While the new asset injection could generate incremental cash flow,the high investment cost implies a relatively low return rate thattends to dilute Daqin’s existing ROE. We think recent share priceweakness should reflect market concerns. Quick Comment – What’s new: DQR announced the acquisition of a 70%equity interest in Taixing Railway, a greenfield project, from the parent group(TRA) at an appraised book value of Rmb3,158mn in cash. After theacquisition, DQR will inject its Taigulan railway asset into Taixing Railway so itsshares in the new entity will increase to 74% ultimately. Low investment returns: Based on designed annual capacity of 40mn tons,tariff at Rmb0.184/ton。 km, and 164km distance for the target asset of TaixingRailway, we estimate it could generate Rmb1.2bn in revenue per year.However, with a high investment cost of Rmb9bn (including Rmb4.5bnappraised equity value and Rmb4.5bn debt), we estimate annual depreciationand interest costs could be around Rmb351m and Rmb225m, respectively.Deducting operating cash costs, we are concerned the profitability could beroughly at break-even level. This could dilute the high profitability (26% netmargin in 2014) and ROE (18% on 2015e) of DQR’s existing asset portfolio.Implications: 1) As the target asset is a greenfield project without earningsdisclosure, it implies high uncertainties on profitability. We estimate cashearnings at Rmb331mn, implying a low cash yield at 3.7%. 2) We estimate the Rmb9bn investment cost for Taixing Railway implies a highunit cost of Rmb55m/km, above Rmb43m/km cost implied in DQR’s EV basedon its current market cap. 3) Given weak demand outlook with 13.1% decline YTD in China’s rail coalthroughput, we think the appraisal value based on historical cost is too high. 4) Given DQR’s track record with more reasonable asset injection made in2010, this new transaction is a negative surprise, in our view. We remaincautious on any future asset injections at high appraisal prices.。 5) Assuming a value destruction of Rmb3.1bn led by this investment, weestimate a fair value loss of Rmb0.2/share, which would be reflected by recentshare price weakness (-3% or –Rmb0.3/share) in the past week.

As reported by various media sources, including Reuters, Spring Airlines plansto launch new flight services between Shanghai Pudong and Pyongyang,North Korea, in February 2016, at a frequency of four flights/week. Accordingto the company, final implementation will still be subject to approval fromboth the North Korean authorities and the Civil Aviation Administration ofChina (CAAC). If these new flights are approved, Spring Airlines will become the third airlinein the world with scheduled flight services to North Korea, after Air Koryo andAir China. Air Koryo is the only carrier in North Korea, operating regular flightsbetween Pyongyang and Beijing, and occasionally seasonal routes to Shanghai,Kuala Lumpur and Vladivostok. Air China currently has two flights/week toPyongyang (three flights/week in the summer). According to CEIC, the number of China’s outbound tourists to North Koreanearly doubled to 237,000 in 2012, from 131,000 in 2010. However, thisrepresented less than 4% of the 6.13m Chinese tourists to South Korea in2014, implying strong growth potential for “first movers” – Spring Airlineswould be the first mover as an LCC and privately owned carrier, or one of thefirst movers overall in this untapped market. North Korea continues to be the subject of comprehensive sanctions programsadministered or enforced by the U.S. Department of the Treasury’s Office ofForeign Assets Control (“OFAC”), the European Union and/or by othercountries and multi-national bodies.

Haige just announced that it has signed a satellite communications productcontract with the Chinese military / government. The order size amounts toRmb160m, or 5.4% of Haige's total revenue in 2014. Products are to bedelivered between 2015 and 2016. Assuming 16% OP margin for the contract, we estimate the deal could boostOP and NP by 3.9% and 3.7%, respectively, for 2015. Following previous contracts secured at the end of 2014 and in Apr-15, thenew contract should further enhance Haige's market position in China'smilitary / satellite communications industry.

Investment conclusion: In our view, DQR’s strongearnings performance following a successful assetinjection (since Sep-10), affluent cash flows, andsignificant dividend upside should further prove it to be avaluable railway asset play in China for long-terminvestment. We reiterate our OW rating given 90%upside from current levels to our DCF-based PT. Strong 2010 results in line: Net profit rose 46% YoY toRmb10.4bn, 4% above our estimate, consistent with 3%higher-than-expected revenue at Rmb42bn. As costincreased 21% YoY, below revenue growth of 26%, OPmargin expanded by a significant 4ppt and operatingprofit surged 43% YoY. Operating cash flow nearlydoubled to Rmb16.9bn, or Rmb1.14/share. DQRannounced DPS of Rmb0.35, implying a 50% payoutratio. Sustained 1Q11 momentum: Thanks to Rmb494mn infresh contribution from the newly acquired Shuhuang JV,operating and net earnings rose 27-30% YoY. Witheffective cost control at 10% inflation vs. revenue growthof 12%, GP margin improved 1ppt to 43% and grossprofit rose 14% YoY. Key catalysts: 1) Industry-wide capacity upgrades bythe Ministry of Railway (MoR); 2) recent tariff hikes forgeneral cargo; 3) potential new M&A opportunities; 4)further progress on industry reform. Valuation: Deep value stock trading at 10.6x 2011e P/Eand 6.8x EV/EBITDA with 8.7% FCF yield. Keydownside risks are: 1) double-dip or significant macroslowdown; 2) unexpected competition from new railwaylines or new energies; and 3) capex overrun.