INDUSTRY NOTE

China | Technology 6 November 2017

Technology EQUITY RESEARCH Summit Takeaway: AI, Semi, Value Chain Key Takeaway We hosted several experts and 24 A/H corporates at our China Summit and Digital Disruption tour last week. Key takeaways: 1) AI shifting from central cloud to the edge (end devices), driving GPU/FPGA demand in near term, 2) AI leaders in China rolling out own ASICs in the next 2~3 years, 3) China's new role in semi, forging ahead in design and catching up in foundry. In smartphone value chain, maintain AAC as top pick for lens opportunity and strength. CHINA Artificial Intelligence - From cloud to edge computing: The rise of AI on the edge (terminal devices, like surveillance cameras, ) from central cloud, can solve one key weakness of AI: the brains are located thousands of miles away from the applications. The benefits of AI on the edge include: 1) better analysis based on non-compressed raw data, which contains more information, 2) lower requirement on bandwidth, as transmitted data has been pre-processed, 3) faster response. This will keep driving the demands for GPUs and FPGAs in near term. Meanwhile, China's leading AI companies including (002415 CH) and (private, leader in voice recognition) also noted they may develop own ASICs in the next 2~3 years, for better efficiency and low power. While machines getting smarter, we notice increasing concerns on data privacy. Governments are not only implementing Big Data laws and policies, also starts investing AI leaders, like Face ++ (computer vision) in China.

Semiconductor - From catching up to forging ahead: Government investments and strategic M&A are pushing the development of local IC industry. In high-end chips including microprocessors, memory, DSP and FPGA, China remains heavily dependent on imports of semiconductor and technology. In 2016, China's IC self-sufficiency rate reached 21.6%, vs. national goal of 40% by 2020 and 70% by 2025. The slowing of Moore's Law may give China a chance to catch up over time. China's advantage is it has a large domestic market, for example, ~30% of memory consumption is already coming from China, mainly for smartphones, PCs and servers. On design side, local industry revenue rose 24% y- y to USD24.7bn in 2016, weighted 28% of global market. 's Hisilicon is near the leading edge. Chinese design houses also have great opportunities in Bluetooth and WiFi. On foundry side, SMIC (981 HK) has improved yield rate on 28nm, and is focusing on 14nm R&D, in order to begin ramping in 2019. This will continue putting pressure on earnings, but we remain confident in 2018~20 revenue CAGR of 17% thanks to diverse technology portfolio and customer mix. According to National IC Investment Fund, local foundry supply is ~50% of demand from local design houses. China is building 26 new 12- inch fabs, accounting for 42% of worldwide new fabs. This will add 1.1mn wafer/month capacity in total, including 400k for foundry and 650k for memory.

Smartphone Value Chain: Key takeaways from our recent channel checks and corporate meetings are: 1) Xiaomi's 2017 smartphone shipment will reach ~90mn units in 2017, beat consensus estimate of 70~75mn units. This will benefit AAC (2018 HK) as a major RF mechanics and optical lens vendor to Xiaomi; 2) Memory and OLED are still the most difficult to get components for Android brands; 3) 3D sensing adoption in Android should start from early-2018, led by , Xiaomi, Huawei and Moto; 4) Dual camera penetration will reach 15-20% by 2017 and likely 40-50%+ by 2018; 5) Camera migration will Rex Wu * Equity Analyst continue, mainly in mid- and low-end smartphones (from 8MP to 12MP/16MP); 6) Huawei +852 3743 8074 [email protected] and Oppo/Vivo are unlikely to use foreign camera module makers as primary supplier, due * Jefferies Limited to mature technology and customer priority. Local leaders like Sunny Optical (2382 HK) are ^Prior trading day's closing price unless still preferred; 7) Hybrid lens adoption should remain conservative due to low yield and otherwise noted. expensive to plastic lens; 8) Handset lens market sees regular price decline. Largan pays more attention to China Top-10 brands now, even (~20mn units per year) and .

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6 November 2017

Chart 1: China IC industry maintained a 8-year CAGR of Chart 2: Local fabless outperformed packaging and foundry 17% with 45% CAGR in 1999~2016 (Rmb bn) Packaging Foundry Design 500 34.3% 40% 434 100% 450 29.9% 35% 30% 90% 400 361 25.3% 27.2% 28.8% 32.2% 34.7% 36.7% 25% 80% 37.9% 350 19.7% 20.1% 302 20% 70% 300 251 20.2% 60% 31.1% 27.7% 15% 27.3% 24.0% 250 216 50% 23.6% 25.0% 193 16.2% 10% 26.0% 200 11.6% 40% 144 5% 150 125 30% 111 0% 20% 43.6% 45.1% 43.9% 43.8% 41.7% 100 -5% 38.3% 36.1% -0.4%-11.0% 10% 50 -10% 0% 0 -15% 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: China Semiconductor Industry Association Source: China Semiconductor Industry Association

Chart 3: China’s self-sufficiency by product type Chart 4: China's new 12-inch fabs from 2017

Capacity System Equipment IC % self-sufficiency Location Company Fab name Status Business (k wafer/mo) Server MPU 0% SMIC B2A 35 Existing Foundry Computer PC MPU 0% Beijing SMIC B1 (Fab 4) Existing Foundry 45 Industrial MCU 2% Beijing SMIC B1 (Fab 5) Existing Foundry Programmable logic device FPGA/EPLD 0% Wuhan Xinxin F1 20 Existing Memory General Wuxi Hynix HC1 100 Existing Memory Digital singal processing DSP 0% Wuxi Hynix HC2 70 Existing Memory Appliaction processor 18% Dalian Fab 68 60 Existing Memory Communication processor 22% Xi'an F1x1 100 Existing Memory Shanghai Huali F1 35 Existing Foundry Communication Embedded MPU 0% Shanghai SMIC S2 (Fab 8) 14 Existing Foundry Embedded DSP 0% Hefei Jinghe HF 40 Building Memory Core network equipment NPU 15% Beijing SMIC B23 35 Building Foundry DRAM 0% Quanzhou Jinhua F2 60 Building Memory United Chip Fab 12x 50 Building Foundry Memory NAND Flash 0% SMIC SZ 40 Building Foundry NOR Flash 5% Shenzhen Unigroup SZ 40 Building ? Image processor 5% Wuhan Yangtze F2 200 Building Memory Display Hualan Decoma F2 20 Building CIS Display driver 0% Nanjing TSMC NJ 20 Building Foundry Shanghai SMIC SN1 70 Building Foundry Shanghai Huali F2 40 Building Foundry Chengdu Globalchip - 20 Building Foundry Total 1,114 Source: China Semiconductor Industry Association Source: National IC Investment Fund

Chart 5: SMIC lags global peers by two generations 2012 2013 2014 2015 2016 2017 2018 2019 2020 28nm PolySION 3Q11 28nm HKMG 1Q12 20nm Planar 2Q14 TSMC 16nm FinFET 4Q15 10nm FinFET 1Q17 7nm FinFET 1Q19 28nm PolySION 4Q12 28nm HKMG 2Q13 22nm FD-SOI 2Q15 Samsung 20nm Planar 2Q14 14nm FinFET 1Q15 10nm FinFET 1Q17 7nm FinFET 1Q19 28nm PolySION 2Q13 22nm FD-SOI 1Q14 20nm Planar 4Q14 GF 14nm FinFET 1Q15 10nm FinFET 1Q17 7nm FinFET 3Q19 22nm Planar 4Q11 14nm FinFET 2Q14 Intel 10nm FinFET 1Q17 7nm FinFET 1Q19 28nm PolySION 2Q15 SMIC 20nm Planar 2Q18 14nm FinFET 1Q19

Source: China Semiconductor Industry Association

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6 November 2017

Chart 6: Global smartphone 3Q17 shipment

(mn units) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 % y-y 4Q17E A A A A A A A JEF Samsung 79.2 77.1 76.0 78.0 80.0 80.4 82.5 9% Apple 51.2 40.2 45.5 78.3 50.8 41.0 46.7 3% Huawei 28.4 32.0 33.6 45.0 34.6 38.5 39.1 16% 47.9 Oppo 13.2 23.0 25.8 30.9 26.1 30.5 33.5 30% 39.9 Vivo 12.5 16.5 21.7 23.6 22.8 24.8 28.6 32% 28.8 Xiaomi 14.5 14.5 15.5 17.0 13.4 23.0 28.0 81% 25.6 LG 13.5 13.9 13.5 14.1 14.8 13.3 13.9 3% ZTE 13.0 15.3 15.4 16.4 13.3 12.2 9.8 -36% +Moto 11.2 11.3 14.0 14.2 11.4 10.3 13.0 -7% Grand Total 337.2 355.0 380.0 437.6 371.1 365.0 400.5 5% Source: Counterpoint, Jefferies estimates

Sunny Optical (2382 HK) . Handset lens: Samsung remains as the biggest customer, which is 30~40% of Sunny’s handset lens sales. This implies 20~30% market share in Samsung. Sunny should see better product mix of 13MP and 16MP in 10MP+, for both Samsung and Chinese customers. 16MP price is 50~60% higher than 13MP.

. Camera module: Major drivers for MOB/MOC are rising adoption of 16MP and 20MP front cameras, as well as bezel-less design. Sunny expects double digit growth in high-end camera modules. Hikvision (002415 CH) . AI on the edge (surveillance camera), powered by DSP, FPGA and GPU. In the next 2~3 years, ASIC will be widely adopted for better performance and low power. Benefits include: 1) better analysis based on non-compressed raw data, 2) lower requirement on bandwidth, 3) faster response.

. Vs. AI start-ups: Security surveillance is a non-life critical mission, unlike self- driving and robot surgery. Hence it doesn’t require 100% accuracy. In addition, AI projects require high level of customization. Hikvision has scale advantage comparing to industry peers and AI start-ups. The company has over 9,000 R&D engineers for solution designs and 500 AI engineers for Big Data training and deep learning algorithm. Hikvision has worked on AI surveillance products with 30+ provincial level police departments, real estate, retail, and Singapore smart city.

. Q4 gross margin should decline on seasonality, owing to recognition of low- margin construction business. Tongda (698 HK) . Casing: Tongda believes metal case ASP has reached the bottom, dropping from Rmb85 to Rmb65 YTD. Total shipment in 2017 will be around 800k units, vs. 600k units in 2016. Tongda now has 3m unit capacity which will not increase in near term. Tongda will not be Apple’s casing supplier in next 10 years.

. Waterproof components: Tongda started to provide waterproof components for Apple since 2016. Revenue from Apple’s order last year was UD30m and expects to reach Rmb100m/Rmb250m revenue in 2017/2018. Waterproof component costs USD2.5 in iPhone X and USD1 in iPhone 7. Tongda takes 25% of Apple’s waterproof components and expects increase to 50% by 2020.

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. Guidance: Tongda expects low teen top-line growth in 2017 and high teen growth in 2018. Q-Tech (1478 HK) . Camera module: Blended ASP Rmb30 vs. Sunny’s Rmb50.

. 3D sensing: collimating lens. The most difficult part is the dot projector on the DOE and VCSEL. Receiving camera is easier. Mentis Vision is providing dense lighting for sunny and O-Film. Q-Tech is proving sparse lighting.

. Growth outlook: 25% YoY growth in volume. 2016 shipment was 178m units. Hytera (002583 CH) . Hytera is the No.1 Chinese brand in Processional Mobile Radio industry and No.2 globally, with 50+ global branches and 4,000 dealers and partners. The company has 4,000 R&D stuff out of total 9,000 and 10 R&D centres (5 domestic, 5 overseas).

. Domestic PDT market: Hytera has 80% market share in PDT market. The whole China PDT market size is around Rmb10b and now is only used up 20%. Global PMR market: market size is Rmb100bn. takes 55% market share now. Tytera sales only Rmb5-6bn and has great growth space.

. Hytera won several big orders competition with Motorola, showcasing their strong competiveness in global PMR market. One is the PMR devices’ upgrading for Holland and the other one is broad-band products offering for Angola valuing Rmb200mn+.

. Three major business drivers: 1) Analog to digital migration; 2) Infrastructure and devices upgrade; 3) Opportunities from Broad-band products.

. Growth outlook: Revenue growth 40-50% YoY; opex-to-sales 15%-20%. New hired 2,000 employees in 2016/17, with 60~70% in software background. Sunway (300136 CH) . Antenna business unit: (1) Traditional antenna business: Sunway provides wireless antenna for Apple as key supplier. 5G antenna is under development and mgmt. expects to see 5G smartphones in 2020E. (2) 4X4 mimo antenna: 4.5G concept and it has been applied to .

. Wireless charging: Sunway estimates wireless charging smartphones will reach 350~400mn units in 2018, including 250mn iPhone and 100mn Samsung. Xiaomi will likely first adopt wireless charging among China brands. Sunway currently supplies to Samsung, with 30% order allocation and USD3~4 dollar content. The company will likely enter iPhone wireless charging supply chain in 2018, in our view.

. Dual camera frame: Sunway now takes 50% of iPhone 8 Plus/X orders, and likely to get more parts in 2018. The company also expects new business opportunities from ’s Pixel smartphone in 2018/2019.

. Stock incentive plan: started in 2017, with net profit target of Rmb750m in 2017, Rmb1.2bn in 2018, and Rmb1.56bn in 2019. O-Film (002456 CH) . 3D-sensing: O-Flim now has dominant position in 3D-sensing for non-Apple mobile developers as O-Film owns 40% stake of Mentis Vision. Domestic penetration for 3-D sensing is now in single-digits. Moto will introduce a

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handset with 3D sensing in 2018, with 2-3m shipments. Huawei Mate11 also has possibility to use 3D sensing.

. Dual camera: capacity at 10mn/m in 2017 and expand to 15mn/m in 2018. GM is 16-17%. Price for 12+20mp is Rmb150, and for 12+8mp is Rmb90. Dual camera penetration for Xiaomi is 10% in 2017 and 30% in 2018. Everwin Precision (300115 CH) . Smartphone: Everwin will provide metal parts products for Apple in 18/2019. Sales from Poop/Vivo were not so good in 2017. Everwin expects Oppo/Vivo sales to recover driven by (1) new metal casing design; (2) customers’ seasonal smartphones upgrade.

. Robot arm: Everwin set up a JV with Kabushiki-Gaisha Yasukawa Denki July this year. Everwin invested Rmb50m and owns 65% of the JV. Everwin’s six-axis robot capacity is 500 units this year and 3,000/10,000 units in 2018/2020. GM for the six-axis robots is 30%. Price per unit is Rmb80k (+additional 20% subsidy from government as domestic products), much lower that overseas competitors price at Rmn120-150k per unit.

. Electric vehicle components: Everwin invested in a Suzhou power company with 40% share holdings in 2016. The company became Tesla’s supplier this year, proving soft connectors for Tesla valued USD100 per automobile. Everwin increased stake to 70% of the power company this year. iFlytek (002230 CH) . Iflytek launched its first auto-translation product Easy Trans 600 this March and has sold 70k units YTD. Easy Trans 600 can provide multi language translation including Chinese, English, Spanish, Tibetan, etc. The device costs Rmb2, 999.

. 1,000+ R&D experts focus on the most advanced AI technology, out of total 7,000 employees. Iflytek expects to expand to 10,000 employees by 2018.

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Chart 7: A/H technology peer valuation table

Last Market Avg ROE Dividend Ticker English name Rating TP 2017~19 CAGR (Consensus) P/E ratio P/B ratio Share price performance price cap volume (%) yield (%) (USD mn) (mn shr) Sales EBIT EPS 2017 2018 2017 2018 2017 2017 5 Day 3 Month YTD 1 Year Electronics 2018 HK AAC Buy 165.0 139.7 21,879 3.9 26.6% 30.3% 28.8% 28.1 20.7 8.5 6.7 33.7 2.6 9% 42% 118% 119% 2382 HK Sunny Optical Buy 123.0 118.4 16,646 8.1 36.7% 59.7% 59.0% 43.3 31.6 15.3 10.8 41.0 0.5 10% 34% 264% 240% 877 HK O-Net Buy 6.7 5.4 549 5.6 25.3% 44.3% 41.3% 16.3 11.0 2.3 2.0 15.2 0.0 0% 12% 50% 32% 3008 TT Largan NC na 5,985 26,564 0.4 23.8% 29.4% 28.8% 28.1 19.3 8.5 6.5 32.9 1.2 3% 2% 55% 68% 285 HK BYD Electronic NC na 20.4 5,891 12.1 13.7% 48.8% 45.1% 15.0 12.5 2.8 2.4 20.1 1.2 -3% 13% 247% 240% 698 HK Tongda NC na 2.1 1,660 44.1 17.3% 20.2% 19.7% 11.8 9.1 2.3 1.9 20.9 2.5 -5% -5% 6% 2% 732 HK Truly NC na 3.1 1,228 55.2 14.2% 14.0% 15.5% 26.4 10.4 1.3 1.2 5.7 1.3 2% 24% 5% -2% 1478 HK Q-Tech NC na 16.9 2,376 15.0 44.0% 70.1% 62.8% 32.1 21.7 7.8 5.9 26.9 0.5 2% 99% 332% 370% Median 24.6% 36.9% 35.0% 26.4 14.1 2.3 1.9 15.3 1.3 0% 12% 50% 32% Software 268 HK Kingdee Buy 4.8 4.2 1,577 33.2 20.2% 24.9% 23.1% 45.1 30.2 2.9 2.7 6.6 0.0 2% 32% 44% 35% 8280 HK CDV Buy 1.7 1.3 107 0.2 15.0% 20.0% 20.0% 7.8 6.2 0.8 0.7 11.0 0.0 -2% 13% 14% -25% 861 HK Digital China NC na 4.8 1,023 5.6 14.0% 65.6% 21.6% 45.3 34.4 2.8 2.6 6.5 0.1 0% -5% -16% -20% 3888 HK NC na 20.5 3,443 10.6 6.5% 48.3% 40.7% #N/A N/A 23.2 0.8 0.9 -0.5 0.4 8% 1% 34% 26% 354 HK Chinasoft NC na 4.6 1,404 14.6 28.0% 29.0% 26.0% 19.1 13.9 2.7 2.4 12.7 0.7 0% 9% 26% 29% 1297 HK Sinosoft NC na 2.2 352 5.4 18.0% 19.4% 14.0% 11.6 9.7 2.2 2.0 19.3 1.2 -4% -9% -9% -31% Median 15.0% 29.0% 23.1% 32.1 23.2 2.7 2.4 6.6 0.1 0% 9% 26% 26% Semiconductor 981 HK SMIC Buy 10.5 13.9 8,270 5.2 13.3% -5.0% 12.2% 26.2 20.8 1.5 1.3 6.4 0.0 22% 67% 16% 27% 522 HK ASM Pacific Buy 126.0 117.0 6,118 5.1 11.8% 25.2% 29.6% 19.1 18.5 4.5 3.9 26.2 1.9 1% 18% 41% 53% 1347 HK Hua Hong NC na 15.4 2,042 6.4 9.5% 15.5% 13.4% 14.4 13.4 1.2 1.1 8.6 2.2 8% 35% 70% 64% 000725 CH BOE NC na 6.0 31,336 1,415.8 33.6% 122.9% 104.3% 27.8 23.3 2.6 2.4 10.0 0.6 6% 69% 129% 160% 603160 CH Goodix NC na 111.0 7,605 2.6 20.3% 14.4% 13.4% 53.1 47.5 14.5 11.7 30.9 0.5 8% 28% 12% na 2330 TT TSMC NC na 239.0 205,054 24.1 8.9% 9.2% 9.4% 18.2 16.3 4.0 3.6 23.3 3.1 -1% 12% 32% 30% 2303 TT UMC NC na 15.5 6,454 41.9 2.0% 14.2% 7.0% 21.3 21.3 0.9 0.9 4.0 3.3 -3% 10% 34% 31% 5347 TT Vanguard NC na 57.0 3,091 1.5 3.4% 3.1% 1.4% 20.9 18.1 3.3 3.2 15.9 5.0 1% 6% 2% -6% Median 12.6% 14.3% 13.4% 23.7 21.0 3.4 3.1 10.0 1.2 7% 28% 33% 31% A-share tech blue chips 002415 CH Hikvision Buy 33.0 39.0 54,228 37.8 28.3% 32.4% 28.9% 36.7 29.1 11.8 9.5 35.3 1.6 8% 39% 151% 145% 002475 CH Luxshare Buy 26.0 24.7 11,818 21.9 35.8% 37.9% 34.5% 43.2 31.0 6.0 5.1 23.8 0.5 0% 25% 80% 71% 002230 CH iFlytek Buy 34.0 57.0 11,941 45.5 38.1% 37.6% 24.1% 155.1 104.9 11.0 10.3 10.7 0.7 10% 26% 112% 92% 002236 CH Dahua NC na 28.0 12,244 26.1 36.6% 39.2% 33.6% 33.7 25.3 8.0 6.2 26.0 0.4 8% 30% 113% 104% 002405 CH Navinfo NC na 26.9 5,195 44.8 32.7% 53.0% 40.2% 119.3 80.7 5.3 5.0 4.8 0.1 10% 45% 43% 29% 002456 CH O-film NC na 22.6 9,236 38.0 31.7% 53.5% 48.6% 41.3 27.9 6.2 5.3 16.2 0.4 -4% 26% 66% 50% 002241 CH NC na 21.4 10,462 38.5 25.5% 24.0% 23.6% 29.4 23.3 5.1 4.3 18.7 0.5 -6% 12% 57% 37% 002008 CH Han's Laser NC na 50.1 8,065 21.3 36.4% 52.5% 46.8% 33.6 28.3 8.5 7.0 27.1 0.9 12% 55% 132% 121% 300115 CH Everwin NC na 30.7 4,180 9.4 40.8% 41.2% 39.5% 30.2 20.0 5.7 4.7 19.6 0.6 -9% -3% 15% 6% 300136 CH Sunway NC na 49.6 7,351 7.8 61.4% 55.6% 55.2% 49.6 31.9 17.2 11.4 38.0 0.1 3% 44% 81% 107% 002045 CH Guoguang Elec NC na 16.9 1,062 9.6 na na na 49.3 25.4 4.8 4.0 9.9 na -2% 12% 38% 20% 300433 CH Lens Tech NC na 33.2 13,096 11.0 34.7% 44.8% 42.0% 40.5 26.5 5.3 4.7 14.1 0.4 2% 10% 46% 54% Median 34.7% 39.2% 34.5% 40.9 28.1 5.9 5.1 17.4 0.5 2% 26% 61% 52% Source: Company Data, Bloomberg, Bloomberg consensus for Not Covered companies, Jefferies estimates

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Analyst Certification: I, Rex Wu, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Registration of non-US analysts: Rex Wu is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC and is not registered/ qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Investment Recommendation Record (Article 3(1)e and Article 7 of MAR) Recommendation Published , 12:41 ET. November 6, 2017 Recommendation Distributed , 12:41 ET. November 6, 2017 Company Specific Disclosures For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/ Disclosures.action or call 212.284.2300.

Explanation of Jefferies Ratings Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.

Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value.

Risks which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may page 7 of 10 Rex Wu, Equity Analyst, +852 3743 8074, [email protected]

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6 November 2017 adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report • AAC Technologies Holdings Inc. (2018 HK: HK$153.70, BUY) • ASM Pacific Technology Limited (522 HK: HK$115.50, BUY) • Hangzhou Hikvision Digital Technology Company (002415 CH: CNY39.90, BUY) • iFlytek Co LTD (002230 CH: CNY57.37, BUY) • Intel Corporation (INTC: $46.34, UNDERPERFORM) • Kingdee International Software Group Co Ltd. (268 HK: HK$4.21, BUY) • Lenovo Group Ltd (992 HK: HK$4.53, BUY) • Luxshare Precision Industry Co LTD (002475 CH: CNY24.95, BUY) • O-Net Communications Group Ltd. (877 HK: HK$5.44, BUY) • Semiconductor International Corporation (981 HK: HK$14.14, BUY) • Sunny Optical Technology Group Co Ltd (2382 HK: HK$123.60, BUY) • ZTE Corporation (763 HK: HK$27.85, BUY) For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/ Disclosures.action or call 212.284.2300. of Ratings IB Serv./Past 12 Mos. JIL Mkt Serv./Past 12 Mos. Rating Count Percent Count Percent Count Percent BUY 1061 51.81% 329 31.01% 63 5.94% HOLD 842 41.11% 167 19.83% 20 2.38% UNDERPERFORM 145 7.08% 16 11.03% 4 2.76%

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6 November 2017

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page 10 of 10 Rex Wu, Equity Analyst, +852 3743 8074, [email protected]

Please see important disclosure information on pages 7 - 10 of this report.