lease one acquisition of new scenic spot project in 2H16.

Potential acquisition targets will be projects which can contribute earn-

ings immediately.

Planning corporate actions but no details. The Company is looking

for investment opportunities overseas such as resorts and theme

parks. In addition, because of the merger of its parent with CITS, it is

also studying potential cooperation with CITS’ duty free shop business

and travel agency business which can create synergies. Meanwhile, its

parent company is trying to reactivate its duty free shop licence in Chi-

na. The Company does not rule out the possibility to acquire this li-

cence from the parent in the future.

Presale of Zhuhai Evergrande OSR Project Phase 1 to start in

October. The Company will strive to launch pre-sale of Zhuhai Ever-

grande OSR Project Phase 1 in October. GFA of this phase is

240,000m2. Revenue make begin to book in 2017.

Source: Bloomberg

August 19, 2016

Continue to streamline its existing business. For the ex-

isting business, the Company will continue to improve the

efficiency and non-performing assets will be disposed when

appropriate. Potential spin-off of some of its businesses is

also possible.

Reasonable valuation but needs better execution for re-

rating. Trading at 0.85x PBR with about HK$4.1bn net cash

(equivalent to 32% of its market cap), we believe the valua-

tion of CTI is not demanding. In the past, the Company has

done a good job in disposing non-core assets. However, the

progress of developing new business and monetizing its

property projects has not been satisfactory so far. Better exe-

cution will be the key for re-rating.

0

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200

250

300

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Aug15 Oct15 Dec15 Feb16 Apr16 Jun16 Aug16

(HK$ million)(HK$)

Turnover (RHS) Price (LHS)

HK$ 2014 2015 2016E 2017E

Revenue (m) 4,475 4,395 4,537 4,858

COGS (m) (2,417) (2,391) (2,431) (2,578)

Gross profit (m) 2,058 2,004 2,106 2,280

Gross margin (%) 46 46 46 47

EBIT (m) 1,660 899 774 885

Net profit (m) 1,739 1,353 629 742

Net margin (%) 39 31 14 15

EPS 0.31 0.24 0.11 0.14

ROE (%) 11.58 8.74 4.00 4.37

Dividend yield (%) 3.19 2.98 2.30 2.89

PER (x) 7.6 9.7 20.6 16.9

PBR (x) 0.9 0.8 0.8 0.8

10

COMPANY / INDUSTRY NEWS

Analyst: Wong Chi Man, CFA (cmwong@chinastock.com.hk; Tel: 852 - 3698 6317)

CHINA TRAVEL INTERNATIONAL [0308.HK; HK$2.35; NOT RATED] – LIMITED DOWNSIDE; WAITING FOR CATALYSTS

Figure 1: 1H16 results highlights

Sources: Company, CGIS Research

(HK$'000) 1H2016 1H2015 Change YOY

Revenue 1,820,093 2,090,922 -13%

Costs of sales (955,870) (1,098,525) -13%

Gross profit 864,223 992,397 -13%

Other income and gains 74,788 98,526 -24%

Changes in fair value of investment properties 24,970 52,348 -52%

Selling and distribution costs (252,999) (265,136) -5%

Administrative expenses (403,705) (412,447) -2%

Finance income 46,929 70,251 -33%

Finance costs (6,157) (13,847) -56%

Share of profits of:

Associates 80,077 58,035 38%

Joint ventures 1,698 2,365 -28%

Profit before tax 429,824 582,492 -26%

Income tax expenses (90,619) (99,126) -9%

Profit for the period for continuing operations 339,205 483,366 -30%

Profit from discontinued operations - 531,661 n.a.

Profit/(loss) for the period attributable to:

Owners of the Company 270,043 937,487 -71%

Non-controlling interests 69,162 77,540 -11%

Earnings per share (HK cents):

Basic (continuing operations) 4.90 7.19 -32%

Basic (discontinued operations) - 9.43 n.a.

Diluted (continuing operations) 4.90 7.18 -32%

Diluted (discontinued operations) - 9.40 n.a.

Segment Performance:

(HK$'000) 1H2016 1H2015 Change YOY

Revenue: 1,820,093 2,090,922 -13%

Tourist attraction operations 756,276 830,485 -9%

Travel agency, travel document and related operations 525,886 669,391 -21%

Hotel operations 345,197 367,737 -6%

Passenger transportation operations 139,468 149,551 -7%

Golf club operations 42,537 61,570 -31%

Arts performance operations 10,729 12,188 -12%

Net Profit:

Tourist attraction operations 75,994 61,219 24%

Travel agency, travel document and related operations 65,057 103,721 -37%

Hotel operations 38,439 50,674 -24%

Passenger transportation operations 83,485 84,004 -1%

Golf club operations (7,150) 5,685 n.a.

Arts performance operations (4,721) (2,396) 97%

Net Margin:

Tourist attraction operations 4.2% 2.9% +

Travel agency, travel document and related operations 8.6% 12.5% -

Hotel operations 7.3% 7.6% -

Passenger transportation operations 24.2% 22.8% +

Golf club operations -5.1% 3.8% -

Arts performance operations -11.1% -3.9% -

11

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China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459

Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.

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 :