We take a neutral view on Hang Seng Index this month with a trading range of 25,000-26,500. Market Outlook. Index Performance

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1 12 th June, 2017 Hang Seng Index Performance Index Performance Abs chg % Change Hong Kong Close 1-Day 1-Day 1-Mth 3-Mth Hang Seng Index 26, HSCI 3, HSCCI (Red Chips) 4, HSCEI (H-Shares) 10, Mkt T/O ($ Mn) 116, , Oversea DJIA 21, NASDAQ 6, Shanghai SE Composite 3, Crude Oil Futures (US$) Gold Futures (US$) 1, Baltic Dry Index USD / Euro Yen / USD Source: Bloomberg Market Outlook Eric Yuen - ericyuen@masonhk.com Hang Seng Index closed down 0.1% at 26,030. Market turnover increased to $117.0 billion. Heavily weighted Tencent (700) surged 1.5%. HSBC (5) and China Mobile (941) tumbled 0.6% and 1.3% respectively. AAC Technologies (2018), Bank of East Asia (23) and Geely Automobile (175) were top performers in Hang Seng Index, up %. Consumption, gaming and local property stocks were mixed. Link REIT (823) closed up 1.0% at all-time high of $ Wharf (4) and Sino Land (83) cut 1.3%-1.4%. Galaxy Entertainment (27) slid 0.7%. Hengan Int l (1044) plunged 1.6%. China Vanke (2202) was flat but other nine of ten largest Chinese property developers all declined with an average loss of 2.6%. CK Infrastructure (1038), China Merchants (144) and China Resources Power (836) were the worst performing index stocks, down 2.1%-3.6%. HSCEI declined 0.5% led by cement, power, railway and securities stocks. Anhui Conch (914) fell 1.9%. China Longyuan (916) and Huaneng Power (902) retreated 1.5%-1.7%. China Railway Group (390), China Railway Construction (1186) and CCCC (1800) shrank 1.0%-1.6%. Five securities companies in HSCEI cut 1.2%-1.8%. Chinese banks and insurers lacked clear direction. CITIC Bank (998), China Life (2628) and Ping An Insurance (2318) added 0.1%-0.6%. ICBC (1398), ABC (1288) and CPIC (2601) lost 1.1%- 1.5%. Automobile manufacturers ended higher. Great Wall Motor (2333) and Dongfeng Motor (489) jumped 3.2% and 0.7% respectively, the most in HSCEI. We take a neutral view on Hang Seng Index this month with a trading range of 25,000-26,500. HSCEI HSI 20-Day MA 10, , Day MA 10, , Day RSI We take a neutral view on Hang Seng Index this month with a trading range of 25,000-26,500.

2 Industry / Corporate News Jason Lam - jasonlam@masonhk.com Key beneficiary of the rapidly expanding auto-finance industry with strong exposure in premium brands Zhengtong (1728) Initiate Risk Level: High Time Horizon: Medium Strong exposure to China s fast growing premium auto sector Distinctive competition advantage in the auto-finance industry Undemanding valuation at 2017 P/E of 11.3x with 2-year earnings CAGR of 57% Zhengtong Auto (1728, Zhengtong, $4.84) is one of the largest Hong Kong-listed 4S auto dealerships that is primarily specialized in the sale of luxury and ultra-luxury passenger vehicles and the provision of aftersales services in China. The company s share price surged 119% year-to-date and outperformed the Hang Seng Index by 82% over the same period. We believe the outperformance was primarily driven by 1) overall re-rating of the sector given an improving auto dealer-oem relationship; 2) robust sales performance recorded across the premium auto segment; 3) anticipated strong model cycle of BMW in 2017 and 2018 to enhance the company s operating performance; and 4) purchase of 5.0mn shares by the major shareholder in May, demonstrating confidence of the management on the company s earnings outlook. We hold a positive view of the company, mainly driven by: 1) Zhengtong has strong exposure to the premium auto sector, with some of the company s major premium brands entering into new product cycles accompanied with an aggressive expansion plan by the company; 2) key beneficiary of the rapidly-growing auto-financing industry; and 3) anticipation of a continuous improvement in the company s overall operational mix away from the less profitable new car sales business. As a premium auto dealership group, Zhengtong is highly sensitive to the sales performance of luxury and ultra-luxury PVs in China. For the year ended 31 December 2016, the sale of new cars contributed 85.8% of the company s revenue of which 87.0% came from the sale of luxury and ultra-luxury PVs. The company had 108 branded dealership stores in operation, of which ~74.0% were made up of BMW and Mini, Land Rover and Jaguar, Volvo and Audi (together as Premium Brands ) dealership stores. As such, we believe Zhengtong will be a key beneficiary of the strong sales performance delivered by the luxury auto segment, particularly with the strong model cycles to be experienced by BMW (2-series and brand new 5-series in 2017, X3 in 2018, 3-series and X2 in 2019), Audi (7 models in 2017, localized Q5 in 2018, etc) and Land Rover (Discovery 5, Velar in 2017, etc). Despite the recent slowdown in Chinese PV market, we hold a positive view on the premium auto segment and believe it should extend its strong sales performance in 2017 after posting a 13.2% yoy sales volume growth in 2016, given 1) improving household income to stimulate replacement demand; 2) increasing utilization of auto-financing among car buyers; and 3) little impact of reduction in tax incentive compared to the rest of the Chinese PV market. Furthermore, the company plans to open 15 luxury and ultra-luxury brand dealership stores in 2017, which in our view bolds well with the market trend and would enhance Zhengtong s operating results. In tandem with the expansion of the new car sales segment, we believe the company s aftersales services segment will also experience a significant growth due to enlarged customer base. Thanks to a higher gross margin for aftersales services, we expect Zhengtong s overall gross margin to improve in both 2017 and Zhengtong offers auto financing services through its 95%-owned subsidiary Dongzheng Auto Finance ( Dongzheng AFC, 5% held by Dongfeng Corporation). It is the only auto-financing company (AFC) being approved by CBRC with a dealer background. As at 31 December 2016, the company s outstanding loans to retail customers and auto dealers amounted to RMB3.7bn representing an increase of 138% yoy. This business segment contributed ~30% of company s gross profit in Growth prospect is promising because Zhengtong can leverage on its (i) unique cost advantage over other dealers through the sourcing of cheaper funds via the interbank market and (ii) close connection with clients to provide more customeroriented financing products compared to commercial banking peers. As such, we believe Zhengtong will be a key beneficiary of the fast-growing auto finance market and achieve a significant growth in loan size in coming two years. This business segment not only provides a new source of earnings but also improve the company s overall earnings quality and visibility in our view. Our revenue forecast for Zhengtong is RMB36.1bn in 2017 and RMB43.5bn in 2018, up 14.5% and 20.4% yoy respectively, primarily driven by growth in new car sales. Taking into account a higher gross margin for aftersales services and auto finance business, we expect the company s overall gross margin to improve considerably from 8.7% in 2016 to 9.6% in 2017 and 10.7% in Our net profit forecast for Zhentong is RMB824.9mn in 2017 (+67.2% yoy) and RMB1.2bn in 2018 (+46.9% yoy). Traded at 11.3x 2017 P/E with 2-year earnings CAGR of 57%, current valuation of Zhengtong remains attractive in our view. We therefore initiate coverage on Zhengtong with a recommendation and 6-month price target price of $5.56 based on 13.0x 2017 P/E.

3 Recent Recommendations Stock Pick Rating Recommendation Highlights Target Price CPMC Holdings (906) Lee & Man Paper (2314) ANTA Sports (2020) Techtronic Industries (669) Hua Hong Semiconductor (1347) Sunny Optical (2382) Lai Sun Development (488) AAC Technologies (2018) Luk Fook (590) Nine Dragons Paper (2689) Successful pilot program in mixed-ownership reform - CPMC Holdings (906) Rising gross margin and dividend payout after the completion of mixed-ownership reform Two acquisitions in March 2017 are likely to enhance production capacity in 2017/2018 Maintain on Lee & Man Paper (2314) as we expect to see more paper price hikes in coming months Maintain Negatives related to company's disappointing 2H16 results should have priced in Domestic paper price has entered another round of up-cycle following sharp retreat in March Capacity growth of both containerboard and tissue paper will be LMP's earnings driver in 2017 Ready for growth by acquisition - Maintain ANTA Sports (2020) Received CSRC approval for issue of corporate bonds making total funds of RMB13.6bn available for M&A Satisfactory first quarter operating data to ensure full year revenue growth at high teens Deserves a premium valuation given its leading market position and a promising industry outlook Reiterate on Techtronic Industries (669) as business outlook remains promising Home Depot's strong 1Q17 results and positive outlook bode well for TTI's business prospect Demand to be driven by solid US housing market and recovery of global infrastructure spending Continuous shift of product mix to industrial power tool market will drive gross margin expansion Weakness in share price offers a good buying opportunity - Maintain Hua Hong Semiconductor (1347) Expect 2Q17 revenue to grow 8% qoq with a better gross margin of 30%-31% Strong net cash of approx. $2.76 per share and steady dividend payout of 30% Reiterate on Sunny Optical (2382) as its fast ramp up of handset lens sets bodes well for gross margin enhancement 4M17 shipment for HLS, HCM and VLS showed a robust increase of 86%, 68% and 41% yoy Increased penetration rate of dual camera features bode well for company's ASP and gross margin A valuation premium is justified in view of an EPS CAGR of 48% from Remains undervalued with deep discount to NAV - Maintain Lai Sun Development (488) Attributable property development profit of $1.0bn in FY18 Continued accumulation of shares by the second largest shareholder Valuation remains unreasonably cheap Maintain on AAC Technologies (2018) as concerns regarding short-selling report is overdone AAC's latest clarification announcement should largely ease investors' concerns Satisfactory 1Q17 earnings with earnings up 72% yoy and gross margin expanded 1.1ppts Valuation is undemanding given our estimates of 28% EPS CAGR from Weakness in share price offers a good buying opportunity Maintain Luk Fook (590) Weak retail sales data in Hong Kong has been discounted in share price Same store sales of its retail shops in China grew 5% yoy in 4Q16 and 11% yoy in 1Q17 Aggressive expansion of China's retail network in 4Q16 is likely to boost earnings growth in FY18. Paper price hike and renminbi appreciation trend will continue to favor NDP (2689). Reiterate Expect paper price to go up further in coming months due to improved demand/supply dynamics Re-rating to continue as earnings will be less impacted by forex fluctuation in FY17 Valuation is not demanding in our view $4.85 $7.40 $25.70 $43.0 $12.0 $71.3 $0.29 $114.4 $31.5 $11.4

4 Technical Ideas China Machinery Engineering Corp (1829, $6.0) TP: $6.67 Risk: Low Time Horizon: Short China Machinery Engineering Corporation contracts international engineering projects. The company constructs thermal power plants, hydro power plants, power station projects and communication projects. It also offers import and export services in electric meters, electro-optic light and castings products. Counter rose 2.4% last Friday, surpassing SMA50. MACD showed positive crossing since last Thursday, indicating a bullish trend ahead.. Short-term target at $6.67. Cut loss at $5.49. Consensus 2017 PER: 10.3x Consensus target price: $7.05 Source: Bloomberg, Mason Securities Bank of East Asia (23, $33.8) TP: $37.2 Risk: Low Time Horizon: Short Bank of East Asia provide general banking and related financial services, and business corporate and investor services. Counter surged 2.4% last Friday to surpass its critical resistance of $ Trading volume equivalent to 3.0x of its 3-month daily average.. Short-term target at $37.2. Cut loss at $31.9. Consensus 2017 PER: 15.6x Consensus target price: $27.0 Source: Bloomberg, Mason Securities

5 Disclosures Investment Rating System Mason Securities Limited s investment rating system is divided into investment ratings, risk rating and investment time horizon. The rating scale is subject to change upon periodic review of market by research department. Assigned ratings are based on company and sector historical performance and analysts intrinsic valuation of the stock Investment Ratings Risk Ratings Investment Time Horizon Ratings Description Buy Expected positive return of > 10 % Hold Expected return range of ~ ±10 % Sell Expected negative return > 10% High (H) 90-day volatility of > 50% Medium (M) 90-day volatility of > 30-50% Low (L) 90-day volatility of < 30% Long (L) 6 12 Months Medium (M) 3 6 Months Short (S) Less than 1 Month Note: 90-day volatility is measured from the security s standard deviation of day to day logarithmic historical price changes. The 90-day price volatility equals the annualized standard deviation of the relative price change for the 90 most recent trading days closing price, expressed as a percentage This report is for information only and is not to be construed as investment advice or as an offer to buy or sell securities or financial instruments. Your investment decision should be based upon your personal investment objectives and should be made only after evaluating the stock s expected performance and risk. While the report is compiled using sources believed to be reliable, no assurance or guarantee is given regarding its accuracy or completeness. Neither Mason Securities Limited nor any of its affiliates, nor any employees or other persons connected with any of them, accepts any responsibility or liability arising from any use of this report. To the extent permitted under applicable law, the above-mentioned companies or individuals may have used the research materials before publication. Mason Securities Limited (or any of its affiliates) and their respective officers, directors, analysts, or employees may or may not have a position in or with respect to the securities or financial instruments covered herein, and may, as principal or agent, buy and sell such securities or financial instruments. However, it is hereby declared that the writer, at the time of writing, does not have any interest in any of the securities or financial instruments covered in this report. An employee, analyst, officer, or a director of Mason Securities Limited (or any of its affiliates), may serve as a director for companies covered in this report. Mason Securities Limited (or any of its affiliates) may from time to time perform investment banking or other services or solicit investment banking or other business for any companies covered in this report. Mason Securities Limited (CE Number: AAC086) is licensed by the Securities and Futures Commission to carry on Types 1, 4, 6 and 9 regulated activities in Hong Kong. Mason Futures Limited (CE Number: AAG007) is licensed by the Securities and Futures Commission to carry on Type 2 regulated activity in Hong Kong.