Yum Cha 飲茶. March 28, 2017 TALKING POINT - DOUBLE HIT IN LATE MARCH RESEARCH NOTES SNIPPETS. INDICES Closing DoD%

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1 Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index (0.7) HSCEI (1.1) Shanghai COMP (0.1) Shenzhen COMP (0.4) Gold BDIY Crude Oil, WTI(US$/BBL) 47.7 (0.5) Crude Oil, BRENT(US$/BBL) 50.8 (0.1) HIBOR, 3-M SHIBOR, 3-M 4.4 (0.3) RMB/USD 6.9 (0.2) TALKING POINT - DOUBLE HIT IN LATE MARCH March 28, 2017 Sources: Bloomberg, CGIS Research DATA RELEASES DUE THIS WEEK Mar 30 Manufacturing PMI Mar 30 Non-manufacturing PMI Apr 2 Caixin China PMI Mfg Source: Bloomberg The HSCEI dropped 1.1% yesterday, with profit-taking pressure apparent in cyclical sectors such as metal and cement. We believe the market is likely to remain volatile in the next few days because of the following factors. Apart from weakness in the US market, we see two specific factors in the Hong Kong market: (i) Tight liquidity in China approaching the quarter-end. As shown in the chart above, the one-week SHIBOR went up near the end of June, September and December last year, and the HSCEI came under pressure at the same time; (ii) Southbound trading will be suspended between March 30 and April 4. We believe some short-term Mainland investors will take profit after the rally in Q1 because they will not be able to trade for three trading days. However, the good news is that based on the experience in the past three quarters, the market will recover when liquidity is back to a more normal level after the quarterend. Unless we see a deep correction in the US market, we believe we are more likely to see a market consolidation rather than a change in market direction. Analyst: Wong Chi-man, CFA RESEARCH NOTES YOFC [6869.HK; HK$16.76; BUY] - Yangtze Optical Fibre & Cable Joint Stock Limited Company s (YOFC) lower-than-expected 2016 results, in our view, were due to higher-than-expected administrative expenses. The impact should be short term in nature. We expect YOFC to continue to report solid top- and bottom-line growth in 2017 and 2018, given the favourable market environment. We expect Q to be the toughest quarter in 2017 for the Company's net profit and margin; its quarterly results should pick up sequentially, given capacity expansion and better economies of scale. YOFC plans to issue A-shares, which will help to narrow the valuation gap between the Company and its A-share listed peers. The post-2016 results share price correction provides a good revisit opportunity. We maintain our BUY rating with a new target price of HK$20.18 based on 14x 2017E PER (up from 13x), which is a discount to its peers. SNIPPETS SHUN TAK [0242.HK; HK$2.68; NOT RATED] - The Company reported a net loss of HK$587m for 2016, in line with its profit warning, because of asset impairment of HK$344m and a HK$503m loss from a JV. On recurring basis, net profit dropped 94.5% YoY to HK$30m as a result of limited revenue booking from property development. Its balance sheet remains strong with a net cash position of HK$1.7bn (21% of its market cap). Valuation is still very low at 0.32x PBR. Major share price catalysts are (i) potential revenue booking of Macau Nova City Phase 5 in 2018 and 2019 (estimated attributable pre-tax profit: HK$6.5bn, equivalent to 80% of its market cap); and (ii) more value-unlocking transactions similar to the partnership with Abu Dhabi Investment Authority last year. 1

2 SNIPPETS CRSC [3969 HK, HK$6.30, BUY, PT of HK$7.74] In-line 2016 results: CRSC reported its 2016 full-year results after market close on 28 March Total revenue grew 22.8% YoY in 2016 to RMB29.4bn, in line with our and consensus estimates. Total profit grew 22.1% YoY in 2016 to RMB3,049m, also in line with our and consensus earnings estimates. The Company declared a dividend of RMB0.10 per share in 2016 with the dividend payout ratio standing at 28.8%. Revenue growth was seen across all the business segments: The Company s urban transit and construction contracting business delivered the fastest revenue growth of all business segments. Revenue from the urban transit segment grew 50.7% YoY in 2016, while revenue from construction contracting, which is related to municipal and railway projects, grew 67.7% YoY. Overseas business revenue grew 38.3% YoY. Railway business revenue grew the slowest, at 6.7% YoY. Gross profit margin expansion sustained more than 20% earnings growth. The Company reported gross profit margin expansion from 25.1% in 2015 to 25.3% in 2016, led by margin expansion in individual business segments. With effective cost control, SG&A costs grew only 11.2% YoY, with SG&A costs as a percentage of total sales falling from 14.5% in 2015 to 13.1% in With an increase in net finance income, the Company was able to keep a stable net profit margin of 10.4% in 2016 despite a decline in FX gains and government grants. Top pick in the railway equipment sector: CRSC is our top pick in the railway equipment sector due to its better earnings visibility and superior earnings growth outlook compared to CRRC (1766 HK) and CRRC Times Electric (3898 HK). The stock currently trades at around 14x 2017E PER. Given its unique position in the rail investment value chain, we believe deepening railway business reform should help boost its valuation in As the railway network is expected to enhance operations to improve profitability, the increasing requirements on railway operations efficiency and safety should drive demand growth upside for railway signaling and communication systems. We will provide more details and update our earnings forecast after the analyst briefing at 10am on 29 March Figure 1: CRSC 2016 result Rmb m % YoY Railway 16,762 15, % Urban transit 5,920 3, % Construction contracting 5,770 3, % Other business % Overseas business % Total revenue 29,402 23, % COGS -21,974-17, % GP 7,428 6, % GPM 25.3% 25.1% 0.2% Selling expenses % Administrative expenses -3,178-2, % Other income and expenses % Operating profit 3,624 3, % OPM 12.3% 12.7% -0.3% D&A % EBITDA 4,133 3, % EBITDA margin 14.1% 14.9% -0.8% Finance cost % Share of profit from JVs and associates % PBT 3,816 3, % Tax % Effective tax rate -16.4% -16.6% 0.2% Net profit 3,191 2, % Net profit to common shareholders 3,049 2, % Minority interest % EPS % Source: Bloomberg, CGIS Research estimates 2

3 March 28, 2017 YOFC [6869.HK] Lower-than-expected 2016 results due to upfront operating costs. Maintain BUY. Yangtze Optical Fibre & Cable Joint Stock Limited Company s (YOFC) lower-than-expected 2016 results, in our view, were due to higher-than-expected administrative expenses. The impact should be short term in nature. We expect YOFC to continue to report solid top- and bottom-line growth in 2017 and 2018, given the favourable market environment. We maintain the view that the leading players with an integrated business model, such as YOFC, should benefit from the tight supply of optical fibre preforms and optical fibres in China. We believe Q will be the toughest quarter in 2017 for the Company's net profit and margin; its quarterly results should pick up sequentially, given capacity expansion and better economies of scale. We revised downwards our net profit forecast for 2017 by 9.5% after factoring in a lower gross margin assumption (from 23% to 20.6%). After the earnings cut, YOFC is still trading at a discount to its peers. We expect the valuation gap to narrow, given the Company s leading position in the global market. YOFC plans to issue A-shares, which will help to narrow the valuation gap between the Company and its A-share listed peers. The post-2016 results share price correction provides a good revisit opportunity. We maintain our BUY rating with a new target price of HK$20.18 based on 14x 2017E PER (up from 13x), which is a discount to its peers. Investment Highlights 2016 results highlights. YOFC s 2016 net profit was RMB701.4m, lower than our and market expectations. YOFC s turnover rose 20.4% YoY to RMB8,102m in 2016, from RMB6,731.1m in 2015, higher than our expectation of RMB7,810.0m. The strong turnover growth was due to continuous investment in broadband networks. The lower-than-expected results were due to: (a) a lower-than-expected gross margin, and (b) higher-than-expected administrative expenses. YOFC s gross margin of 20.7% in 2016 was higher than the 19.4% in 2015, but lower than our expectation of 22.3%. YOFC s administrative expenses were up 32.8% YoY to RMB732.4m in 2016, higher than our expected YoY increase of 17.4%. The increase in administrative expenses was mainly due to a 38% increase in staff costs to RMB644m, which was a result of hiring 25% more staff. The Company declared a final dividend of RMB0.255 per share, an increase of 47% from RMB0.174 per share in The payout ratio increased from 21% in 2015 to 25% in 2016, higher than our expectation of 20%. Turnover in the China market increased by 19.3% YoY to RMB7,399m accounting for 90% of the Company s total turnover, while overseas revenue increased by 33% YoY to RMB703m. Downstream demand remains solid. YOFC management reiterated that market demand for optical fibre cable is likely to remain solid in 2017, given the continuous investment by telecom operators. SARFT recently announced that it will invest RMB100bn to build a nationwide, interconnected cable TV network with two-way broadband capability. The major part of the investment will be an optical transmission network. SARFT s investment will partly offset the decline in CAPEX by telecom operators and should create new demand for optical fibre cable in China. Management believes that supply and demand of optical fibre preforms will become balanced only in 2H However the adoption of the 5G standard in China is expected to create new growth areas for optical fibre suppliers, including YOFC. Downward earnings adjustment. We revised downwards our net profit forecasts for 2017 by 9.5%, given a 2.4ppt downward revision in the gross profit margin. YOFC plans to issue A-shares, which will help to narrow the valuation gap between the Company and its A-share listed peers. The post-2016 results share price correction provides a good revisit opportunity. TMT Sector Hardware BUY Close: HK$16.76 (Mar 28, 2017) TP: HK$20.18 (+20.43%) Share Price Performance (HK$) Source: Bloomberg. Market Cap Shares Outstanding Auditor US$1,472m 682.5m KPMG Free Float 39.8% 52W range Turnover (RHS) 3M average daily T/O HK$ US$1.7m Major Shareholding Draka (26.4%) Source: Bloomberg, Company data Price (LHS) (HK$ million) China Huaxin (26.4%) 0 Key Financials (in RMBm) E 2018E Mark Po, CFA Senior Analyst Revenue 5, , , , ,214.8 Change (YoY %) Gross Profit 1, , , , ,104.6 Gross Margin % Net Profit ,004.3 Net Margin % EPS (Basic) Change (YoY %) (6.3) DPS $0.000 $0.174 $0.255 $0.256 $0.294 ROE (%) Dividend Yield (%) PER (x) PBR (x) (852) markpo@chinastock.com.hk Wong Chi Man, CFA Head of Research (852) cmwong@chinastock.com.hk FCF Yield (%) 2.76% 2.79% 1.26% 2.18% 0.60% Capex (m) (36.3) (322.3) (800.0) (800.0) (920.0) Free cash flow per share Net Gearing (%) Source: Bloomberg, CGIS Research, 3

4 Figure 1: Results highlights 2016 Results Highlights (RMB m) 1H H H H H H 2016 Revenue 2,635 3,042 3,050 3,682 3,678 4,425 Cost of sales and services (2,110) (2,480) (2,462) (2,965) (2,870) (3,557) Gross profit Other income and other gains and losses Distribution and selling expenses (50) (74) (63) (100) (85) (115) Administrative expenses (210) (232) (232) (320) (299) (434) Finance costs (51) (48) (36) (120) (108) (22) JV & Associates Profit before tax Income tax expense (36) (35) (47) (27) (52) (45) MI Owners of the Company Gross margin (%) Operating margin (%) Net Margin (%) Source: Company, CGIS Research Figure 2: Key assumptions for YOFC F 2018F Turnover (RMBm) Optical fibre preforms and fibres 2, , , , , , ,803.7 Optical fibre cables 2, , , , , , ,765.2 Other products and services Total 4, , , , , , ,215.0 Optical fibre preforms and fibres Optical fibre cables (12.2) Other products and services (27.6) Total Gross margin (%) Optical fibre preforms and fibres Optical fibre cables Other products and services Net margin (%) ASP Optical fibre preforms (RMB/tonne) 1, , , ,068.4 Optical fibres (RMB/fkm) Optical fibre cables (RMB/fkm) ASP Optical fibre preforms (5.6) (7.9) Optical fibres (9.5) (6.7) Optical fibre cables (5.0) (1.3) (5.1) Volume Optical fibre preforms (tonne) , , , , ,895.7 Optical fibres (fkm) 27, , , , , , ,796.7 Optical fibre cables (fkm) 17, , , , , , ,892.4 Volume Optical fibre preforms Optical fibres Optical fibre cables (7.6) Cost (HKDm) S,G&A (528.1) (548.6) (565.4) (714.4) (931.9) (1,009.2) (1,103.3) Financial Expenses (68.0) (78.0) (81.3) (99.2) (156.4) (130.3) (65.8) S,G&A Financial Expenses (16.7) (49.5) CAPEX (RMBm) n.a. n.a Net Gearing (%) Source: Company, CGIS Research 4

5 Figure 3: Earnings projection Income Statement (RMBm) FY2014 FY2015 FY2016 FY2017F FY2018F Cash Flow Statement (RMBm) FY2014 FY2015 FY2016 FY2017F FY2018F Revenue 5,677 6,731 8,102 9,091 10,215 Net Income ,045 Growth yoy% 17.6% 18.6% 20.4% 12.2% 12.4% Depreciation & Amort Gross Profit 1,088 1,304 1,675 1,873 2,105 Change in Working Capital (409) (242) 21 (40) (302) Growth yoy% 6.9% 19.9% 28.4% 11.8% 12.4% Cash from Ops , Selling General & Admin Exp. (565) (714) (932) (1,009) (1,103) Capital Expenditure (36) (322) (800) (800) (920) Others Operating Expenses/Items Sale of Property, Plant, and Equipment Operating Income ,045 Change in Investing Acitivities (290) (27) Growth yoy% n.a. 16.5% 17.2% 17.7% 15.3% Cash from Investing (326) (349) (611) (800) (777) Interest Expense (99.2) (156.4) (130.3) (65.8) (70.1) Net increase in bank borrowings 886 (27) (701) Interest and Invest. Income Income/(Loss) from Affiliates Issuance of Common Stock Other Non-Operating Inc. (Exp.) Common Dividends Paid (574) 0 (119) (174) (175) Impairment of Goodwill Special Dividend Paid Gain (Loss) On Sale Of Invest Other Financing Activities (105) (101) (124) (135) (153) Gain (Loss) On Sale Of Assets Cash from Financing 1, (943) (201) (205) Income Tax Expense (71) (74) (97) (107) (124) Minority Int. in Earnings Net Change in Cash 1, (620) 49 7 Net Income ,004 Growth yoy% 12.4% 22.4% 22.9% 24.5% 15.0% Balance Sheet (RMBm) FY2014 FY2015 FY2016 FY2017F FY2018F Ratios FY2014 FY2015 FY2016 FY2017F FY2018F ASSETS Sources: Company, CGIS Research Profitability Cash And Equivalents 2,011 2,047 1,428 1,477 1,483 Return on Assets % 8.0% 8.1% 8.9% 10.1% 10.4% Receivables 1,898 2,296 2,310 2,592 2,913 Return on Capital % 12.8% 11.4% 12.1% 13.2% 13.5% Inventory Return on Equity % 21.6% 17.9% 18.1% 19.7% 19.7% Other Current Assets Total Current Assets 4,612 5,028 4,636 4,792 5,209 Margin Analysis Net Property, Plant & Equipment ,651 2,267 2,941 Gross Margin % 19.2% 19.4% 20.7% 20.6% 20.6% Long-term Investments SG&A Margin % 10.0% 10.6% 11.5% 11.1% 10.8% Other Intangibles EBIT Margin % 10.7% 10.5% 9.9% 10.2% 10.4% Deferred Tax Assets, LT EBITDA Margin % 12.7% 12.3% 11.5% 12.2% 12.8% Other Long-Term Assets 1,197 1,572 1,891 1,981 2,076 Net Income Margin % 8.2% 8.5% 8.7% 9.6% 9.8% Goodwill Accounts Receivable Long-Term Asset Turnover Total Long Term Assets 1,979 2,554 3,543 4,248 5,017 Total Asset Turnover 0.9x 0.9x 1.0x 1.0x 1.0x Total Assets 6,591 7,583 8,179 9,040 10,226 Fixed Asset Turnover 2.9x 2.6x 2.3x 2.1x 2.0x Accounts Receivable Turnover 3.2x 3.2x 3.5x 3.7x 3.7x LIABILITIES & EQUITY Inventory Turnover 8.1x 9.9x 12.6x 12.6x 12.6x Accounts Payable 1,112 1,320 1,683 1,888 2,122 Accrued Exp Liquidity Short-term Borrowings 1,465 1, ,118 Current Ratio 1.8x 1.7x 1.8x 1.6x 1.6x Curr. Port. of LT Debt Quick Ratio 1.5x 1.4x 1.3x 1.3x 1.2x Curr. Income Taxes Payable Avg. Days Sales Out Unearned Revenue, Current Avg. Days Inventory Out Other Current Liabilities Avg. Days Payable Out Total Current Liabilities 2,584 2,977 2,636 2,956 3,320 Avg. Cash Conversion Cycle Long-Term Debt 1, Net Debt to Equity 17% 11% 8% 8% 9% Def. Tax Liability, Non-Curr Other Non-Current Liabilities Growth Over Prior Year Total Liabilities 3,680 3,851 3,743 4,087 4,477 Total Revenue 17.6% 18.6% 20.4% 12.2% 12.4% Common Stock Net Income 12.4% 22.4% 22.9% 24.5% 15.0% Additional Paid In Capital Payout Ratio % 0.0% 14.9% 23.3% 20.0% 20.0% Retained Earnings 2,174 2,893 3,495 4,020 4,823 Treasury Stock Comprehensive Inc. and Other Minority Interest Total Equity 2,911 3,732 4,436 4,954 5,749 Total Liabilities And Equity 6,591 7,583 8,179 9,040 10,226 5

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Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: