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[Table_Title] Company Report: VSTECS Holdings (00856 HK)

Andrew Song 宋涛

(852) 2509 5313

公司报告：伟仕佳杰控股 (00856 HK) [email protected].

hk 12 February 2018

[Table_Summary] Starting a New Page, Initiate with "Buy"

翻开新的一页，首次给予“买入”评级 VSTECS is a leading technology products solutions and supply chain

services platform in the Asia Pacific region. Founded in 1991 in Hong

Kong, VSTECS started its business with IT products distribution and then

expanded its business to enterprise systems and IT services. As at the end of

2017, VSTECS built partnerships with over 200 of the world’s top 500

companies and over 40,000 downstream partners. The business channel

covers mainland China and eight countries in Southeast Asia.

The Company is shifting its distribution business toward value-added IT

service business and B2C business. VSTECS completed its new strategic

layout in 2017. Currently 2B businesses include supply chain services, cloud

services, one-stop IT services and logistics services besides traditional

distribution. Consumer finance and new retail was newly added to the

Company’s 2C business, based on its rich SKUs and channels. Synergies are

expected to be created from these segments.

We forecast 2017-2019 EPS to increase to HK$0.434, HK$0.618 and

HK$0.747, respectively. We believe that revenue from enterprise systems

and IT services will see a boost in the coming years with great market

demand and the Company’s one-stop solutions service. In addition, growth of

the finance segment and the retail segment is expected to bring revenue

expansion and margin improvement. Initiate with “Buy” and a TP of

HK$6.18. Our TP represents 14.3x, 10.0x and 8.3x 2017, 2018 and 2019

PER, respectively. We believe that the Company’s valuation is attractive

compared with its peers. Risks: 1) Intense competition among the IT services

industry, 2) risks in developing finance and retailing businesses.

伟仕佳杰是亚太地区领先的科技产品解决方案及供应链服务平台。公司于 1991 年在香港

成立，最先开始 IT 产品分销业务并随后将业务范围扩展至企业系统和 IT 服务。于 2017 年

底，公司和超过 200 家世界 500 强企业建立合作关系并拥有超过 4 万个下游合作商。业务

渠道覆盖中国大陆和东南亚八个国家。

公司正在将其分销业务转型为增值 IT 服务和 B2C 业务。伟仕佳杰在 2017 年完成了其全

新的策略布局。目前对公业务除了传统分销业务还包括供应链服务、云服务、一站式 IT 服

务和物流服务。公司对客业务新增加了消费金融和新零售，依托其丰富的产品种类和渠道。

预期各业务之间将产生协同效应。

我们预测 2017-2019 每股盈利将分别上升至 0.434 港元、0.618 港元和 0.747 港元。我们

相信企业系统和 IT 服务会在未来几年迎来快速增长，基于庞大的市场需求以及公司的一站

式服务。此外，金融和零售板块也预期将带来销售增长和利润率提升。首次给予“买入”评

级以及 6.18 港元的目标价。我们的目标价分别相当于 14.3 倍/10.0 倍/8.3 倍 2017/ 2018/

2019 年市盈率。我们认为公司估值相对其同业吸引。风险：1) IT 服务行业竞争加剧；2) 开

展金融和零售业务带来的风险。

[Table_Rank] Rating: Buy

Initial

评级：买入 (首次覆盖)

[Table_Price] 6-18m TP 目标价: HK$6.18

Share price 股价: HK$3.780

Stock performance

股价表现

[Table_QuotePic]

[Table_PriceChange] Change in Share Price

股价变动

1 M

1 个月

3 M

3 个月

1 Y

1 年

Abs. % 绝对变动 %

(18.2) (0.3) 44.3

Rel. % to HS Index

相对恒指变动 % (12.1) (1.6) 19.1

Avg. Share price(HK$)

平均股价（港元） 4.5 4.3 2.9

Source: Bloomberg, Guotai Junan International.

[Table_Profit] Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE

年结收入股东净利每股净利每股净利变动市盈率每股净资产市净率每股股息股息率净资产收益率

12/31 (HK$ m) (HK$ m) (HK$) (△ %) (x) (HK$) (x) (HK$) (%) (%)

2015A 45,576 450 0.299 (22.5) 12.6 2.624 1.4 0.124 3.3 11.6

2016A 48,161 552 0.383 28.1 9.9 2.657 1.4 0.124 3.3 14.4

2017F 52,813 626 0.434 13.3 8.7 2.958 1.3 0.130 3.4 15.3

2018F 62,063 891 0.618 42.4 6.1 3.356 1.1 0.216 5.7 19.4

2019F 73,394 1,077 0.747 20.9 5.1 3.837 1.0 0.261 6.9 20.6

[Table_BaseData] Shares in issue (m) 总股数 (m) 1,459.8 Major shareholder 大股东 Li Jialin 40.2%

Market cap. (HK$ m) 市值 (HK$ m) 5,518.0 Free float (%) 自由流通比率(%) 42.6

3 month average vol. 3 个月平均成交股数(‘000) 1,732.9 FY18 Net gearing (%) FY18 净负债/股东资金 (%) 63.5%

52 Weeks high/low (HK$) 52 周高/低 (HK$) 4.980 / 1.990 FY18 Est. NAV (HK$) FY18 每股估值（港元） 8.0

Source: the Company, Guotai Junan International.

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[Table_PageHeader] VSTECS Holdings (00856 HK)

TABLE OF CONTENTS

INDUSTRY ANALYSIS .....................................................................................................................................3

COMPANY ANALYSIS ......................................................................................................................................6

Corporate Profile .......................................................................................................................................6

Business Model .........................................................................................................................................6

Expansion Strategy ...................................................................................................................................7

FINANCIAL ANALYSIS ..................................................................................................................................10

Revenue ....................................................................................................................................................10

Gross Profit and Gross Margin .............................................................................................................. 11

Operating Profit & Operating Margin ....................................................................................................12

Net Profit & Net Margin ...........................................................................................................................12

EPS & Dividend........................................................................................................................................13

Working Capital Management ................................................................................................................13

ROA & ROE ..............................................................................................................................................14

VALUATION ....................................................................................................................................................15

Financial Statements and Ratios ...........................................................................................................17

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INDUSTRY ANALYSIS

IT products distribution is a mature industry in China. IT products distribution is an important bridge connecting brand

manufacturers and retailers. Based on distributors’ strong sales channel and supply chain, distributors can reduce

manufactures’ sales pressure and marketing costs and provide retailers and consumers larger products mix. Generally

speaking, IT products distribution business in China can be divided into three stages. The first stage (1980-1997) is the

beginning of the distribution. Most distributors simply adopted “Buy-in and Sell-out” strategy to help manufacturers sell their

goods and earn price differences. In this stage, the industry has been developing extensively and the companies that entered

early completed primitive accumulation. The second stage (1997-2007) is a buy-side market and the manufacturers reduced

the layers of the supply chain. The industry’s competiveness became fierce alongisde the entering of global corporations,

e-commerce and chain stores. IT production distribution was segmented into consumer electronic goods and enterprise IT

products, and sales channels were built separately depending on the end customers. The distributors’ profit margin started to

go down. The third stage (2007-now) enters into the era of depth distribution. Manufacturers’ focus has moved from channels to

customers and the customers’ demands are placed in the first place. The rise in e-commerce B2B further makes the price

system more transparent and squeezes profits of traditional distributors. As a result, distributors need to develop their own

competiveness besides their established channels, and value-added services are becoming core competitive. As of 2017, the

largest IT products distributors in China included VSTECS (00856 HK), Digital China (000034), Synnex Technology (2347 TT)

and Ingram Micro.

IT spending is projected to speed up in 2018. According to the technology research and advisory company Gartner,

worldwide IT spending in 2018 is expected to reach US$3.7 trillion, up 4.5% YoY, beating 3.8% YoY growth in 2017. Projects in

digital business, blockchain, Internet of things, and progression from big data to algorithms to machine learning to artificial

intelligence will be the main drivers of the industry growth. In China, Gartner forecasts faster YoY growth in total IT spending of

6.7% in 2018, arriving at RMB2,638 billion. In detail, enterprise software and IT services are the two segments projected to

achieve fastest YoY growth of 12.5% and 10.7% in 2018, becoming the major momentum in total IT spending.

Figure-1: Worldwide IT Spending Forecast Figure-2: China IT Spending Forecast

Source: Gartner, Guotai Junan International. Source: Gartner, Guotai Junan International.

IT service is supported by policies in China. In 2015, State Council of the PRC issued “Implementation Opinions on Actively

Rolling out the Internet plus Initiative” (《关于积极推进“互联网+”行动的指导意见》). The opinion pointed out that the connection

between internet and different industries is to be in depth and new business based on the internet should be the new driver of

economy growth by 2018. In addition, the new industry eco-system of “Internet plus”, which is linked, intelligent,

service-oriented and collaborative should be completed by 2025. In the context of that, IT services in China will be in great

demand in the coming years. Moreover, technology innovation including cloud computing and big data has been accepted by

enterprises and has become popular among them, which is expected to further enlarge the market. According to IDC, the total

market for IT services is expected to reach RMB 1,039 billion in China in 2021, growing at a CAGR of 15.5% during 2017-2021.

3.8%

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2017F 2018F 2019FData Center Systems Enterprise Software

Devices IT Services

Communications Services YoY

US$ bn

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Figure-3: YoY Growth of IT Market Size in China Figure-4: China IT Service Market Forecast

Source: Wind, Guotai Junan International. Source: IDC, Guotai Junan International.

Consumption plays an important role in China’s economy. Fast consumption growth and consumption upgrade is shifting

China toward a consumption-driven country. In 2017, total retail sales of consumer goods increased by 10.2% YoY to

RMB3,473 billion. Despite continuous increasing final consumption spending, the proportion of final consumption spending in

total GDP was 53.6% in 2016 and growth contribution to GDP was 58.8% in 2017, still below that of developed countries. With

the increase in per capita disposable income and willingness to consume, we believe that there is sufficient room for

consumption to grow in China. In addition, online business recorded a faster growth rate compared to offline retail growth. In

2017, total online retail sales of physical goods rose 28.0% YoY, outpacing growth of total retail sales by 17.8 ppts, accounting

for 15.0% of total retail sales of consumer goods.

Figure-5: GDP Growth Contribution From Final

Consumption Spending in China

Figure-6: Total Retail Sales and Online Retail Sales

of Physical Goods in China

Source: National Bureau of Statiatics of China, Guotai Junan International. Source: National Bureau of Statiatics of China, Guotai Junan International.

Online consumer finance has been soaring in China in recent years. According to Oliver Wyman, total amount of online

consumption loans in China is expected to reach RMB10,021 billion in 2021, representing a CAGR of 54.3% during 2016-2021.

The core target group of online consumer finance is consumers between the age of 18 and 35, who are willing to shop and are

still in the stage of accumulating wealth and building credit profiles. Their active shopping demands but insufficient credit profile

creates massive demand for consumer finance products provided by non-traditional financial institutions. Online consumer

finance has short term, high interest rate and no guarantee characteristics, which can be further segmented into cash loan

products and merchandise loan products. For the enterprises that provide online consumer finance products, key areas of

competitiveness include online traffic, risk control, funding costs and operating costs.

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2009 2010 2011 2012 2013 2014 2015 2016

Cloud computing Big data

Internet of things

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GDP contribution from final consumption spending

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Total retail sales of consumer goods

Online retail sales of physical goods

Online retail/ total retail

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Figure-7: Amount of Online Consumption Loans in

China

Figure-8: Number of Active Borrowers for Online

Consumption Loans in China

Source: Oliver Wyman, Guotai Junan International. Source: Oliver Wyman, Guotai Junan International.

Regulatory measures are expected to benefit licensed participants in the long term. Since 2015, the Chinese government

has continued to encourage the development of consumer finance by issuing a series of supporting documents. However,

without efficient regulation, problems including excessive borrowing, repeated credit granting, inappropriate collection,

abnormally high interest rates and infringement upon personal privacy started to appear during the rapid growth of cash loans.

The government thereby issued the “Notice on the Regulation and Rectification of the “Cash Loan” Business” (《关于规范整顿

“现金贷”业务的通知》) to regulate the cash loan industry. The approval of new internet micro credit licenses has been

suspended and cash loans without shopping scenario has also been paused. In our view, the regulation will slow down

consumer finance in the short term, however, a regulated market is good for licensed players and the healthy growth of the

whole industry as uncertainty will be removed and the government’s strategy of encouraging consumption using finance tools

will be unchanged.

Table-1: Documents Published related to Consumer Finance

Date Documents

June 2015 Measures of China Banking Regulatory Commission for the Implementation of Administrative

Licensing Matters Concerning Non-bank Financial Institutions

《中国银监会非银行金融机构行政许可事项实施办法》

July 2015

Guiding Opinions of the People's Bank of China, the Ministry of Industry and Information

Technology, the Ministry of Public Security, et al, on Promoting the Sound Development of

Internet Finance

《中国人民银行、工业和信息化部、公安部等关于促进互联网金融健康发展的指导意见》

March 2016 Guiding Opinions of the People's Bank of China and the China Banking Regulatory

Commission on Enhancing the Financial Support for New Consumption Areas

《中国人民银行、银监会关于加大对新消费领域金融支持的指导意见》

August 2016 Interim Measures for the Administration of Business Activities of Online Lending Information

Intermediary Institutions

《网络借贷信息中介机构业务活动管理暂行办法》

April 2017 Guiding Opinions of the China Banking Regulatory Commission on Risk Prevention and

Control of the Banking Sector

《中国银监会关于银行业风险防控工作的指导意见》

December 2017 Notice on the Regulation and Rectification of the “Cash Loan” Business”

《关于规范整顿“现金贷”业务的通知》

Source: China Banking Regulatory Commission, the People's Bank of China, Guotai Junan International.

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COMPANY ANALYSIS

Corporate Profile

VSTECS Holdings Limited (“VSTECS” or “the Company”) is a leading science and technology products solutions and

supply chain service platform in the Asia Pacific region. The Company's history can be dated back to 1991 when the

Company was first established as an IT distribution company focused on distributing IT components and IT related products in

Hong Kong and mainland China. The Company went public on the main board of the Hong Kong Stock Exchange in 2002 and

then the Company continued to diversify its product portfolio and expand its distribution network. In August 2007, the Company

acquired ECS Holdings Limited listed in Singapore and became a top 3 IT products distributor in Asia Pacific. As at the end of

2016, VSTECS has built partnerships with over 200 of the world’s leading companies, including HP, Apple, Seagate, AMD and

other famous brands, and its business contains distribution, enterprise systems and IT services operating in nine countries. In

addition, VSTECS is further expanding its business to cloud services, consumer finance and O2O retailing platforms, to

establish a one-stop IT services platform and 2C business.

Figure-9: Extensive Coverage in the Asia Pacific Area of VSTECS

Source: the Company.

Business Model

Distribution business is the largest revenue contributor of the Company. VSTECS distribution business is separated into

three parts; namely supply chain business, components business and finished products business since 2016. Supply chain

business provides supply chain solutions for original equipment manufacturers like Lenovo and Hikvisions, with warehouse and

logistics services and components. Components business includes distribution of IT components products such as CPUs and

hard disks, while finished products business includes distribution of IT finished goods such as desktop PCs, notebooks, tablets

and the latest electronic products including drones, VR devices, etc. The Company has established solid partnerships with

upstream manufacturers like HP, Seagate, Western Digital, Huawei, Dell and other well-known digital products brands. Also, the

Company has developed over 40,000 downstream partners in nine countries. The solid partnership with both upstream and

downstream partners, as well as thorough channel coverage, make the Company one of the leading technology products

distributors in China and Southeast Asia.

Enterprise systems is a fast growing business with large market demand. Enterprise Systems provides enterprise system

tools, including middleware, operating systems, Unix/NT servers, databases, storage and security products, supporting IT

infrastructure. Enterprise systems customers include local governments in China, banks and middle and small enterprises.

Based on rich hardware and software, VSTECS is able to satisfy its clients’ various demands and provide one-stop solutions.

IT Services (“ITS”) include IT infrastructure design and implementation, training, maintenance and support services.

ITS is VSTECS’ core competive area and the Company is building a services and resources platform, which includes engineer

resources pool, component resources pool and e-commerce, vendor cooperation resources pool and management tool

resources pool. The Company owns over 1,000 licensed technicians covering tier-4–tier-6 cities and an enormous components

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inventory with 200,000 SKUs for online and offline sales. Also, the Company cooperates with over 200 upstream vendors with

sufficient resources and has acquired qualifications to be the authorized service center for 12 vendors. As at the end of 2017,

the Company cooperates with more than 10,000 downstream partners, conducting over 500 IT infrastructure service projects

and around 200 IT maintenance projects.

Expansion Strategy

VSTECS is shifting its business from traditional distribution business to value-added IT services and 2C business. The

Company has completed the structure reorganization and founded several subsidiaries in the last two years. In the future,

VSTECS is going to develop supply chain services through VES Supply Chain (“伟仕通”), a cloud system through VSTECS

Cloud (“伟仕云安”), consumer finance through VST FS (“伟仕金服”) and VST MC (“伟仕小贷”), and new retail through VST

CB (“伟仕酷购”). The Company intends to combine all these platforms together and build a consolidated one-stop services

platform to create synergies.

VST MC is a newly established subsidiary which owns a internet micro credit license. VST MC obtained the license on

August 2017 and became one of the fewer than 300 companies to own the micro credit license, which is suspended, to be

approved according to the latest rule in China. Both 2B and 2C loaning is through VST MC, including consumer financing and

supply chain financing. Cooperating with over 15,000 downstream partners and third-parties in the logistics platform, the

Company is familiar with these resources and knows its partners’ financing demands well. We believe that supply chain

financing is a controllable and stable business for the Company, leveraging on its wide business network.

VST FS is expected to grow rapidly with cash loaning business and spending installment business. VST FS was

established in June 2017 and first launched its mobile App Huaku (“花酷”) in Android OS and loaning in October 2017. The

management team is originally from leading consumer financing companies and financial institutions with rich experience. The

Huaku app offers cash cards for online micro-credit cash lending and consumption cards for online and offline spending

installment. As discussed above, consumer financing is now in high demand among young people with a strong desire to shop

but insufficient income. The Company’s merchandise loan is not affected by the latest regulation and is still in operation. In

addition, leveraged on the Company’s new retail strategy with abundant and competitive 3C and gaming and entertainment

product mix available online and offline, we believe that the business has a large market and is expected to grow rapidly in the

coming years.

The Company develops their own big data risk control system. The platform combines credit assessment and lending

systems, anti-fraud systems and approval collection systems together and includes an automatic decision engine. The system

uses big data model technology to have overall quantitative evaluation on user credibility to establish the user’s credit limit,

spending limit, and revolving use of credit limit, and setting borrowing interest rate and detects clustering attacks, gray list and

blank account risk, etc. Also, the system establishes different credit approval procedures for different users based on their data

and scenario and classifies the user’s level of overdue risk based on their application data and previous lending behavior to

apply an automatic loan collection strategy (text message/ interactive voice response (“IVR”)/ man power/ outsource loan

collection). Moreover, the management team is from leading consumer financing companies and financial institutions with rich

experience.

Figure-10: VSTECS’ Big Data Risk Control System

Source: the Company.

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VST CB is building an O2O new retailing platform. VSTECS has focused on 2B business over the past years which has a

relatively low profit margin, however, the Company has been expanding its business into 2C areas. VSTECS has a tight and

strong business relationship with brands manufacturers covering 3C products, AR/VR hardware, game and entertainment

equipments and other electronic products, which provides the Company with rich product SKUs. VSTECS develops its 2C

business both online and offline. Online business includes 1) Cool Buy E-commerce which is an online store platform owned by

the Company, 2) Tmall flagship store where the Company’s 2C products are available, 3) WeChat Store, and 4) third-party

brand online stores operated by the Company, for example, Xiaomi online stores in Lazada. The Company chooses different

products to sell in its own retailing channels from the products which VSTECS distribute for its downstream partners in the 2B

channels to avoid conflicts of interest. Offline business models include Cool Buy Convenient Store, Cool Buy Digital Store and

Xiaomi Flagship Stores in Singapore. Cool Buy Convenient Store adopts a franchise business model, mainly focusing on tier-3

and tier-4 cities in China. Franchisees purchase electronic products from VSTECS while purchases of other merchandise such

as daily goods and snacks are purchased independently. The Company views convenient stores as offline traffic entrances,

through which the Company may generate Cool Buy App members by offering promotions. The Company owns approximately

30 convenient stores as at the end of 2017 and intends to expand to 200 in 2018. VSTECS opened a Cool Buy Digital Store in

Beijing at the end of 2017 and plans to open another two stores in 2018. Digital Stores are operated by the Company and may

be developed into a franchise business model in the future. Though B2C business faces fierce competition with a number of

players, we believe that the Company enjoys unique competitiveness with its cost advantage and huge market share in

lower-tier cities.

A close circle has formed within the Company’s financial services business, IT products business and new retailing

business. The Company’s new retailing platform tightly connects online and offline business and shares one membership

system. Customers can enjoy membership benefits both online and offline, including Cool Buy E-commerce, Cool Buy Digital

Stores and Cool Buy Convenience Stores, and gain a bonus by checking in, spending, topping up, sharing, etc. In addition, data

is connected to VST FS and customers may apply for consumption loans easily and conveniently. Moreover, consumption loans

can attract more customers.

Figure-11: A Close Circle of Retailing and Finance Services of VSTECS


Cloud computing is one of VSTECS’ new focus during rapid growth. Cloud computing has been growing fast in recent

years and is becoming an important part of IT systems. The Company has developed close operations with leading cloud

computing providers in the world, including Amazon Webservices (“AWS”), Microsoft Azure, VMware, Huawei, etc. The

Company established its own mixed cloud platform based on public cloud resources like AWS, Azure and Huawei and private

cloud resources like VMware. The Company now offers a whole range of services from IaaS, Paas to SaaS, including training,

consulting, maintenance services, cloud disaster recovery services, value-added services, resale services and other business.

In addition, the Company has its own talent pool, including 300 professional engineers covering tier-1 to tier-3 cities in China, of

which some are certified by AWS, Azure, VMware and other top cloud providers.

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Figure-12: Partners of the Company Figure-13: Cloud Business of the Company

Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.

VSTECS is developing its own logistics service system. The logistics system was first established by the Company for

internal use and then opened for public. The Company owns 3 major logistic centers in China, 5 major regional distribution

centers and 19 sun-warehouses, as at the end of 2017. A total of 3,796 routes of delivery combinations are available and

delivery services within 48 hours provided to 767 cities. The Company promises local delivery within 1.5-3 hours, with timeline

rates achieving 96.5%.

Figure-14: Logistics Service System of the Company Figure-15: Nationwide Coverage


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FINANCIAL ANALYSIS

Revenue

Revenue grew at a CAGR of 6.2% during 2013-2016. VSTECS has been growing steadily during past years with in-depth

coverage in China and Southeast Asia. If we break down the three areas of business, distribution business accounted for the

largest proportion of total revenue, however, the CAGR during 2013-2016 was -0.8%. The Company further broke down

distribution business into supply chains, components and finished products in the 2016 annual report, with YoY growth having

reached -2.5%, -29.1% and 19.9%, respectively. In recent years, consumers have shown preference to finished products and

big brand PCs rather than self-assembled devices, resulting in a shrink in components business, parallel with the market trend.

However, the Company is focusing more on finished goods and is enriching its product mix, including drones, VR devices and

other the latest products, achieving fast growth in 2016. Supply chain business mainly relies on the Company’s big clients with

strong relationships, so the revenue was largely stable and is dependent on their demands. Enterprise systems are the

Company’s major area of competitiveness by providing one-stop enterprise solutions through integrating software, hardware

and services, achieving rapid growth in recent years, with CAGR of 26.4% in 2013-2016. The Company’s IT services mainly

focus on pre-sale advice and after-sale maintenance support for enterprise systems. IT services recorded revenue CAGR of

6.6% in 2013-2016 and surged by 35.0% YoY in 2016.

Table-2: VSTECS’ Revenue Breakdown - by Business

HK$ mn 2012 2013 2014 2015 2016 1H17

Distribution business 29,998 31,954 30,574 31,000 31,610 15,643

YoY 6.5% -4.3% 1.4% 2.0% 4.5%

-Supply chain business - - - 8,620 8,401 3,747

YoY -2.5% -5.4%

-Components business - - - 7,383 5,232 2,219

YoY -29.1% -17.0%

-Finished products business - - - 14,997 17,978 9,676

YoY 19.9% 16.2%

Enterprise system 6,874 8,064 11,101 14,378 16,283 8,215

YoY 17.3% 37.7% 29.5% 13.3% 12.6%

IT services 225 221 218 198 268 143

YoY -2.0% -1.4% -9.0% 35.0% 30.8%

Total revenue 37,098 40,239 41,893 45,576 48,161 24,001

YoY 8.5% 4.1% 8.8% 5.7% 7.3%


Revenue in 1H17 increased by 7.3% YoY to HK$24.0 billion. Distribution business rose by 4.5% YoY in revenue, mainly lifted

by finished products business which increased 16.2% YoY. Enterprise system business rose 12.6% YoY and we believe that it

will keep growing fast alongside the popularity of cloud computing and enlarging market demand. IT services also recorded

rapid growth of 30.8% YoY. The Company is opening up in new areas in Southeast Asia, such as Laos, Cambodia and

Myanmar. By region, revenue in Southeast Asia reached HK$4,665 million, up 10.4% in 1H17, accounting for 19.4% of total

revenue, up 0.8 ppts. We believe that the huge demand for IT services in Southeast Asian countries will further support the

Company’s growth in the context of VSTECS’ full-service delivery and thorough channel implementation.

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Figure-16: VSTECS’ Revenue - by Business Figure-17: VSTECS’ Revenue - by Region


We forecast revenue to grow at a CAGR of 15.1% during 2016-2019 with new business to bearing fruit. In our view,

distribution business will still be the main component of the Company’s revenue structure. However, we expect that finished

goods sales will still outperform components sales along with the market trend. Enterprise systems and IT services will be the

driver for the Company with huge market demand and the Company’s ability to offer one-stop solutions for corporations and

governments. In addition, more opportunities and needs will appear in Southeast Asian countries as economies grow, which will

further boost the Company’s business growth. Finance business and new retail business are brand new segments which

started in 2H17. Nevertheless, the Company has close cooperation with brand manufacturers and can develop a strong product

mix with attractive prices. Thus we believe that the Company’s online and offline retail sales have unique competitiveness and

achieved rapid growth in 2018 and 2019. Consumer finance has a large market in China, especially for young people who are

willing to buy electronic devices. Moreover, the Company acquired an internet micro-credit license of which issuance has been

suspended, which is expected to support growth within the finance segment and in turn stimulate retail growth. Overall, we

forecast 2017-2019 revenue to increase by 9.7% YoY, 17.5% YoY and 18.3% YoY to HK$52.8 billion, HK$62.1 billion and

HK$73.4 billion, respectively.

Figure-18: VSTECS’ Revenue and YoY Growth Figure-19: VSTECS’ Revenue Breakdown


Gross Profit and Gross Margin

Gross profit grew at a CAGR of 7.0% during 2013-2016. Gross profit grew steadily along with revenue increase in the past

years with stable gross margin. The Company’s revenue was mainly from distribution business which has low gross margin. In

2015, 2016 and 1H17, gross margin reached 3.7%, 3.9% and 4.1%, respectively. As there was a higher proportion of enterprise

systems and IT services took in total revenue, which enjoys higher gross margin, we can see gross margin has been gradually

picking up. In addition, the Company’s new business finance and retailing have a much higher gross margin which can reach

around 45% and 20%, respectively, in their respective industries; we believe that overall gross margin improvement can be

expected in the coming years.

17.4%

10.9%

37.3%

33.8%

0.6%15.6%

9.2%

40.3%

34.2%

0.6%

Outer: 1H17 Inner: 2016

Supply Chain businessComponents businessFinished products businessEnterprise System

IT Services

81.4%

18.6%

80.6%

19.4%

Outer: 1H17 Inner: 2016

North Asia

Southeast Asia

8.8%

5.7%

9.7%

17.5% 18.3%

0%

5%

10%

15%

20%

0

20,000

40,000

60,000

80,000

2015A 2016A 2017F 2018F 2019F

Turnover YoY

HK$ mn

68.0% 65.6% 63.9% 60.4% 58.0%

0.0% 0.0% 0.0% 1.6% 2.0%

31.5% 33.8% 35.5% 36.2% 38.0%

0.4% 0.6% 0.7% 0.8% 0.9%

0%

20%

40%

60%

80%

100%

2015A 2016A 2017F 2018F 2019FDistribution Business Finance

Retailing Enterprise System

IT Services

HK$ mn

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We forecast overall GPM to improve by 0.1 ppts YoY, 0.3 ppts YoY and 0.1 ppts YoY to 4.0%, 4.3% and 4.4% in

2017-2018, respectively. The improvement in overall GPM will be mainly driven by a higher proportion of enterprise systems

and IT services business as well as the Company's layout in the finance segment and retailing segment. Driven by both

revenue growth and gross margin improvement, we expect gross profit to rise 13.8% YoY, 26.0% YoY and 20.4% YoY to

HK$2,113 million, HK$2,663 million and HK$3,206 million, respectively.

Figure-20: VSTECS’ Gross Profit and YoY Growth Figure-21: VSTECS’ Gross Margin


Operating Profit & Operating Margin

We forecast 2017-2019 operating profit to be HK$907 million, HK$1,263 million and HK$1,527 million, respectively. Due

to the nature of the Company’s business, operating profit margin is relatively low, between 1.5% and 2.0% during the past

years. The main part of selling and distribution expenses and administrative expenses are staff costs which can account for

around 50% due to the Company’s large sales team and engineer team. As Company’s finance and retailing business

develops, we believe that staff costs and rental costs will increase in the coming years and result in a fast rise of operating

expenses. However, benefitting from higher margin of new businesses, overall operating margin is forecasted to improve to

1.7%, 2.0% and 2.1% in 2017-2019, respectively.

Figure-22: VSTECS’ Operating Profit and YoY Growth Figure-23: VSTECS’ Operating Margin


Net Profit & Net Margin

We forecast 2017-2019 net profit to grow YoY by 13.3%, 42.4% and 20.9% to HK$626 million, HK$891 million and

HK$1,077 million, respectively. The Company recorded net profit of HK$450 million, HK$552 million and HK$266 million in

2015, 2016 and 1H17, respectively. The Company’s share of associates’ profit plus share of joint ventures’ loss reached HK$25

million in 2015 and HK$33 million in 2016, respectively, mainly from its investment in Southeast Asian countries. We expect

profit to keep increasing as the economy in these countries grows rapidly. The Company's income tax is calculated based on

1.5%

9.4%

13.8%

26.0%

20.4%

0%

5%

10%

15%

20%

25%

30%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015A 2016A 2017F 2018F 2019F

Gross profit YoY

HK$ mn

3.7%3.9%

4.0%

4.3%4.4%

3.3%

3.6%

3.9%

4.2%

4.5%

2015A 2016A 2017F 2018F 2019F

Gross margin

-19.8%

18.1%13.3%

39.3%

20.9%

-20%

0%

20%

40%

0

500

1,000

1,500

2,000

2015A 2016A 2017F 2018F 2019F

Operating Profit YoY

HK$ mn

1.5%1.7% 1.7%

2.0% 2.1%

1.0%

1.5%

2.0%

2.5%

2015A 2016A 2017F 2018F 2019F

Operating margin

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the profit generated in each country or region and the average effective tax rate was approximately 20% in its history. We

forecast 2017-2019 net margins to grow YoY by 0.1 ppts, 0.2 ppts and 0.1 ppt to 1.2%, 1.4% and 1.5%, respectively, supported

by new business, and thus net profit is expected to embrace a boost.

Figure-24: VSTECS’ Net Profit & YoY Growth Figure-25: VSTECS’ Net Margin


EPS & Dividend

We forecast 2017-2019 basic EPS to be HK$0.434, HK$0.618 and HK$0.747, respectively, representing a CAGR of 25.0%

during 2016-2019. The Company dividends per share were HK$0.299 and HK$0.383 during 2015 and 2016, representing

payout ratio of 41.4% and 32.4%. As the fast growth of the Company and improvement in profitability, we believe that the

Company will maintain its payout ratio between 30%-35% in the coming years, with dividend payment to be HK$188 million,

HK$312 million and HK$377 million, respectively.

Figure-26: VSTECS' Dividend Payout Ratio


Working Capital Management

The Company kept a good record in working capital management. Overall turnover cycle was maintained at 36 days, 38

days and 35 days during 2014-2016, respectively. During the period, inventory turnover days increased from 26 days to 30 days

and receivables days increased from 54 days to 60 days, however, total turnover cycle was reduced, helped by a 12 day rise in

payables days. In 1H17, overall turnover cycle increased to 53 days which was caused by increasing receivables days due to

payment time differences and was affected by a large client’s account period. We believe that turnover cycle will be back to

normal levels at the end of 2017 and the stable working capital management is likely to remain over the next few years,

benefitting from the Company’s large scale and bargaining power. We forecast 2018-2019 overall turnover cycle days to be 35

days and 34 days, respectively.

-22.1%

22.5%

13.3%

42.4%

20.9%

-30%

-10%

10%

30%

50%

0

300

600

900

1,200

2015A 2016A 2017F 2018F 2019F

Net Profit YoY

HK$ mn

1.0%1.1% 1.2%

1.4% 1.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2015A 2016A 2017F 2018F 2019F

Net margin

25.4%30.6%

41.4%

32.4%30.0%

35.0%35.0%

0%

10%

20%

30%

40%

50%

2013A2014A2015A2016A2017F 2018F 2019F

Payout ratio

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ROA & ROE

We forecast ROA and ROE to further improve in 2017-2019. The Company has recorded relatively high ROE in the

distribution industry over the past years, reaching 11.6% and 14.4% in 2015 and 2016, respectively. The remarkable ROE was

mainly driven by the Company’s high operating efficiency, mature management system, relatively high gearing and fast cash

turnover, despite low profit margin. In addition, we believe that the Company will further increase its gearing rate to develop its

new business and equity multiplier is expected to rise. By implementing DuPont analysis, we expect higher ROE in 2017-2019

due to forecasted net profit margin improvement and rising equity multiplier, which will be 15.3%, 19.4% and 20.6% in

2017-2019, respectively. ROA is also expected to increase to 3.6%, 4.5% and 4.7% during 2017-2019, respectively.

Figure-27: VSTECS' ROA Figure-28: VSTECS' ROE


Table-3: DuPont Analysis on VSTECS’ ROE

2015 2016 2017 2018 2019

Net margin (net profit / revenue) 1.0% 1.1% 1.2% 1.4% 1.5%

Asset turnover (revenue / asset) 271.8% 295.6% 291.7% 290.4% 294.8%

Equity multiplier (asset / equity) 431.4% 424.1% 443.5% 465.5% 476.0%

ROE 11.6% 14.4% 15.3% 19.4% 20.6%


Table-4: Key Financial Forecasts

HK$ mn HISTORICAL FORECASTS YoY

2014 2015 2016 2017 2018 2019 2017 2018 2019

Revenue 41,893 45,576 48,161 52,813 62,063 73,394 9.7% 17.5% 18.3%

Gross profit 1,673 1,697 1,857 2,113 2,663 3,206 13.8% 26.0% 20.4%

Operating profit 844 677 800 906 1,263 1,527 13.3% 39.3% 20.9%

Net profit 578 450 552 626 891 1,077 13.3% 42.4% 20.9%

EPS (HK$) 0.386 0.299 0.383 0.434 0.618 0.747 13.3% 42.4% 20.9%

Gross margin 4.0% 3.7% 3.9% 4.0% 4.3% 4.4% 0.1 ppts 0.3 ppts 0.1 ppts

% SG&A of turnover 2.0% 2.2% 2.2% 2.3% 2.3% 2.3% 0.1 ppts 0.0 ppt 0.0 ppt

Operating margin 2.0% 1.5% 1.7% 1.7% 2.0% 2.1% 0.0 ppt 0.3 ppts 0.1 ppts

Net margin 1.4% 1.0% 1.1% 1.2% 1.4% 1.5% 0.1 ppts 0.2 ppts 0.1 ppts Source: the Company, Guotai Junan International.

4.6% 4.8%

3.0%3.3%

3.6%

4.5% 4.7%

0%

1%

2%

3%

4%

5%

6%

2013A2014A2015A2016A 2017F 2018F 2019F

ROA

14.7% 15.7%

11.6%14.4% 15.3%

19.4% 20.6%

0%

5%

10%

15%

20%

25%

2013A2014A2015A2016A2017F 2018F 2019F

ROE

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VALUATION

Investment highlights for the Company include: 1) a leading position in technology products solutions in Asia Pacific in the

era of big data. IT services demand, with big data and cloud computing growing rapidly in the world over the past years, which

will drive the Company’s business revenue to be boosted in the future. 2) The Company’s ability to consolidate resources.

VSTECS solely owns key resources of IT services, including engineer resource pools, component resource pools, vendor

cooperation resource pools and management tools resource pools. Thus the Company is able to provide one-stop solutions for

their customers without short boards. In addition, the Company has over 20 years channel layout and a strong relationship with

upstream and downstream enterprises, bringing it unique competitive advantages. 3) Synergies generated from the company’s

multiple segments. VSTECS’ businesses include enterprise systems, IT services, supply chain services, logistics services,

loaning services, B2B and B2C services. The Company can satisfy the needs of its customers and strengthen cooperation. 4)

Channel layout overseas. On the one hand, VSTECS has developed strong relations with the world’s top IT enterprises,

including Microsoft, Amazon and VMware, to help bring their products into the Chinese market. On the other hand, the

Company has built its own channels in eight Southeast Asian countries, including Singapore, Thailand and Malaysia. Along with

the growth of Chinese companies overseas, like Huawei and Xiaomi, the Company has achieved in-depth cooperation with

these domestic corporations and rapid growth in overseas market. 5) Revenue and profit growth contributed from the finance

segment and retailing segment. Despite that the Company only started operations in these two segments in 2H17, the new

areas of business perfectly fill in the Company’s business circle and is expected to create new synergies. In addition, growth in

these two business areas is expected to improve the Company’s profit margin and may be a stock price catalyst.

Our DCF model suggests an NAV of HK$7.96 per share. We have used the DCF model to evaluate the Company’s business.

We have forecasted the Company’s free cash flow from 2018 to 2027 as well as the terminal value of cash flow afterwards. By

discounting the FCFs and terminal value to present based on the assumptions shown in the table below, we arrive at an implied

NAV of HK$11.6 billion, which is equivalent to HK$7.96 per share.

Table-5: DCF analysis for VSTECS

WACC Calculation DCF Calculation (HK$ m)

Risk-free rate 2.00% PV of Free Cash Flow to the Firm (2018-2027) 4,281

Market risk premium 10.23% PV of Terminal Value 9,983

Beta 1.1 Net (Debt)/Cash (2,639)

Cost of equity 13.25% Less: Minority Interests 0

NAV 11,625

Cost of debt 3.50% Number of Shares (mn) 1,460

Effective tax rate 20.0% NAV per Share 7.96

After tax cost of debt 2.8%

Sensitivity Analysis on 2017F NAV (HK$ million)

E/(E+D) 50.00% Perpetual growth rate

WACC 8.38% 1.5% 2.0% 2.5% 3.0% 3.5%

WACC

6.9% 14,616 15,902 17,482 19,470 22,046

Perpetual growth rate 2.50% 7.4% 12,876 13,895 15,122 16,630 18,527

7.9% 11,416 12,236 13,208 14,379 15,819

8.4% 10,173 10,842 11,625 12,553 13,672

8.9% 9,104 9,657 10,295 11,043 11,930

9.4% 8,176 8,637 9,164 9,774 10,488

9.9% 7,363 7,750 8,190 8,694 9,277

Source: Guotai Junan International.

Initiate with “Buy” investment rating and TP is set at HK$6.18. VSTECS is on track for fast growth over the next few years

with revenue expansion and profit improvement. The Company is currently trading at 8.7x 2017 PER and 6.1x 2018 PER. We

believe that the Company’s current valuation is attractive. We initiate with a TP of HK$6.18, which represents 14.3x, 10.0x and

8.3x 2017, 2018 and 2019 PER, respectively, or 0.32x 2017-2019 PEG. We believe that the Company’s valuation is attractive

compared with its peers. Our TP represents 22.4% discount to our DCF derived NAV and is equivalent to 61.2% upside

potential, and therefore we give the Company a “Buy” rating.

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Major risk factors include: 1) Intense competition among the IT services industry. The IT services industry in China is

large and is experiencing rapid growth. However, there have been more participants entering the market in recent years,

making competition fiercer. Players who fail to catch up with the latest technology may lose market share. 2)

Lower-than-expected B2B growth. Demands from supply chain and components business decreased in 2016 and 1H17, and

the main growth driver for B2B business has been finished IT goods. The Company’s B2B growth may be slower than our

expectation when demand weakens. 3) Policies against internet micro credit. Internet cash loan business has currently been

suspended and the market is awaiting new regulation. Business growth may be negatively affected by a new rule against

internet micro credit. 4) Risks in finance business and retailing business. Finance business and retailing business are brand

new segments for the Company starting at 2H17. These two areas of business are still in the early stage and needs time to

develop and make profit.

Table-6: Peers Comparison Table

Company

Stock Code Currency Last price

PE(x) PB(x)

ROE(%)

D/Y(%)

Gross

Margin(%) Market Cap

16A 17F 18F 19F 16A 17F 18F 19F

17F HKD mn

IT distribution and IT service

Tech Data Corp TECD US USD 92.400

12.5 16.7 10.2 8.8

1.6 1.5 1.4 1.3

9.3

0.0

5.0

27,566

Synnex Technology

Intl Corp

2347 TT TWD 37.900

13.0 10.9 10.3 10.2

1.5 1.4 1.3 1.3

12.7

6.6

3.6

16,810

Digital China Holdings 861 HK HKD 4.020

12.1 n.a. 19.8 13.7

0.7 0.7 0.7 0.7

(2.2)

0.0

20.0

6,743

Vstecs Holdings 856 HK HKD 3.780 9.9 8.7 6.5 4.6 1.4 1.2 1.0 0.9 15.4 3.4 3.9 5,518

Changhong Jiahua

Holdings Lt

8016 HK HKD 0.790

4.9 n.a. n.a. n.a.

0.9 n.a. n.a. n.a.

n.a.

n.a.

n.a.

1,149

Simple Average 10.5 12.1 11.7 9.4 1.2 1.2 1.1 1.0 8.8 2.5 8.1

Weighted Average 12.2 13.8 11.0 9.4 1.4 1.3 1.2 1.2 9.5 2.3 6.2

Source: Bloomberg, Guotai Junan International.

Figure-29: VSTECS’ Historical Forward PER Figure-30: VSTECS’ Historical Forward PBR

Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International.

0

1

2

3

4

5

6

7

8

Closing price (HK$) 3x 5x 7x 9x 11x

0

1

2

3

4

5

6

7

Closing price (HK$) 0.5x 0.8x 1.1x 1.4x 1.7x

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Financial Statements and Ratios

[Table_IncomeStatement] Income Statement

Year end 31 Dec (HK$ m) 2015A 2016A 2017F 2018F 2019F

Total Revenue 45,576 48,161 52,813 62,063 73,394

Cost of sales (43,879) (46,305) (50,700) (59,400) (70,187)

Gross profit 1,697 1,857 2,113 2,663 3,206

Selling and distribution costs (648) (732) (792) (943) (1,138)

Administrative expenses (369) (334) (423) (465) (550)

Other income and gains (3) 9 8 9 9

Operating Profit 677 800 906 1,263 1,527

Finance cost (140) (141) (157) (185) (218)

Share of associates’ profits 35 36 38 40 42

Share of a joint venture’s loss (10) (6) (5) (5) (4)

Profit Before Tax 562 689 782 1,113 1,346

Income Tax (112) (137) (156) (223) (269)

profit After Tax 450 552 626 891 1,077

Non-controlling Interest 0 0 0 0 0

Shareholders' Profit / Loss 450 552 626 891 1,077

Basic EPS 0.299 0.383 0.434 0.618 0.747

[Table_CashFlowStatement] Cash Flow Statement


PBT 562 689 782 1,113 1,346

Income tax (148) (107) (155) (216) (265)

Adjust for depre.&amort. 22 22 28 27 27

Change in WC (16) 437 (795) (1,023) (1,259)

Others 101 100 113 138 168

Cash from Operating Activities 522 1,140 (26) 39 18

Interest received 14 11 9 11 13

Purchase of PPE (77) (176) (20) (20) (20)

Others 33 (225) 8 8 8

Cash from Investing Activities (30) (390) (3) (1) 1

Net bank borrowings 2,033 (1,375) 244 786 963

Interest paid (140) (141) (157) (185) (218)

Dividend paid (180) (180) (188) (312) (377)

Others (176) (78) 0 0 0

Cash from Financing Activities 1,537 (1,775) (101) 290 368

Net Changes in Cash 2,029 (1,025) (130) 328 386

Cash at Beg of Year 1,495 3,234 1,980 1,850 2,179

Foreign exchange effect (291) (229) 0 0 0

Cash at End of Year 3,234 1,980 1,850 2,179 2,565


[Table_BalanceSheet] Balance Sheet


Property, plant and equipment 287 280 272 265 259

Goodwill 311 307 307 307 307

Interest in associates & JV 345 585 605 633 663

Deferred tax assets 62 67 76 109 131

Others (8) (2) 6 7 8

Total Non-current Assets 997 1,237 1,266 1,320 1,367

Cash & Cash Equivalents 3,234 1,980 1,850 2,179 2,565

Inventories 3,974 3,708 4,626 5,138 6,399

Trade & other receivables 8,564 9,368 10,363 12,733 14,569

Total Current Assets 15,772 15,056 16,840 20,050 23,532

Total Assets 16,768 16,293 18,106 21,370 24,900

Trade & other payables 7,276 8,099 9,217 11,077 12,915

Short-term borrowings 4,635 2,396 2,641 3,103 3,670

Taxation Payable 19 46 53 76 91

Total Current Liabilities 11,931 10,541 11,911 14,256 16,676

Deferred Income 5 6 7 8 10

Long-term Borrowings 986 1,849 1,848 2,172 2,569

Deferred tax liability 28 33 38 54 65

Total Non-current Liabilities 1,018 1,888 1,893 2,234 2,644

Total Liabilities 12,949 12,429 13,804 16,490 19,319

Total Shareholders' Equity 3,819 3,864 4,302 4,881 5,581

Minority Interest 0 0 0 0 0

Total Equity 3,819 3,864 4,302 4,881 5,581

[Table_FinancialRatio] Financial Ratios

2015A 2016A 2017F 2018F 2019F

Gross margin 3.7% 3.9% 4.0% 4.3% 4.4%

Operating margin 1.5% 1.7% 1.7% 2.0% 2.1%

Net margin 1.0% 1.1% 1.2% 1.4% 1.5%

ROA 3.0% 3.3% 3.6% 4.5% 4.7%

ROE 11.6% 14.4% 15.3% 19.4% 20.6%

Current Ratio (x) 1.3 1.4 1.4 1.4 1.4

Net gearing (%) 62.5% 58.6% 61.3% 63.5% 65.8%

Interest coverage (x) 5.0 5.8 5.9 7.0 7.1

Dividend payout ratio (%) 41.4% 32.4% 30.0% 35.0% 35.0%

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[Table_FinancialRatio] Financial Ratio [Table_CompanyRatingDefinition] Company Rating Definition

The Benchmark: Hong Kong Hang Seng Index

Time Horizon: 6 to 18 months

Rating Definition

Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable.

Accumulate 收集 Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable.

Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral.

Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable.

Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.

[Table_IndustryRatingDefinition] Sector Rating Definition

The Benchmark: Hong Kong Hang Seng Index

Time Horizon: 6 to 18 months

Rating Definition

Outperform 跑赢大市 Relative Performance>5%; or the fundamental outlook of the sector is favorable.

Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral.

Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable.

[Table_DISCLOSUREOFINTERESTS] DISCLOSURE OF INTERESTS

(1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for GREENLAND BROAD (01253 HK),GUOTAI JUNAN I (01788 HK),BINHAI INVESTMENT (02886 HK),GFI MSCI A I

(03156 HK),CAM SCSMALLCAP (03157 HK),ZHENRO PPT (06158 HK),LINK HOLDINGS (08237 HK),GFI MSCI A I-R (CNY) (83156 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report.

(4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months.

(5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this Research Report.

(6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies.

DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. © 2018 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen’s Road Central, Hong Kong. Tel.: (852) 2509-9118 Fax: (852) 2509-7793 Website: www.gtja.com.hk