What’s new . CYTS recently announced plans to list two of its subsidiaries, China CYTS M.I.C.E Service Co., Ltd. (i.e. business exhibition) and CYTS Shanshui Hotel Investment & Management Co., Ltd. on the National Equities Exchange and Quotations (NEEQ.)n CYTS currently holds an 82% stake in M.I.C.E Service (i.e. Meetings, Incentives, Conferences, and Exhibitions). As of December 2014, M.I.C.E had RMB969m in total assets and RMB237m net assets. In 1H15, the business generated RMB882m in revenue, and had gross/net margin of 12% and 2.3%, respectively. It contributed to 18% of CYTS’s total revenue and 10% in gross profit in 1H15. The company has 51% ownership in Shanshui Hotel. Shanshui Hotel had RMB436m in total assets and RMB207m net assets as of December 2014. In 1H15, the hotel business generated RMB171m in revenue, contributing 4% to total revenue; nonetheless, gross margin was high at 86%, and gross profit contribution came in at 14%. Net margin in 2014 was 5.6%. (Shanshui Hotel did not disclose its 1H15 bottom line.)DB’s view . We believe as the two subsidiaries go public, CYTS should benefit from the following:n CYTS will be able to monetize some of its initial investment, and realize the market value of the businesses. We believe the listings on NEEQ could also help lift CYTS’ valuation, which is currently trading at 29x our 2016E PER compared to an average of 35x on NEEQ. There will be more liquidity in CYTS as the IPOs bring in more investors. There will be extra funds to grow and expand the M.I.C.E and hotel businesses. In addition, going public could also broaden the financing channels available to the two subsidiaries. As public companies, there will be more visibility in their operational and financial information. Improved visibility could help increase investors’ confidence in the stock. CYTS could potentially introduce stock incentive plans for the management teams of the two businesses, which could incentivise them and improve their performance. We reiterate our Buy recommendation with target price of RMB28.

Initiating with Buy, with 44% potential share price upside to our TP at CNY46 . Five reasons why we are more optimistic than the Street There is a significant growth opportunity in the video surveillance industry, and we believe Hikvision should be one of the major beneficiaries of new demand for smart city and IoT (Internet of Things) applications, the ongoing upgrade product cycle, and consolidation of the industry. We forecast a 2015-2018 CAGR of 41% in sales and 39% in EPS for Hikvision, with ROE rising from 36% in 2014 to 43.6% in 2018. Its solid home-base advantage in China, successful overseas market expansion, and rising net cash position should boost its earnings upside and share price performance. Five reasons why we are more optimistic than the Street . (1) Exciting opportunity for smart city and IoT business: Investors may underestimate the demand for video surveillance applications in the smart city and IoT markets. We expect this segment’s sales contribution to increase from 12% in 2014 to 25% in 2018 (sales CAGR of 70%). (2) Robust upgrade demand for its front-end (analog to IP cameras, 2015- 2018E sales CAGR of 44%) and back-end (DVR to NVR, 2015-2018E sales CAGR of 37%) products plus integrated software lead to our higher 2016- 2018 OPM forecasts of 26.1-26.7% than the Street’s 25-26%. (3) Ongoing market share gains in China (on a sales basis) from 28% in 2014 to 48% in 2018E, helped by its competitive sales footprints, its solid relationships with system integrators and commercial customers, and the government’s encouraging policies for safe city and Made in China 2025. (4) Successful overseas market expansion for its brand business in 20 countries, ahead of Chinese peers, further boosting its EPS momentum. (5) Potential growth in other security business (access control, total solution). Valuation and risks . We base our valuation of CNY46 on 19x our 2016E EPS, which is lower than Hikvision’s historical P/E (23x) since 2011 (when it became a total solutions supplier). Our 10-year DCF valuation model suggests a fair price of CNY51. Downside risks: weaker demand, order loss to peers, and inventory.

To develop Romantic Show of Li River in Guilin . The company announced today to set up a subsidiary with Guilin Tourism (000978.SZ, RMB8.69, NR) in Guilin, Guangxi. The subsidiary, Guilin Li River Romantic Show Performance Ltd., will develop a romantic show in Guilin. According to the announcement, Songcheng will construct a corresponding theme park and theatre surrounding the Li River culture theme. Songcheng will invest RMB140m in the subsidiary, with 70% ownership, and Guilin Tourism will put in RMB60m and hold 30% stake. We reiterate Buy with TP RMB34. DB’s view - continuous market expansion . Songcheng Performance is currently operating five romantic shows, and has another three in the pipeline. Romantic Show of Li River marks the ninth one. Under the assumption of 2.5 million visitors per annum (80% of the most maturated show) at ASP of RMB70 (in-line with the latest two shows) and a net margin of 35%, the project could achieve a ROE as high as 30%. As the opening date is still uncertain, we have not factored it into our model. We like the newly announced Li River project for the following reasons. Cooperation with local tourism company. We believe the cooperation could benefit Songcheng, as Guilin Tourism bringing in knowledge on the local business environment and culture, as well as tourism resources. Forming cooperation with local players could also help speed up Songcheng’s national expansion, in our view. Popular tourism destination. Guilin is a popular tourism destination that suitable for travel all-year around, and it is one of China’s national historical and cultural cities. Guilin recently introduced six-day visa-free entry policy to ASEAN tour group in May 2015, and it is also one of the sixteen cities in China that adopt the 72-hour visa-free policy to transit passengers. We believe Guilin’s tourism industry will benefit from the relaxed visa policy. Rich Culture. Guangxi province is one of the five autonomous regions in China, with unique culture. There are 12 minority groups living in Guangxi, and the province has the largest minority population in China. We believe the minority culture could bring rich content to the Romantic Show of Li River, which should in turn help attract visitors. Located in Central China. The previous eight projects (five under operation and three in the pipeline) are located in the Eastern Coast of China, Western China, or on the Hainan Island. Romantic Show of Li River is the first project will be the first one located in Central China. We believe Songcheng is on the right track of its national expansion.

Key beneficiary of ultra-high-voltage (UHV) investment boom . Most leveraged UHV play; new venture in mid-voltage products Pinggao is a leading UHV GIS player with 40% market share. Thanks to accelerated UHV build-out in China, we expect the company to deliver 40%/38%/24% earnings growth in 2015-17E. Moreover, its newly established mid-voltage business is also poised well for the catch-up investment in China’s distribution network upgrade, which is budgeted as Rmb2tr in 2015-20 by the government. We initiate with a Buy rating and a target price of Rmb27.1. Most leveraged UHV play; new venture in mid-voltage products . Thanks to its core UHV GIS products (”gas-insulated switchgear“, >70% revenue contribution), Pinggao stands as a key beneficiary of accelerated UHV investment, with revenue expected to double in 2014-17E. It is also the most leveraged UHV play (35% FY15E revenue) among peers. The planned huge investment in China’s distribution network will also benefit its new Tianjin venture focusing on low-mid voltage switchgear and component businesses. Earnings to grow by 40%/38%/24% in 2015/16/17E, or 31% CAGR . Based on our proprietary UHV approval/tender forecast, we expect Pinggao to receive orders of c.Rmb4-5bn p.a. during the period. We expect net profit to grow by 40%/38%/24% in 2015/16/17E, or a 31% CAGR through 2015-17E, driven not only by revenue growth but also by margin expansion on rising contribution from higher margin UHV products and operating leverage. Valuation and risks . We value Pinggao based on DCF through 2025E (WACC: 7.2%, tgr: 1%). The stock is currently suspended pending announcement of share placement and potential asset injection. Our current investment thesis is based on its existing business and we believe the planned corporate action is unlikely to be negative to the company as it is conditional on minority shareholder approval. Key downside risks include investment in UHV being below expectation or delayed versus forecast, margin and market share pressure from intensifying competition and growth in new mid-voltage business below expectation.

Maintaining Buy, but cutting target price on higher investment in Aoyou.com。 High expenditure in Aoyou.com may drag down earnings nearer term We reiterate our Buy rating on CYTS as we continue to see material upside return after our target price cut to RMB28 (from RMB35) to factor in the higher investment in Aoyou.com with no return nearer term. We reduce our 2015 and 2016 earnings forecasts by 20% and 19% respectively. However, from a valuation perspective on our estimates Aoyou and Gubei Town are free for investors, although they are not making a profit at the current stage. High expenditure in Aoyou.com may drag down earnings nearer term。 CYTS invested heavily in Aoyou.com, following its “Aoyou+” strategy aimed at return and growth longer term. Continuous system upgrades and content enrichment were put in place. In 1H15, CYTS spent close to RMB300m on the sales and marketing of Aoyou.com, opened more than 300 offline service spots for O2O development, and introduced 13 new departure cities. Currently, Aoyou.com does not charge any commission. Ancient towns remain the growth drivers。 Both Wuzhen and Gubei outperformed in 1H15 with a 27% yoy and 135% yoy increase in revenue, respectively. We expect the two ancient towns, especially Wuzhen, to be the key growth driver going forward, supported by an increasing number of leisure tourists, continuous upgrades and content enrichment. It is worth noting that Gubei town turned profitable in 2Q15, and we believe it is highly likely to report positive net earnings in FY 2015. Valuation and risks。 We derive our target price of RMB28 on a DCF-based valuation, with WACC at 8.1% and a terminal growth rate of 3%, in line with China CPI growth. If we break down the current share price by the different segments’ earnings, on our estimates we find Gubei and Aoyou free for investors. Therefore, we believe downside risk for CYTS is limited. Risks: 1) a slowdown in the tourism industry; 2) anti-corruption moves; 3) rising competition; and 4) slow return from new projects.

Strong growth to resume from 2016; Buy XJ Electric is one of China’s leading UHV DC and smart grid system providers.Due to delay in grid investment and lack of high-margin UHV delivery, 1H15earnings registered a 76% decline. However, we expect the company to deliver117/42% earnings growth in 2016-17E, thanks to accelerated UHV DCinvestment and catch-up investment in China's distribution network upgrade(budgeted as Rmb2tr in 2015-20). It is also well positioned in the fledgingelectric vehicle charging market. Initiating with Buy and Rmb22.5 target price. Twin growth drivers: UHV DC and Distribution Grid Thanks to its full set of UHV DC products including converter valves, control &protection systems and field equipment, XJ stands as a key beneficiary of avisible acceleration of the approval and construction of UHV transmissionlines, with an expected revenue growth of 65%/60% in 2016-17E for its DCpower transmission segment. Moreover, the government’s ambitiousdistribution investment target of Rmb2tr in 2015-20 will benefit its smart substationand distribution business (contributing 50% gross profit in 2014). Earnings to grow 117%/42% in 2016/17E; potential from overseas and EV We expect the strong net profit growth to be driven by: 1) recovery in non-DCsegments after a decline in 2015; 2) strong sales growth in the DC segment;and 3) margin expansion on a rising contribution from higher margin UHVproducts. Potential overseas orders provide additional upside as most of theplanned overseas UHV lines adopt DC technology. Leveraging on its strongR&D capability and sound track record, we believe XJ Electric will stand out asa competitive player once the electric vehicle charging market takes off. Valuation and risks We value XJ Electric based on DCF through 2025E (WACC: 7.7%, tgr: 2%). Keyrisks include grid investment below expectation or delayed versus forecast;margin pressure or market share loss from intensifying competition; growth innew business below expectation.

Strong recovery in 2016 after a hiccup in 2015; Buy . Market leader in grid dispatching, automation and relay protection NARI is a leading grid automation systems provider. Despite an earnings slide in 1H15 caused by a delay in delivery, we project 102%/33% earnings growth in 2016-17E on the back of resumed delivery and China’s aggressive investment plan for its distribution network in 2016-20. NARI is also best positioned among peers on the asset injection front. We initiate with Buy and a target price of Rmb18.1. Market leader in grid dispatching, automation and relay protection . NARI is a leading player in power grid automation (69% of revenue in 2014). We forecast a >35% CAGR in the rural electrification and power distribution automation sub-segment in 2015-17, driven by China’s smart grid and distribution investment boom in 2016-20. China aims to boost the penetration of distribution automation from 20% in 2014 to 90% by 2020; NARI should be a key beneficiary, leveraging on its established competitiveness. Earnings to grow by 102%/33% in 2016/17E; substantial asset injection upside . We expect strong net profit growth, driven by the recovery in power automation after delayed delivery in 2015. We are upbeat on the recovery in 2016 based on the trend in order backlog/revenue in 2013-15E. Moreover, the company has a strong track record in asset injection. The injection of NARI Electric by November 2016 should substantially enlarge the company’s earnings base and increase its exposure to the booming UHV investment. Valuation and risks . We value NARI based on 1) DCF through 2025E (WACC: 7.1%, tgr: 2%), and 2) an Rmb3.6/share potential value enhancement from asset injection. Our target price translates into 36x/27x 2016/17E EPS. Key downside risks include: 1) lower-than-expected investment in secondary automation equipment; 2) market share loss or margin pressure in secondary equipment tenders; 3) risks associated with new PPP projects; and 4) uncertainty over asset injection.

Box office revenue grew 44% yoy to RMB1.2bn Wanda Cinema reported its August 2015 operational data today. During thisyear's summer holiday period (i.e., July and August), Wanda Cinemamaintained its strong growth momentum and generated box office revenue ofRMB1.2bn, which represents an increase of 44% yoy. The number of movieviewers during the summer holidays came in at 31 million, up 53% yoy. Wereiterate our Buy recommendation with our RMB202 target price unchanged. Our 2H15 forecast on the conservative side The 44% yoy box office growth achieved during the summer holidays beat our2H15 box office growth forecast of 30% yoy. In addition, with Hollywoodmovies Mission Impossible, Rouge Nation and Minions coming into cinemas inSeptember, we believe box office growth will continue to be strong. Oursecond-half box office estimate is likely on the conservative side, and webelieve there could be upside potential to our forecast. Theatre expansion continued Wanda opened 11 new theatres with 106 new screens in July and August2015. This implies that these new theatres have an average of 9.6 screens pertheatre, which is much higher than the 8.9 screens per theatre at the existingtheatres. As of 31 August, Wanda was operating a total of 202 theatres with1,800 screens. The company has opened 20 new theatres so far in 2015, 50%of its annual target of 40 new theatres. Valuation and risks We derive our RMB202 target price on a DCF-based valuation with a WACC of8.3% (3.9% in-house risk-free rate, 5.6% equity risk premium, 1.0 beta) and aterminal growth rate of 4% for structural growth in China’s film industry. Thestock is currently trading at a 44x PER (2016E), which converts to a PEG of1.4x on our 30% CAGR earnings growth over 2016-18E. Key risks include lossof policy support from the government, piracy issues and competition fromonline media.

What’s new? On 1 September 2015, after four years of preparation since the announcementof a preliminary draft, the State Council passed a draft plan to promote China’smovie industry, which will be delivered to the Standing Committee of theNational People’s Congress for further and final inspection. The draft plan hassix chapters with 62 clauses, and it focuses on the following three areas:n To lower the entry barriers by 1) lifting the restriction on movie productionenterprises, 2) simplifying the examination procedures on production andscreening (but more strict on the content compare to the Regulation on theAdministration of Movies) , and 3) enhancing information transparencyn To encourage more corporations and individuals to enter the movieindustry by 1) setting up special fund for movie investment; 2) offeringfavorable taxes policies; 3) encouraging financial institution to providesupport; 4) promoting the development and upgrade of movie theatreswith favorable government policies; and 5) encouraging investment anddonation to the movie industry from non-government forcesn To strengthen supervision and regulate market order by 1) enhancingregular supervision on movie-related operations; 2) ensuring theinstallation of standardised ticketing system to prohibit underreporting ofbox office by theatres; and 3) protecting movie-related IPDB’s view – implication on China’s movie industry. Lowered entry barriers and improved policy and financial support couldencourage more talented directors/producers to enter the field, whichshould bring more high-quality movies to the market. As high-qualitymovies bringing in high box office revenue, this would benefit bothupstream and downstream players. Favorable tax rates and government subsidies would help improvecompanies’ profit margin and thus encourage future investment. Supportive policies on theatre development should benefit bigdownstream operators such as Wanda Cinema, which is expandingquickly in the market with 40 new theatres opening each year. Smallerplayers in lower-tier cities would also have the inventive to expand. China’s box office has been expanding at 37% CAGR over 2009-2014. Amore regulated movie industry would provide a healthier environment formore sustainable long-term growth.

Adjust target price to RMB34, with 2015/16E forecast unchanged. We adjust down our target price to RMB34 from RMB79 to reflect the recent24-for-10 stock split. We leave our 2015E and 2016E earnings forecastsunchanged at RMB618m and RMB910m, respectively. Our new core EPS comein at RMB0.43 in 2015E and RMB0.61 in 2016E. We reiterate our Buyrecommendation on the strong performance of Romantic Shows in Sanya,Lijiang and Jiuzhaigou Valley. 24-for-10 stock split. Songcheng Performance recently conducted a 24-for-10 stock split, whichincreased the current number of shares outstanding to 1,431m from 594m. Asa result of the stock split, each year’s corresponding EPS declined 58%. Chairman Huang purchased 0.29m shares. In August, Huang Qiaoling, Chairman of Songcheng and Director of allRomantic Shows, purchased 0.29m of the company’s shares on the stockmarket. Huang’s shareholding position increased to 8.675% from 8.626%,which reflects his confidence in Songcheng’s future growth outlook. Valuation. We derive a target price of RMB34, based on DCF valuation with a 7.7%WACC and a terminal growth rate of 4% to reflect strong growth in both theoffline cultural show and online business. The stock is trading at 26x our 2016Ecore earnings, which converts to a 1.0x PEG on our 26% earnings CAGR over2016-18E. Risks. Key downside risks include a decline in domestic tourists, rising competition,safety incidents, and delays in new project development.

1H15 earnings grew steadily by 9% yoy to RMB121m。 Huangshan Tourism announced its 1H15 earnings today with net profitincreasing 9% yoy to RMB121m, in line with our estimate and accounted for40% of our full year 2015E forecast. Visitor volume to Huangshan grew slightlyby 2% yoy to 1.3 million in 1H15; nonetheless, we believe traffic growth willpick up in 2H15E and 2016E, thanks to Hefei-Fuzhou high speed railway. Thestock is currently trading at 21.5x 2016E PER. We reiterate our Buyrecommendation with a target price of RMB30 unchanged. Revenue increased 6% yoy thanks to solid hotel business。 Total revenue increased 6% yoy to RMB656m, driven mainly by 12% yoygrowth in hotel business to RMB214m. Cable car revenue decreased 5% yoy toRMB143m, due mainly to the operation suspension of Yuping cable car in1H15. As the operation resumed in mid-June 2015 with capacity more-thandoubled(to 2,400 passengers per hour from 1,000) and a price increase ofRMB10 to RMB90 per ride, we expect the company’s cable car business toreport strong growth in 2H15E. Revenue from ticketing admission and travelservice came in flat at RMB115m and RMB136m, respectively. Hefei-Fuzhou high speed railway to deliver 2H15 growth。 Hefei-Fuzhou high speed railway, which started operation on 28 June 2015,significantly shortens the travelling time from Hefei to Huangshan to 1 hourand the duration between Beijing and Huangshan to 5 hours. We expect therailway to stimulate traffic volume growth in 2H15E and 2016E to 2.0 millionand 3.6 million, respectively. (See our “Let’s visit Huangshan – Hefei-FuzhouHigh Speed Railway” report for traffic volume analysis.)。 26.85 million shares issued in August 2015。 We have modeled the dilution effect of a 40.2mn new share issuance in 2015E,and the company has issued 26.85mn shares in August at RMB18.55 per share.

A small beat with stable operating trends and better-than-peers asset quality. Bank of Beijing (BOBJ) reported 1H15 NPAT of Rmb10bn, up 13.4% yoy, whichwas 3.5% ahead of our estimates and made up 58% of our full-year forecasts. The results were driven by PPOP growth of 18.8% yoy and a stable credit costof 86bps in 1H15. The bank’s asset quality trend is less likely a concern thanthose of peers, with NPL formation rate of merely 29bps in 1H15 on ourestimates. Reflecting prudent risk management, stable operating trends inMSE lending and retail banking segment and solid deposit franchise, wemaintain BOBJ as our top pick among A-share banks. On our estimates, thebank is currently trading at 0.7x 2015E P/B and 4.3x 2015E P/E, against ROE of16.9%. Stable asset quality with low NPL formation rate and strong provision coverage. BOBJ’s asset quality remained stable in 2Q15 as NPL balance merely edged upby 3.4% qoq in 2Q15, resulting in lower NPL ratio of 0.92% (1Q15: 0.93%). Given zero NPL write-off/disposal in 1H15, we estimate gross NPL formationrate to be only 29bps (2H14: 46bps). Contrary to sector trends, its specialmention loan contracted by 13% hoh to 1.05% of total loans as of 2Q15 (1Q15:1.31%). Overdue loans grew modestly by 23% hoh to 1.51% of total loans. Asthe bank charged credit costs of 70bps in 2Q15, NPL coverage ratio and grosscoverage ratio stayed largely flat at 307% (+2% qoq) and 2.83% (-1bps qoq). 2Q15 – running the numbers. In 2Q15, BOBJ reported NPAT of Rmb5.1bn, up by 1.3% qoq and 16.8% yoy. The solid results were driven by strong PPOP growth of 19.2% yoy and stablecredit cost of 70bps. With AIEA expansion of 10% yoy and stable NIM (-4bpsyoy), net interest income grew by 10% yoy in 2Q15. Net fee income grew by41% yoy on the back of robust growth in agency service (+55% yoy) andguarantee and commitment business (+79% yoy). As revenue growth of 16%yoy outpaced OpEx growth of 8.4% yoy, CIR dipped by 1.9% yoy to 27.4% in2Q15. Its core tier-1 ratio declined by 56bps hoh to 8.60% due to cash dividendof Rmb2.64bn booked in 1H15, while total CAR was boosted by issuance ofRmb18bn capital bonds to 11.51% (+43bps hoh) as of June 2015. Its preferredshare worth Rmb15bn is still pending for regulatory approval, which may boostits tier-1 ratio by 125bps upon completion of issuance. Strong business momentum in MSE lending and retail banking. BOBJ grew its MSEs by 12% hoh in 1H15 to Rmb222bn, which accounted for30% of total loan book. On retail side, retail customer base rose by 8.5% hoh to13.2mn with interest income and fee income from retail segment up 20% yoyand 32% yoy respectively. BOBJ accumulatively issued 16.64mn socialinsurance cards, ranking No.1 across the nation. As such, the bank managedto maintain a strong deposit market share of 8% in Beijing as of 1H15.

1H15 earnings grew 27% yoy to RMB107m . LiJiang YuLong announced its 1H15 earnings today with net profit increasing 27% yoy to RMB107m, inline with our estimate and accounted for 48% of our full year 2015E forecast. Revenue increased 7% yoy to RMB350m due primarily to strong performance of Jade Dragon Snow Mountain cable car. We reiterate our Buy recommendation with target price RMB21 unchanged. Strong growth in cable car . Revenue from the three cable cars increased 34% yoy to RMB177m, driven by 13% yoy tourist volume growth. The main Jade Dragon Snow Mountain cable car outperformed the other two and reported 57% yoy volume growth to 0.94 million. Traffic volume to Spruce Meadow and Yak Meadow cable cars declined 17% yoy to 0.66 million and 18% yoy to 46k, respectively, due partially to cannibalization from the main cable car. Overall ASP improved 18% yoy to RMB108, thanks to a more favorable product mix (i.e. more tourists chose to take the premium Jade Dragon Snow Mountain cable car). We expect the overall ASP to continue to increase, as the main cable car (priced 3x higher than the other two cable cars) outperforming and attracting more visitors. Performance show facing pressure fr\om Songcheng’s Romantic Show . Revenue from performance show (i.e. Lijiang Impression) decreased 11% yoy to RMB109m, mainly due to intensified competition as Songcheng (300144.SZ, Buy, RMB43.04) entered the market in Mar-14. Average occupancy rate decreased 2.6ppts yoy to 79%. As a result, gross margin declined 1.6ppts and net profit came in at RMB 54m, down 15% yoy. Revenue from hotel business was flat yoy at RMB44m. 9M15 outlook . Management expects 9M15 net profit to improve 10-40% to RMB179-228m, driven by continuous growth in Jade Dragon Snow Mountain cable car. The company targets to achieve RMB181m in full year 2015.

Baosteel 1H15 NPAT in line; reiterating Buy。 Baosteel announced its 1H15 results after market close on 24 August, 2015. Revenue was RMB81bn, down 17% YoY, implying 98% 1H15 DBe, 48% FY15DBe and 43% Bloomberg consensus. Its 1H15 NPAT reached RMB3.2bn, up1% YoY, implying 109% 1H15 DBe, 47% FY15 DBe and 48% Bloombergconsensus. As Baosteel’s NPAT is almost in line with market consensus, webelieve that these 1H15 results will not surprise the market. Please find theresults summary tables in the following pages. Better-than-expected ASP/cost control help improve average unit gross profit. Baosteel reported average ASP in 1H15 as RMB 4,019/t (down 14.5% YoY),much less than the HRC benchmark (down 25% YoY). By successfullycontrolling costs, Baosteel’s average unit gross profit climbed to RMB588/t, up4% YoY and 9% HoH, albeit the average benchmark price and steel spread(HRC) dropped to c. RMB1,065/t for 1H15, down 12% YoY and 20% HoH,respectively. Meanwhile, Baosteel has done well promoting sales volume in1H15, up 1% HoH and down only 5% YoY, in line with our estimates. Steady sales volume in line with expectations. In addition to cost control, we also believe that Baosteel effectively managedits steel product mix. Key products of Baosteel, HRC and CRC enlarged theirgross profit on a HoH basis. Only medium plates recorded negative gross profitin 1H15. We will wait for management to disclose the sales volumebreakdown by products in order to better understand whether production mixmanagement is as important as its cost control for its 1H15 results. Reiterating Buy on Baosteel; major risk. Steel spread is running on the trajectory of a historical low level in 1H15. Weexpect 3Q15 profitability to continue under pressure, but it could recover in4Q15. We believe that the current share price has already priced in theseconcerns. Baosteel’s 1H15 results have demonstrated its excellent corporategovernance, which could help to strengthen its leading position in the Chinesesteel industry. We derive our target price of RMB11.5 based on 1.6X 2015EBVPS. The target PB multiple is justified by the average of Baosteel’s A-sharepeers. Downside risks: dramatic Chinese policy changes. We reiterate our Buyrating for Baosteel.

Core NP lowered 6/13/14% for 2015/16/17, mainly on sales and GPM changes. Although we believe the 2015 sales target of 18% is unachievable (we budget15% growth) due to the macro slowdown and change in distributors forHerborist, SJ will likely perform better than the industry. It should continue tofocus on product and brand enhancement. Therefore, despite the hiccup in2015, we remain positive on its five-year plan. We maintain Buy with a revisedtarget price of RMB48.52. 1H15: sales hurt by macro slowdown; change in distributors for Herborist. Management explained that, although SJ only reported 14% growth, thisalready exceeds the market’s 9% growth for the cosmetic industry. Theshortfall in 1H15 is mainly on Herborist, which failed to recover in 2Q15. Webelieve its growth was only in the mid single digits due to its change indistributor to more multi-brand operators from a single brand. Thus, sales indepartment stores were weak. However, online sales rose 30% for the brand. GF and Giving also reported double-digit growth, while Kao’s sales rose 60%yoy. Except for Herborist, which reported flat GPM, all other brands (includingKao) reported an increase in GPM. We lower our sales forecast and assume SJ’s sales target is unachievable. Management maintains its full-year sales target of 18% growth but admits thatit is a stretch target, as some of the issues that occurred in 1H should continueinto 2H. However, this is for the benefit of its long-term growth. In addition,there will likely be more new products launched from 3Q (a new productlaunch event is to be held on 27 August). Based on the trend for 1H15, welower our sales for 2015/15/17 by 6/5/5%. Our NP (core) is lowered by6/13/14% for the same period. We remain positive on its five-year strategy andbelieve that this is a short-term hiccup. Valuation and risks; TP of RMB48.42 from RMB55.45, on earnings revision. Our primary valuation methodology is DCF, employing a COE of 7.82%, beta of0.7 and a terminal growth rate of 2.5%. This produces a fair-value estimate ofRMB51.45/share, implying 2015/16E PEs of 34x/30x (this excludes one-offitems). The industry risk is higher competition from global and regional players. Company risks include brand/product concentration and failure to implementmanagement’s five-year plan.