To acquire CDNetworks & CDN-Video in cash. Wangsu announced a major asset restructuring plan, under which it will acquire in cash97.82% of Korean CDN service provider CDNetwoks’ outstanding shares (or 84.9% ofCDNetworks’ total equity) and a 70% stake in CDN-Video. The acquisitionconsideration for CDNetworks/CDN-Video amounts to ~Rmb1.275bn/51.63m. As of 30Sept 2016, Wangsu had over Rmb5bn cash and cash equivalents. CDNetworks is a global CDN service provider. According to Wangsu’s announcement, CDNetworks was established in 2000 andmainly provides CDN services and DDoS protection services. It has the biggest marketshare among Korea’s CDN service providers and is ranked among the top three CDNservice providers in Japan. As of end-2016, the company had over 180 nodes globally,covering 98 cities in 49 countries and serving around 1,300 clients. CDN-Video is aRussian CDN service provider, with 30 nodes and 400 plus clients. In 2015,CDNetworks posted revenue of Rmb618m and net profit of Rmb23.43m. An important step towards globalization. We believe the acquisition, if approved, 1) will greatly enrich Wangsu’s overseas noderesources while helping the company set up more globalized operation and salesteams. It should also increase the company’s brand recognition overseas, facilitatingfaster and more effective overseas expansion; and 2) will enable both parties topromote their competitive products leveraging each other’s resources and channels. Forexample, CDNetworks’ global video conference system can be integrated intoWangsu’s product lines, while Wangsu’s live streaming service-related products can besold to Korean and Japanese clients. Valuation: maintain Buy rating. As the restructuring plan is still pending shareholders’ approval and approvals fromrelevant regulators, we leave our earnings estimates unchanged for now. We maintainour Buy rating and DCF-based price target of Rmb80.00 (WACC = 7.3%).

Acquiring Green Star Cloud and Eco-atlasWangsu announced it will acquire a 100% stake in Green Star Clound (GSC) and a30% stake in Eco-atlas for Rmb12.4m and Rmb9m, respectively. Upon completion, thiswill make GSC and Eco-atlas Wangsu's wholly-owned subsidiaries. In 9M16, GSC/Ecoatlasposted revenue of Rmb510k/1.20m, with losses of Rmb2.20m/1.78m. Acquisitionand consolidation of the two should have a limited impact on Wangsu, in our view, asit already holds a 70% stake in Eco-atlas. Cloud computing may become a new area into which Wangsu expandsNotably, GSC provides public, private and hybrid cloud solutions. Wangsu has thelargest CDN (content delivery network) in China, built on a cloud computing platform,leading to higher profit margin, as the platform improves internal bandwidth andefficiency of using node resources. After acquiring GSC, we believe Wangsu is likely tocapitalize on GSC's cloud computing capacity and provide more cloud computingservices to clients. In addition, with its large investment to build a cloud securitynetwork in 2016, we think cloud computing-related businesses are likely to becomeWangsu's new growth driver. One of the first to receive MIIT's CDN licenceRecently, Wangsu and Alibaba Cloud received CDN licences, becoming the first batchof Chinese companies to be granted such licences by the Ministry of Industry andInformation Technology (MIIT). MIIT regrouped the telecom sector at end-2015,clarifying businesses included in the CDN segment and separating CDN companies fromthe Internet data centre (IDC) segment. With CDN licences issued, companies applyingfor the business must get their internet access systems, information security systemsand registration & information management systems approved by regulators, which webelieve will lead to higher entry barriers. Valuation: Maintain BuyWe continue to be bullish on the growth of China's CDN sector and think Wangsu islikely to continue to benefit from it. We maintain our DCF-based price target ofRmb85.50 (7.4% WACC) and Buy rating.

Raising 2016/2017 net profit estimates 7%/4% We are increasing our 2016 and 2017 earnings forecasts 7% and 4%, respectively, andthe stock is being added to the UBS Key Call list. Although we have adjusted ourmargin forecasts downward because of higher depreciation charges, strong videostreaming sector demand has led us to increase or 2016 revenue growth forecast from60% to 70%, though we maintain our 55% growth forecast for 2017. We think themarket is underestimating this revenue growth and overstating competitive pressures. CDN service demand to grow fast and upside for Wangsu's market share We estimate the content delivery network (CDN) service market in China will grow at aCAGR of about 40% in 2015-17, driven by the popularity of internet service and newinternet applications like live video streaming. We believe Wangsu Science andTechnology’s (Wangsu) share in China’s overall CDN market was over 50% in H116and we expect it to continue to rise because Wangsu provides reliable, high qualityservices, while some of its rivals are still testing and adjusting their platforms. We expect gross profit margin to stabilise Wangsu adopted an aggressive pricing strategy in H116 to rapidly seize market share inlive video streaming, resulting in gross margin contraction. However, we expect grossmargin to stabilise in H216 and expand in 2017, because: 1) the present pricecompetition is not sustainable; and 2) pricing pressure should ease as Wangsu hasgained leadership in the live streaming market—80% of China’s streaming platformsare now Wangsu's clients, according to the company. Valuation: added to UBS Key Call list We maintain our Buy rating and price target of Rmb85.50 (we are raising our earningsforecasts, but the number of shares has also increased due to a private placement, soour price target does not change). We derive our price target using a DCF methodology(WACC of 7.4%). Our 2016/17 earnings estimates are now 2.5%/4.5% above Windconsensus. Wangsu is trading at 23x 12-month rolling forward PE, below -1 standarddeviation of the past three years' mean. We think the CDN market will continue togrow relatively quickly and we believe Wangsu can expand its market share andmaintain a healthy profit margin. We consider the current valuation attractive.

Q316 revenue grew 50.6% YoY; net profit ex. one-offs grew 58.1% YoY In Q316, the company recorded revenue of Rmb1.166bn (up 50.6% YoY), net profitattributable to the parent of Rmb330m (up 40.1% YoY) and net profit ex. one-offs ofRmb310m (up 58.1% YoY). Non-recurring items was significantly impacted by changesin government subsidy, which was Rmb7.83m in Q316, compared to Rmb42.34m inQ315, mainly as the company had received most of the subsidy in H116. In Q1-Q316,the company's revenue/ net profit attributable to the parent/net profit ex. one-offsgrew 60.2%/64.2%/68.4% YoY, respectively. Gross margin dropped moderately, but operational efficiency further improved Gross margin came in at 41.7% in Q316, below 44.3% in Q315 and 43.6% in Q216.We believe this was mainly as the company adopted relatively aggressive pricingstrategy to actively obtain market share in 2016, especially in emerging areas such aslive broadcasting. The good thing is that the company's selling expense ratio furtherdropped to 5.5% in Q316, lower than 5.8% in Q216 and 6.9% in Q315. This indicatesthat the overall CDN market is still growing and the company's CDN services are stillquite competitive. We expect CDN service revenue to keep growing rapidly and GM to recover We expect Wangsu's CDN services to sustain rapid growth in the next two years: 1)demand for CDN will continue to grow, and we expect China's CDN market to sustainc40% CAGR in the next two years; 2) Wangsu possesses strong advantages in CDNnode coverage, leverage of large network traffic and operational experiences. We alsobelieve Wangsu's gross margin will gradually recover. We believe its price for livestreaming services is already low and price competition is unsustainable. Valuation: maintain Buy rating and price target of Rmb85.5 We expect Wangsu to sustain c50% revenue CAGR in the next two years. Currently,the market may be overly concerned about CDN sector's growth and competitionpressure from other CDN service providers, especially from cloud service providers. Wemaintain our Buy rating and derive our price target of Rmb85.5 based on the DCFmethodology (WACC 7.4%).

Industry competition stabilizing; prices gradually reaching a new balance Wangsu developed live-streaming CDN technology two years ago. Although its livestreamingCDN services were initially priced expensively, Wangsu has adjusted itspricing for such services this year in response to intensifying competition, aiming torapidly capture share in this space, particularly incremental demand. Currently, the livestreamingmarket's competitive landscape is starting to reach a new balance and, whileWangsu's pricing remains the highest, little room remains to continue cutting prices. Overall competitive advantages are still clear; still consolidating market share The company stated that, compared with other CDN vendors, Wangsu's advantagesmainly consist of the following: 1) The scale and stability of its platform, especiallywhen it comes to high-traffic events. 2) Prompt service, including rapid response tocustomer needs and effective solutions. 3) CDN service technology, accumulatedexperience and bespoke service. 4) As a third-party vendor, Wangsu does not haveissues with internal businesses that compete with its customers. Based on theseadvantages, we expect the company's market share to keep rising steadily, exceeding50% in 2016, despite fiercer competition. Steady progress for cloud security and overseas CDN projects 1) On the security front, particularly in terms of DDoS attack protection, the companypossesses good technology, related products and high-grade customers from thegovernment, financial and internet sectors. The company has also developed an antihackingproduct, for which it intends to step up marketing efforts for next year. 2) Itsoverseas CDN project is continuing to progress. The company estimates that its numberof overseas nodes will exceed 100 by end-2016 (end-2015: 60+). Meanwhile, it has setup subsidiaries in India, Ireland, the US and Malaysia to facilitate overseas businessdevelopment. Valuation: Maintain Buy rating and Rmb85.5 price target The market is fairly cautious on the overall CDN market and the company's potential tosustain rapid growth, whereas we expect the company's ~50% top-line CAGR toremain intact for the next two years. We maintain our Buy rating and DCF-derived pricetarget of Rmb85.5 (WACC 7.4%).

Q3 net profit grew 30% YoY 9M16 revenue and net profit were Rmb8.92bn and Rmb350m, respectively, up 29%and 13% YoY. This included Q3 revenue and net profit of Rmb3.08bn and Rmb90m,up 13% and 30% YoY. Earnings resumed relatively brisk YoY growth in Q3. Net margin dragged down by R&D spend Blended gross margin stayed low at 13.2% in Q3, down 0.1ppt from Q2. The weakgross margin was mainly due to high demand from internet customers, as most ofthese sales consist of lower-margin single and dual CPU servers. Q3 net margin was2.9%, down 0.7ppt QoQ, which we mainly attribute to high R&D spend during thequarter, which lifted the administrative expense ratio to 5.8% in Q3 from 5.1% in Q2. Plans to raise funds via rights issue Inspur plans to raise up to Rmb3.1bn through a rights issue. In addition to increasingworking capital and repaying bank loans, Inspur plans to use the proceeds to invest intwo projects a "Modularized Data Centre R&D and Commercialization Project" and"All-flash Storage Array R&D and Commercialization Project". The company is adomestic leader in whole-cabinet servers, with a market share of ~70%. Meanwhile,the company's sales of data storage products are also increasing quickly.Implementation of the projects to be funded by the proposed rights issue could furtherimprove the company's product coverage and market share and drive earnings growth;the company estimates that the aforementioned projects will, after beginningproduction, have annual capacity of 320 and 300 sets, adding Rmb100m and Rmb50mpa to Inspur's bottom line. Valuation: Maintain Buy rating。 The stock is currently trading on 24x 2017E PE, 1 SD below the historical average (28x)and much lower than the industry average (46x). Our Rmb33.5 price target is based onDCF (WACC 6.6%) and is equivalent to 34x 2017E PE, lower than the industry averageand the company's historical average (38x). We maintain our Buy rating on Inspur.