A-share research

Tuesday, 11 December, 2018 Bringing to the World

BUY Digital Technology (002415:CH) Unchanged Hangzhou Hikvision Digital Technology Co Ltd Sector: Information Technology Changing focus Industry: Electronic Equipment, Instrume Sub-Industry: Electronic Equipment & Instrum The US agreed to hold off on raising the tariff on US$200bn worth of Chinese goods from Key data 10% to 25% on 1 January 2019. We believe a sustainable truce between China and the US Price (Rmb) 26.87 52wk High (Rmb) 44.29 may benefit Hangzhou Hikvision Digital Technology. We maintain our EPS forecasts of 52wk Low (Rmb) 23.60 Rmb1.25 in 18E (+21.4% YoY), Rmb1.58 in 19E (+26.4% YoY) and Rmb1.86 in 20E (+17.7% Market Cap (Rmbm) 247,937 YoY). Our target price is unchanged at Rmb68.48 (43.3x 19E PE). With 155% upside, we Market Cap (US$m) 35,935 Shares outstanding (m) 9,227 maintain our BUY recommendation. Free float (%) 23.9 1M relative return (%) 0.8 Minimal revenue exposure to US. The US restricted exports of 14 types of emerging 6M relative return (%) -11.2 technologies in November, and added 44 Chinese companies to its export control list in YTD relative return (%) -2.6 Dividend yield (2017, %) 1.86 August, which we expect to have a limited impact on Hikvision at present. In order to cope CSI 300 3,160 with a potential escalation of the Sino-US trade war, Hikvision has aimed to promote high- value-added solutions in developing countries and increased sales of low-end products in Inst Ownership (Top 5) North America. It derived c.29% of 17A revenue from overseas markets, with less than 6% CETHIK GROUP CO LTD 39.6% Gong Hongjia 13.6% from the US. Hong Kong Securities 10.4% WEI Xun Investment M 4.9% Shifting supply chain. According to Hikvision’s IPO prospectus, its upstream suppliers HK Pukang Internatio 2.0% include integrated circuit (IC), printed circuit board (PCB), power supply, case, and audio & Source: Bloomberg video algorithm firms. We see its IC imports as a potential weak link, which may impede Sector head its growth if Sino-US trade tensions intensify. We note domestic firms started the development of application specific integrated circuit (ASIC) for artificial intelligence (AI) Liu Yang products in 2016-17, which may satisfy robust demand from surveillance, internet and [email protected] automation companies in the future. An industry fund, set up by Hikvision’s parent CET Hik Group, invested Rmb200m in the series A funding of chip developer NextVPU in Analyst October. We believe domestically produced AI chips are already capable of replacing Liu Yang imported visual processing units (VPU) for Hikvision, and may become good alternatives for graphic processing units (GPU) going forward. [email protected] Growing market. We estimate sales from distributors, government clients and corporate clients account for 30%, 30-35% and 35-40% of Hikvision’s domestic sales, respectively. Hikvision initiated a campaign to help its distributors reduce inventories this year, which we expect to affect sales from distributors by Rmb2bn. We note the firm’s incremental accounts receivable-to-quarterly revenue ratio declined to 8.5% in 2Q18 and 9.5% in 3Q18, from 13.5% in 1Q18, and therefore anticipate improving performance from the distributor channel in 4Q18. Meanwhile, public tenders for security and surveillance projects recovered significantly in October-November, with the number of tenders up 52% YoY and a combined tender value jumping 82% YoY, beating both figures in 4Q17.

Maintain BUY. We maintain our EPS forecasts of Rmb1.25 in 18E (+21.4% YoY), Rmb1.58 in 19E (+26.4% YoY) and Rmb1.86 in 20E (+17.7% YoY). Our target price is unchanged at Rmb68.48 (43.3x 19E PE). The stock is currently trading at 21.5x 18E PE and 17.0x 19E PE. With 155% upside, we maintain our BUY recommendation.

50 (Rmb) Volume Price (m) 180k 45 160k Financial Table 40 140k 35 120k (Rmbm) 2017 2018E 2019E 2020E 30 100k 25 80k Revenue 41,905 50,421 62,896 76,667 20 15 60k Growth YoY (%) 31.2 20.3 24.7 21.9 10 40k Net profit 9,410.9 11,544.1 14,563.6 17,162.0 5 20k 0 0k Growth YoY (%) 26.8 22.7 26.2 17.8 EPS (Rmb) 1.03 1.25 1.58 1.86 Growth YoY (%) -16.3 21.4 26.4 17.7 12/2015 02/2016 04/2016 06/2016 08/2016 10/2016 12/2016 02/2017 04/2017 06/2017 08/2017 10/2017 12/2017 02/2018 04/2018 06/2018 08/2018 10/2018 12/2018 Gross margin (%) 43.5 42.5 43.3 43.2 ROE (%) 34.2 34.2 35.4 34.5 Source: Bloomberg PE (x) 26.1 21.5 17.0 14.4

Source: Bloomberg, SWS Research

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A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Changing focus

Short-term trade war overhang pushed back

The market concerned about the negative impact on Hikvision’s export business from the escalating trade frictions between China and the US. Hikvision derived c.29% of 17A revenue from overseas markets, and less than 6% from the US. Based on our estimates, c.25% of Hikvision’s products exported to the US (by value) are subjected to 10% tariff, which are shared by the firm and its customers.

The Trump administration approved the National Defense Authorization Act (NDAA) in June, restricting government institutions using technologies from ZTE (000063:CH - BUY) and prohibiting the National Defence Department from renewing contracts with suppliers that have Chinese partners. The bill has a limited impact on Hikvision, given its small exposure to business with the US government.

In August, the US added 44 Chinese companies to its export control list. Hikvision was not included in the list, and it does not sell products or services to the US military. In November, the Bureau of Industry and Security (BIS) of the US Ministry of Commerce called for public comments on an export control policy that restricts exports of 14 types of emerging technologies.

During the Group of 20 summit in Argentina, President Xi Jinping and US President agreed to hold off on imposing new tariffs, and pledged to step up negotiations toward the removal of all additional tariffs and reach a concrete deal that is mutually beneficial. Trump will postpone a plan to raise tariffs on US$200bn worth of Chinese goods from 10% to 25%, on 1 January. Meanwhile, President Xi agreed to increase purchases of American agricultural, energy and industrial products in a bid to narrow the trade surplus with the US.

Although the trade war overhang is mitigated in the short-term, the US will continue to raise the tariff to 25% if no deal on technology transfer, intellectual property, non-tariff barriers and agriculture is reached within 90 days.

Hikvision generated c.50% of export sales from Southeast Asia and other developing countries, 30% from west Europe and Australia, and only 20% from the US. In order to minimise the impact from the trade frictions, it aims to promote high-value-added solutions in developing countries.

In the North America market, it aims to increase sales of low-end products, which we believe can offset shrinking sales of higher-end products in the US as certain large customers may shift to non-Chinese suppliers for compliance reasons.

Addressing the chip supply shortage

According to Hikvision’s prospectus and previous annual reports, the company’s upstream suppliers mainly consist of IC, PCB, energy supply, chassis and basic audio & video algorithms vendors. The company can purchase energy supply and chassis products from domestic suppliers, develop software for audio & video algorithms, and secure PCB products domestically. However, IC becomes the major constraint to its development, with (CPU) and GPU as the core setbacks.

Intel (INTC:US) and (NVDA:US) were the major processor vendors for Hikvision before the trade frictions, and now investors worry about a chip supply shortage facing the company after the trade restrictions.

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Fig 1: Overview of Hikvision’s upstream suppliers Name Major upstream products Upstream suppliers Proportion Producing area Original source Source Year The main raw materials for (6758:JP), Sharp (6753:JP), Micron production include IC, PCB, Hikvision IC Technology (MU:US), Philips, Texas Japan, US Prospectus 2010 power supply and chassis Instruments (TXN:US), Analog Devices (ADI:US) accessories, etc. Basic audio & video algorithms ITU-T, ISO/IEC Prospectus 2010 Top five suppliers Seed International 22.47% Prospectus 2009 Hong Ri International Electronics 4.99% IC Prospectus 2009 Ningbo Guanshuo Electronics 4.20% PCB Prospectus 2009 Hangzhou Yucheng Electronics 4.09% Power supply and chassis Prospectus 2009 Join Young Corporation 3.09% Prospectus 2009 Key suppliers NVIDIA US Since 2014

Source: ifind, Company prospectus, Company filings, SWS Research

Following the rise of artificial intelligence (AI) in the Chinese market, a number of start-ups led by veterans or former executives at leading IC firms started to invest in AI application- specific integrated circuits (ASIC) from 2015 onwards. After several years of development, some of them have raised more than Rmb100m of funds and launched products available for mass production. As per Sohu Tech news on 24 October, chip and system solutions start-up NextVPU raised Rmb200m from series A fundraising, led by Hangzhou CETC HiK Equity Investment Fund Management Partnership (L.P.). We read this as an important indicative of the entry of Chinese AI chip designers into the major supplier scope.

Fig 2: Overview of major AI chip start-ups Company name Founder Year Terminal-based AI chip Cloud-based AI chip Fundraising Note AI chip design, expected to Former R&D executive in Marvell Intengine Tech Lu Yong 2017 c.Rmb195m via series A start mass production in 2H18 Semiconductor (MRVL:US) Launched NPU IP series in Formerly worked in Qualcomm (QCOM:US), Kneron Liu Juncheng 2015 c.US$18m via series A1 September 2018 Electronics (005930:KR) and Mstar Launched three products in Launched two products in Formerly worked in the Institute of Computing Cambricon Chen Tianshi 2016 Series B March 2018 May 2018 Technology of Chinese Academy of Sciences Launched AI chip N171 in Formerly worked in SMIC (981:HK) and NextVPU Feng Xinpeng 2016 Series B August 2018 Advanced Micro Devices (AMD:US) Develop AI chips for cloud Formerly worked in AMD and Enflame Tech Zhao Lidong 2018 pre-A series, c.Rmb340m data centres Communications

Source: SWS Research

We note Hikvision mainly adopts VPU and GPU chips to produce its front-end and back- end products like smart camera series Shenmou and cloud-based server Daofeng. We believe domestic-made AI chips can replace VPU imports at present, and anticipate GPU to achieve import substitution in the foreseeable future.

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Fig 3: Main chips used by Hikvision for production of its front- and back-end products Domestic Launch Link Product series Details Function Application scene Key performance Chip supply year available and Roadway/airport/expressway/port/station, Back-end Shenbu 2016 Traffic accident detection 16-way analysis GPU HiSilicon may etc. have the ability 64-way, supporting 32 pairs of Lianpu 2016 Face intelligence analysis server Pedestrian traffic simultaneous face analysis Information 32-way channels, supporting high Chaonao 2016 Various scenes compression/storage/search bandwidth and storage Lieying 2015 Video cloud structured server Transportation, security 160-way, 1080P Vehicle video cloud structured Daofeng 2015 Transportation, security 3m checkpoint pictures per day server Real-time three-dimensional Large-scale analysis of large crowds around Domestic- Front-end Shenmou Binocular 2016 2-way 2MP resolution camera NVIDIA GPU analysis of human behaviour traffic crossings/banks, etc. made GPU？ Accurate capturing of events and Movidius Domestic- Full-field 2016 4MP resolution camera behaviour VPU made VPU Domestic- Identity and Face analysis and identity Entrance/identity authentication 2MP resolution camera, 10-inch 2016 VPU/GPU made person comparison confirmation display VPU/GPU Domestic- Roadway/airport/expressway/port/station, Shenbu 2016 Traffic accident detection 7MP resolution camera VPU/GPU made etc. VPU/GPU

Source: Company website, Company WeChat account, SWS Research

Domestic sales to bottom out

We expect distributors to contribute 30% of Hikvision’s domestic sales, and government and corporate clients to contribute 30-35% and 35-40%, respectively. We expect improved sales among distributors in 4Q18E, in addition to rising demand from corporate and government clients.

The company’s net profit growth slowed to 20% YoY in 9M18 and sustained a series of YoY declines for two consecutive quarters due mainly to the impact of its “Honeycomb plan”, which was introduced in May aiming to helping distributors deplete inventories and shorten payment cycles. We expect the plan to drag down the firm’s 3Q18 revenue by c.Rmb1bn. Following accelerated promotion of the plan, we believe it will weigh on Hikvision’s earnings growth in the near term, but will help distributors improve inventories and accounts receivable, boding well for long-term growth.

Fig 4: YoY revenue and profit growth decelerates in 2Q-3Q18 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Revenue (Rmbm) 7,044 16,448 27,730 41,905 9,365 20,876 33,803 Growth YoY 35% 31% 31% 31% 33% 27% 22% Quarterly revenue (Rmbm) 7,044 9,404 11,282 14,176 9,365 11,511 12,927 Growth YoY 35% 28% 31% 31% 33% 22% 15% Net profit (Rmbm) 1,481 3,292 6,153 9,411 1,816 4,147 7,396 Growth YoY 29% 26% 27% 27% 23% 26% 20% Quarterly net profit (Rmbm) 1,481 1,811 2,861 3,258 1,816 2,331 3,248 Growth YoY 29% 24% 28% 27% 23% 29% 14%

Source: Company filings, ifind, Research

The proportion of incremental accounts receivable in quarterly revenue dropped sharply to 8.5% in 2Q18 and 9.5% in 3Q18, as result of the promotion of the “Honeycomb plan”. We expect the company’s revenue from distributor channels to improve QoQ in 4Q18E, when the plan comes to a conclusion.

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Fig 5: Benefitingfrom the “Honeycomb” scheme, accounts receivable are under control 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Revenue 7,044 16,448 27,730 41,905 9,365 20,876 33,803 Accounts receivable 12,047 13,304 15,172 14,705 15,971 16,950 18,180 Accounts receivable growth compared with the beginning of a year 804 2,061 3,929 3,462 1,265 2,244 3,475 Accounts receivable/ revenue 11.41% 12.53% 14.17% 8.26% 13.51% 10.75% 10.28%

Quarterly revenue 7,044 9,404 11,282 14,176 9,365 11,511 12,927 Quarterly growth in accounts receivable 804 1,257 1,868 -467 1,265 979 1,231 Accounts receivable growth/ quarterly revenue 11.41% 13.37% 16.55% -3.29% 13.51% 8.50% 9.52% 7.03% YoY growth in revenue 1,844 3,899 6,593 9,981 2,321 4,428 6,073 YoY growth in accounts receivable 3,192 2,888 3,116 3,462 3,924 3,646 3,009 Growth in accounts receivable/ growth in revenue 173.08% 74.05% 47.26% 34.69% 169.06% 82.33% 49.54%

Source: Company filings, iFinD, SWS Research

According to public information, we see substantially increased bids for video surveillance projects between October and November 2018, with the number of bid invitations of video surveillance projects rising 52% and the amount jumping 82% YoY, which already surpassed the total amount in 4Q17. However, due to a high base effect, the growth in winning bids has slowed, with the number of winning bids increasing 34% YoY and the amount climbing 4.1% YoY. We expect to see a recovery in winning bids in 4Q18, the amount of which is likely to hit a record high.

Fig 6: Bid invitations for video surveillance projects Fig 7: Winning bids of video surveillance projects 25 (Rmbbn) 180% 20 (Rmbbn) 160% 160% 18 140% 20 140% 16 120% 14 120% 100% 15 12 100% 80% 10 80% 60% 10 8 60% 6 40% 5 40% 4 20% 20% 2 0% 0 0% 0 -20% 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q15 1Q16 4Q17 1Q18 2Q18 3Q18 3Q15 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Jan-Nov 18 Jan-Nov 18 Total amount of bid invitations YoY changes (RHS) Total amount of winning bids YoY changes (RHS)

Source: soubiao.org, ccgp.gov.cn, SWS Research Source: soubiao.org, ccgp.gov.cn, SWS Research

Hikvision announced in June that it partnered with (000333:CH – BUY) for cooperation in AI and with Foxconn Industrial Internet (601138:CH – BUY) in industrial internet, Internet of Things, big data, AI, among others. Under a complex global environment, we remain positive on the Hikvision’s outlook given its efforts in developing new business which carries higher profits, stabilising growth, and improving added value.

Valuation

The firm guided 18E net profit growth of 10-30% YoY, implying 4Q18 net profit of Rmb3.0- 4.8bn (+19.6% YoY calculating on the mean value, higher than 3Q18 growth). As the “Honeycomb plan” comes to an end in 4Q18 and the rush in overseas channel expansion concludes, the firm’s destocking efforts have paid off, and its cash flow has reached a reasonable level, matching its earnings since 3Q18. We expect the firm to achieve QoQ growth in 4Q18 earnings despite uncertainties stemming from the trade dispute.

Against the backdrop of the trade dispute between China and the US, the firm achieved c.20% YoY earnings growth from 4Q17 to 2Q18 and progress in its new businesses like intelligent manufacturing and AI Cloud. We note Hikvision has extended its business from video surveillance products to industrial automation products since 2015, the market size

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

of which is about five times that of the video surveillance industry. We maintain our net profit forecasts of Rmb11.5bn in 18E, Rmb14.6bn in 19E, and Rmb17.2bn in 20E.

We derive a weighted average cost of capital (WACC) of 7.35%, using an 11% effective tax rate with reference to the firm’s average tax rate in 2014-17, a 40% debt-to-asset ratio (similar to its current leverage ratio), and a beta of 1.46.

Fig 8: WACC calculation WACC Risk-free rate 3.45% SWS Research Risk-free rate (Wind) 3.45% Risk-free rate (manual input) Equity risk premium 4.00% SWS Research Equity risk premium (Wind) 4.00% Equity risk premium (manual input) Beta 1.46 SWS Research Beta (Wind) 1.46 Beta (manual input) 1.46 Cost of equity (Ke) 9.29% CAPM Nominal cost of debt (Kd) 5.00% Historical average Debt-to-asset ratio 40% Long-term capital structure as judged by the analyst Effective tax rate 11.00% Long-term value combined with current tax rate WACC 7.35% Weighted average

Source: Wind, SWS Research

In our model, we identify a three-year explicit period, a six-year semi-explicit period and a three-year transition period. We assume revenue growth of 21% in the semi-explicit period (vs 20.3% in 18E, 24.7% in 19E, and 21.9% in 20E), a terminal EBIT margin of 20.7% (in line with the average in 2015-17), and 10ppts premium for return on invested capital (ROIC) against WACC in the transition period, which we consider as conservative, as ROIC of c.37% in 2015-17 was c.30ppts higher than the WACC in the same period. Based on the FCFF model, we derive a target price of Rmb68.48 (implying 43.3x 19E PE), which represents 155% upside. We maintain our BUY recommendation.

Fig 9: FCFF key assumption Valuation period Years Revenue growth ROIC EBIT Margin WACC Explicit period 3 — — 7.35% Semi-explicit period 6 21% Stable Stable Stable Transition period 3 Declining Stable Stable 10.00% Terminal period After 12 years 3% 12.54% 20.70%

Source: Wind, SWS Research

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Fig 10: FCFF calculation Rmbm Value Percentage Combined value of explicit and semi-explicit periods 74,697 13% Terminal value 492,633 84% Core firm value 574,156 97% Plus: Non-core long-term investment 130 0% Bank balances and cash 16,468 3% Held-for-trading investment -12 0% Total firm value 584,005 100% Minus: Interest-bearing debt 5,409 1% Minority interests 246 0% Minority interests 246 PB for minority interests 1 Equity value 585,088 99% Share capital (m) 9,227 Equity value per share End-2017 62.68 Latest equity value per share 12/3/2018 68.48 11

Source: Wind, SWS Research

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Fig 11: Revenue Fig 12: Net profit Fig 13: EPS

90,000 (Rmbm) (%) 70.0 20,000 (Rmbm) (%) 60.0 2.00 (Rmb) (%) 60 80,000 18,000 1.80 50 60.0 50.0 70,000 16,000 1.60 40 50.0 14,000 1.40 60,000 40.0 30 12,000 1.20 50,000 40.0 20 10,000 30.0 1.00 40,000 10 30.0 8,000 0.80 30,000 20.0 0 20.0 6,000 0.60 20,000 4,000 0.40 -10 10.0 10.0 10,000 2,000 0.20 -20 0 0.0 0 0.0 0.00 -30 2013 2014 2015 2016 2017 2018E 2019E 2020E 2013 2014 2015 2016 2017 2018E 2019E 2020E 2013 2014 2015 2016 2017 2018E 2019E 2020E Historical Forecast YoY (RHS) Historical Forecast YoY (RHS) Historical Diluted EPS, historical Forecast YoY (RHS) Source: Bloomberg; SWS Research

Fig 14: ROE Fig 15: Gross & net margins Fig 16: Debt-equity ratio

40 (%) (%) 20.0 50.0 (%) 12.0 (%)

35 45.0 15.0 10.0 40.0 30 35.0 10.0 8.0 25 30.0 20 5.0 25.0 6.0

15 20.0 0.0 4.0 15.0 10 10.0 -5.0 2.0 5 5.0 0 -10.0 0.0 0.0 2013 2014 2015 2016 2017 2018E 2019E 2020E 2013 2014 2015 2016 2017 2018E 2019E 2020E 2013 2014 2015 2016 2017 2018E 2019E 2020E Historical Forecast YoY (RHS) Gross margin Net margin Debt-equity ratio Source: Bloomberg; SWS Research

Fig 17: PE +/- 1 stdev Fig 18: PB +/- 1 stdev (x) (x) 60 18.00 16.00 50 14.00 40 12.00 10.00 30 8.00 20 6.00 4.00 10 2.00 0 0.00

11/2015 02/2016 05/2016 08/2016 11/2016 02/2017 05/2017 08/2017 11/2017 02/2018 05/2018 08/2018 12/2015 03/2016 06/2016 09/2016 12/2016 03/2017 06/2017 09/2017 12/2017 03/2018 06/2018 09/2018 Source: Bloomberg; SWS Research Source: Bloomberg; SWS Research

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Company financials

Forecast income statement (Rmbm) 2016 2017 2018E 2019E 2020E Revenue from principle operations 31,935 41,905 50,421 62,896 76,667 Business tax & surcharges 255 371 414 525 650 Cost of sales 18,653 23,467 28,776 35,375 43,175 Selling expense 2,991 4,430 5,478 7,098 8,617 Administrative expense 3,109 4,205 5,531 7,169 8,620 Finance cost (225) 265 (74) (136) (202) Impairment of assets 318 485 100 10 20 Gains (losses) from change in fair value of assets (40) 42 (5) (1) 12 Investment income 40 45 0 0 0 Other income (net) 1,481 44 427 563 260 Profit before tax 8,314 10,487 12,751 15,948 19,163 Income tax expense 890 1,109 1,211 1,403 2,031 Net profit 7,424 9,378 11,539 14,545 17,132 Minority interest 1 (33) (5) (19) (30) Net profit attributable to common shareholders 7,424 9,411 11,544 14,564 17,162 EPS 1.23 1.03 1.25 1.58 1.86

Source: Bloomberg, SWS Research

Forecast cash flow statement (Rmbm) 2016 2017 2018E 2019E 2020E Net profit 7,424 9,378 11,539 14,545 17,132 Depreciation & amortisation 241 341 286 394 506 Finance cost 64 272 (74) (136) (202) Non-operating costs 203 (190) (91) (114) (150) Changes in working capital (1,808) (2,344) (1,549) (2,589) (2,698) Other 92 (84) 4,091 (154) (185) Cash flow from operations 6,216 7,373 14,202 11,946 14,403 Capex (911) (1,692) (642) (596) (366) Other (2,472) 483 (3) (30) (17) Cash flow from investing (3,383) (1,209) (645) (626) (383) Proceeds from share issuance 247 92 0 0 0 Changes in debt (436) 345 (1,516) 138 (290) Dividends paid 2,931 3,800 5,102 6,213 7,808 Other 3,562 (38) 194 197 154 Cash flow from financing 443 (3,402) (6,424) (5,878) (7,944) Net cash flow 3,489 2,507 7,132 5,442 6,077

Source: Bloomberg, SWS Research

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Forecast balance sheet (Rmbm) 2016 2017 2018E 2019E 2020E Cash & cash equivalents 13,638 16,468 23,601 29,043 35,119 Accounts receivable 11,244 14,705 17,693 22,071 26,903 Inventories 3,830 4,940 5,895 7,260 8,865 Other current assets 7,821 8,539 6,118 7,133 8,318 Current assets 36,532 44,653 53,307 65,506 79,206 PP&E 2,854 3,024 2,858 3,036 3,119 Intangibles 659 678 649 620 591 Other long-term assets 1,303 3,216 3,170 3,414 3,450 Total assets 41,348 51,571 59,984 72,576 86,365 ST borrowings 48 1,644 97 335 155 Accounts payable 10,647 14,301 17,536 21,557 26,310 Other current liabilities 1,439 1,257 1,257 1,257 1,257 Current liabilities 12,133 17,201 18,890 23,150 27,723 Total liabilities 16,870 20,967 23,016 27,413 32,080 Share capital 6,103 9,229 9,227 9,227 9,227 Capital reserves 1,048 1,819 1,821 1,821 1,821 Required reserves 2,615 3,484 4,549 5,893 7,476 Retained earnings 14,861 16,598 21,901 28,772 36,341 Minority interests 193 246 241 223 192 Shareholders' equity 24,479 30,604 36,995 45,191 54,313 Total liabilities and equity 41,348 51,571 60,011 72,604 86,393

Source: Bloomberg, SWS Research

Key performance indicators 2016 2017 2018E 2019E 2020E Per share (Rmb) EPS 1.23 1.03 1.25 1.58 1.86 Operating cash flow per share 0.67 0.80 1.54 1.29 1.56 Dividend per share 1.10 0.50 0.56 0.69 0.87 Book value per share 2.63 3.29 3.98 4.87 5.87 Operating indicators (%) Gross margin 41.1 43.5 42.5 43.3 43.2 Ebitda margin 21.6 22.4 20.8 21.0 21.2 Ebit margin 20.9 21.5 20.2 20.4 20.5 Net margin 23.4 22.7 23.1 23.3 22.6 Asset turnover 0.8 0.8 0.8 0.9 0.9 Financial leverage 1.7 1.7 1.6 1.6 1.6 ROE 33.9 34.2 34.2 35.4 34.5 ROA 20.7 20.3 20.7 22.0 21.6 Debt-to-equity ratio 7.2 7.0 1.7 1.7 0.9 Debt-to-assets ratio 4.3 4.1 1.0 1.0 0.5 Valuation indicators (x) PE 21.9 26.1 21.5 17.0 14.4 PB 10.2 8.2 6.7 5.5 4.6 EV/Sales 7.5 5.7 4.5 3.6 2.8 EV/Ebitda 34.9 25.5 22.0 17.0 13.5 FCF yield (%) 2.3 2.2 6.1 4.5 5.8 Dividend yield (%) 4.1 1.9 2.1 2.6 3.2

Source: Bloomberg, SWS Research

A-share research

Tuesday, 11 December, 2018 Bringing China to the World

Information Disclosure：

The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed. Undertakings of the Analyst I (We) am (are) conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China and have registered as the Securities Analyst. I hereby issue this report independently and objectively with due diligence, professional and prudent research methods and only legitimate information is used in this report. I am also responsible for the content and opinions of this report. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Disclosure with respect to the Company The company is a subsidiary of Shenwan Hongyuan Securities. The company is a qualified securities investment consulting institute approved by China Securities Regulatory Commission with the code number ZX0065. Releasing securities research reports is the basic form of the securities investment consulting services. The company may analyze the values or market trends of securities and related products or other relevant affecting factors, provide investment analysis advice on securities valuation/ investment rating, etc. by issuing securities research reports solely to its clients. The Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials or log into www.swsresearch.com for the analysts' qualifications，the arrangement of the quiet period and the affiliates’ shareholdings. Introduction of Share Investment Rating Security Investment Rating：

When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Trading BUY: Share price performance is expected to generate more than 20% upside over a 6-month period. BUY: Share price performance is expected to generate more than 20% upside over a 12-month period. Outperform: Share price performance is expected to generate between 10-20% upside over a 12-month period. Hold: Share price performance is expected to generate between 10% downside to 10% upside over a 12-month period. Underperform: Share price performance is expected to generate between 10-20% downside over a 12-month period. SELL: Share price performance is expected to generate more than 20% downside over a 12-month period. Industry Investment Rating: When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight：Industry performs better than that of the whole market；

Equal weight： Industry performs about the same as that of the whole market；

Underweight：Industry performs worse than that of the whole market.

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A-share research

Tuesday, 11 December, 2018 Bringing China to the World

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