Benefitting from the 'made in China' trend; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Technology Hardware & Equipment Company Kstar Date 17 October 2016 Initiation of Coverage Benefitting from the 'made in China' trend; initiating with Buy Reuters Bloomberg Exchange Ticker 002518.SZ 002518 SZ SHZ 002518 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 1,380 1,514 1,745 2,080 2,677 EBIT (CNYm) 152 214 293 363 478 Reported NPAT (CNYm) 153 233 326 393 505 DB EPS FD(CNY) 0.51 0.53 0.74 0.89 1.14 DB EPS growth (%) 18.2 3.3 38.7 20.5 28.5 ROE (%) 10.9 15.7 18.8 19.2 20.7 PER (x) 23.7 33.3 29.3 24.3 18.9 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items Outperformer in China IT sector with strong growth and solid balance sheet ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 14 Oct 2016 (CNY) 21.54 Price target - 12mth (CNY) 27.00 52-week range (CNY) 26.48 - 15.35 Shenzhen Index 2,144 Frank Lin Research Associate (+886) 2 2192 2824 frank.lin@db.com Birdy Lu Research Analyst (+886) 2 2192 2822 birdy.lu@db.com Price/price relative 81216202428323610/144/1510/154/16KstarShenzhen Index (Rebased) Performance (%) 1m 3m 12m Absolute -1.1 -11.0 17.2 Shenzhen Index 3.5 0.2 8.8 Source: Deutsche Bank Stock data Market cap (CNYm) 9,546 Market cap (USDm) 1,419 Shares outstanding (m) 443.2 Major shareholders – Free float (%) 0 Avg daily value traded (USDm) 0.0 Source: Deutsche Bank As a leading Chinese uninterruptable power supply (UPS) brand, Kstar will benefit from the government’s “pro-domestic brand” policy. We anticipate 20-30% profit growth from its UPS/inverter operations in 2016-2018E, driven by local government’s continued electric power infrastructure set-up. Kstar’s early stage growth in the EV power charging sector is also fuelling its secular up-trend in long-term earnings, stimulated by central government’s promotion. Thanks to its disciplined capex control (on superior yield), Kstar has an expanding net cash position. We like Kstar’s favourable industry outlook from all business lines and solid balance sheet; initiating with a Buy rating. Government’s infrastructure build-up is propelling UPS/inverter demand Kstar is the largest Chinese UPS brand, with a 15+% domestic market share. By leveraging its high efficiency UPS products and close relationship with government and operators, we believe its UPS/inverter businesses will deliver 20-30% profit CAGR in the next three years, from a 20% revenue CAGR on improved product mix. Kstar’s high exposure to telecom/financial sectors has ensured stable growth/margin. The company also taps into TV broadcasting industries and is benefiting from strong UPS demand from the networking infrastructure upgrade from analogue to digital in Guangxi/Yunnan provinces. Engagement in electric vehicle (EV) charging segment is bearing fruit To mitigate China’s significant air pollution issue, the government is promoting EV adoption aggressively, which will accordingly trigger strong demand for power charging systems. We estimate China’s EV charging pile market will expand at a 40+% CAGR in 2016-2020E. By leveraging key know-how in power storage/fast charging, Kstar has developed highly efficient (96+%) power piles with enlarged shipment to Zhejiang and Jiangsu’s power station operators in 2016. Due to the strict certification process resulting from safety concerns, Kstar’s charging pile carries a 45+% GPM vs. corporate average of 35+%. We view the strong EV charging sales as a long-term margin driver to Kstar thanks to the confirmed secular up-trend in China. Valuation and risks We base our TP of RMB27 on 30x 2017E P/E, or 1.0x PEG, in line with Asian peers of 20-30x P/E, or 1.0x PEG. This valuation is justified by the strong sector outlook. Downside risks include slower EV adoption and fierce competition. Distributed on: 16/10/2016 21:00:00 GMT 17 October 2016 Hardware & Equipment Kstar Page 2 Deutsche Bank AG/Hong Kong Model updated:13 October 2016 Running the numbers Asia China Hardware & Equipment Kstar Reuters: 002518.SZ Bloomberg: 002518 SZ Buy Price (14 Oct 16) CNY 21.54 Target Price CNY 27.00 52 Week range CNY 15.35 - 26.48 Market Cap (m) CNYm 9,