Operating cashflow and working capital should improve: Yutong announcedthat it has received a subsidy of Rmb3.09bn (out of Rmb3.23bn total) regardingOctober to December 2015 NEV sales. Yutong's accounts receivable balancecontinued to increase to Rmb12.9bn as of end-3Q16 from Rmb11.2bn at end-1H16,mainly reflecting an increase in government subsidy receivables. Thus, we expectthe settlement of 2015 NEV subsidy receivable to improve its 2016 operatingcashflow and working capital. In addition, given the strong NEV bus sales in December, we believe Yutong willbe able to achieve this annual NEV sales target of 25k units for 2016: That'sdespite the uncertainty in NEV policy. We maintain our OW rating on Yutong: Its 3Q16 GP margin improved both YoYand QoQ thanks to an improving product mix as well as declining EV batterycost. We expect the potential relaxation of the ban on usage of NCM batteries inNEV buses in 2017 could help Yutong to lower its costs and maintain stablemargins for its NEV buses, despite a tapering subsidy scheme in the next year. Moreover, we believe its high dividend yield (~6.6% in 2016e) makes it anattractive investment against a backdrop of declining return on financialproducts in China.

As part of management's incentive plan, SPA announced the granting of580,000 shares of restricted stock (0.0725% of its existing shares) to 30 selectemployees. The shares are to be granted at Rmb24.29/share, with a valid periodof 66 months with four installment periods for unlocking. The first unlockingperiod starts 18 months after the record date. The shares will be unlocked at25% each period when weighted average profit per aircraft is no less thanRmb20mn. Subscription of the additional shares will contribute Rmb13.51mncash to capital reserves. After the shares are granted, Shanghai Spring International Travelservice Co., Ltd,the controlling shareholder of SPA, will have a slightly lower shareholding at62.95% from 63.00%.

SPA’s RPK growth decelerated significantly to 11.5% YoY inOct-16, from 21.1% in Sep-16, reflecting sudden weakness inmarket demand. Specifically, the weakness was mainly led by a notable slowdown in internationalroutes to +13.5% YoY from +51.2%, and a decline in regional routes to -2.2% YoYfrom +4.9%. Domestic RPK ramped up marginally to +11.4% YoY from 10.9%,which may have been partly led by capacity reallocation. YTD, RPK growth remained weak at 11.5% YoY, vs. 46.3% YoY for the same periodin 2015. Specifically, RPK growth in domestic, international and regional routeswas -1.3%, 51.8% and -9.5% YoY, respectively. Due to demand weakness, ASK growth slowed to 16.1% YoY, from 25.5% in Sep-16, but was significantly higher than RPK growth. As result, PLF fell -3.6ppt YoYto 87.3% in Oct-16, with -4.4ppt and -3.2ppt YoY in domestic and internationalPLFs, to 78.3% and 91.7%, respectively - the lowest levels seen in 2016. For the first 10months of 2016, overall PLF was 92.2% (-1.4ppt YoY). PLFs ondomestic, international and regional routes remained high at 94.5% (-0.7ppt),88.1% (-1.5ppt) and 94.1% (+1.9ppt), respectively.

SIAC's pax growth softened slightly to +8.4% YoY in Oct-16, from +9.8% YoY inSep-16. Specifically, improvement was found in domestic routes (9.8% vs. 7.2%),while weakened in international routes (9.1% vs. 14.9%), and regional routes (-2.1% vs. 2.6%). YTD, pax growth was flat at 9.8% YoY, after 10.0% YoY for F9M16,but below 17.3% YoY for F10M15. Aircraft movement picked up slightly to +5.5% YoY, following +5.2% YoY in Sep-16. Improvement was mainly driven by further acceleration in domestic routes(6.8% vs. 4.2%), while slowdown was reported in international routes (4.1% vs. 7.1%) and regional routes (0.5% vs. 2.5%). YTD, flight traffic growth was 7.2% YoY,below 7.5% YoY for F9M16 and 12.1% YoY for F10M15. Cargo and mail throughput growth strengthened further to +11.0% YoY, from+7.4% YoY in Sep-16. For F10M16, growth was 3.5% YoY, higher than 2.6% YoY inF9M16 and flat with 3.5% YoY for the same period in 2015. CAAC penalty update: According to CAAC official news on Oct. 25, 2016,approval of temporary flights, chartered flights and new route applications atSIAC will cease, due to its low punctuality from March to Sep. SIAC has beenunder the same penalty since May 2016.

Hengrui continued to deliver 20% growth in revenue andprofit. It also made significant headway in the R&D pipeline. Delivering 20% growth in 3Q again: Revenue was Rmb3.0bn, +20% YoY. For Jan-Sept, revenue was also up 20% YoY. Although segment breakdown is onlyavailable in its half yearly reports, our check of hospital prescription salesindicated that Hengrui's oncology portfolio delivered growth of 13% and 22% YoYin July and August, respectively, while the CNS portfolio delivered growth of 16%and 29% YoY. Novel oncology drug apatinib and US sales have been majordrivers of growth this year. Cyclophosphamide generated US$112mn of sales inJan-Aug, up 6% YoY at the brand level (sold via partner Sandoz, IMS sales). Wethink the launch of sevoflurane this year will also mitigate the slower growth ofits maturing chemo generic drug portfolio. Hengrui also sells irinotecan, letrozole,and oxaliplatin in the US but they are relatively much smaller contributors.Margins held steady vs. 3Q15, leading to profit growth of 20% as well. Significant headway in its "tinib" pipeline in 3Q: After the successful of launchof apatinib in China for stomach cancer, Hengrui has followed on with trials tobroaden its label. In 3Q, it started patient recruitment for head and neck cancers(combined Phase 1/2) and liver cancer (Phase 3). For famitinib (or SHR1020), itstarted a Phase 3trial in metastatic non-small cell lung cancer. Lastly, it started aPhase 3trial for pyrotinib in HER2positive metastatic breast cancer. See our Oct.7, 2016, pipeline tracker for details. Becoming a contender in the biosimilar space: Hengrui received an IND approvalto begin clinical trial on bevacizumab in 3Q. This is potentially a biosimilar toRoche's Avastin, which is approved for colon, lung, ovarian, cervix, kidney, andbrain cancers. Hengrui has deep expertise in mAB. Its SHR1314and PD-1molecules have now entered early stage clinical trial. Generic application for albumin-bound paclitaxel receiving fast-track status: Thebranded original Abraxane (US$968mn global sales, 2015) is approved in the USfor advanced pancreatic, non-small cell lung, and breast cancers. It is available inChina but not reimbursed. Several players are racing to develop a first generic,including CSPC, Hisun, Chia Tai, Kelun, and Qilu. Only Hengrui has received thefast-track status (Oct 28release by CDE), which is now at production review.

After an NDR with SPA management to meet key investors inHong Kong, we think more patience is needed before there is ameaningful improvement in capacity allocation in 4Q16. 3Q16capacity was further affected by Shanghai traffic restrictionsdespite the belated arrival of new aircraft. Key takeaways: We took SPA management on a non-deal roadshow onSeptember 13, 2016 post its 1H16 results. We summarize several key points asfollows:1. Capacity issue not settled: Due to the delayed aircraft delivery in 1H16, SPA’sASK grew by only 8.4% YoY in the period. While it did receive 10 aircraft fromlate June-16 to Aug-16, actual ASK growth of 18.5%/18.4% YoY in July/Aug-16 wasstill below management's previous expectation of capacity expansion, which theysaid was attributable to extended traffic restrictions at Shanghai Airport put inplace by CAAC. Management said this had disrupted SPA’s original capacityexpansion plan, and the subsequent allocation of the new planes to ad-hocroutes (e.g. Shijiazhuang – Manzhouli) had led to sub-optimal yield and lowerutilization hours. 2. Tighter capacity control: Management cautioned there was a risk that feweraircraft introductions could be approved by CAAC for 2017, depending on therelease of a new 13th Five Year Plan for China's aviation industry. According tomanagement, a more stringent capacity plan may result in only ~10 new aircraftbeing added in 2017, vs. the original plan of 14. 3. Initiatives for ancillary sales: New efforts have been made to upgrade inflightancillary sales by adding more high-end products (from Rmb200 to Rmb700price range) with POS terminals installed for credit card payment. SPA is furtherexploring the opportunities of cross-border e-Commerce by leveraging its surplusfreight capacity, especially on Japanese/Korean routes. 4. New market focus: Management said it would continue to explore newdomestic routes to be launched from Shenzhen, Kunming and Urumqi, as well asinternational routes to Cambodia and Thailand. While PLF and yields arebeginning to improve on Japanese routes, it expects full recovery in 1H17. 5. Government subsidies: With the support of sustainable government subsidies,especially on international routes, SPA continues to focus on maintaining highPLFs. It receives subsidies from about 30 airports.

Despite further earnings cuts on the back of weaker-thanexpectedvolume growth, risk-reward profile becomes morepositively skewed. Given 26% upside potential plus 3.5%dividend yield, we are raising our rating to OW. Earnings trough in 2016: Led by compounded effects of demand weakness,traffic diversions and tariff cuts, DQR’s earnings fell significantly by 50% YoY in1H16. The negative trend may continue in 2H16, but we expect 2016 to be thetrough with a 51% dip in profit. Despite our further earnings cuts on moreconservative assumptions, we expect a recovery of 5% and 4% YoY in 2017 and2018, led by normalizing traffic and tariffs, as well as potential demand recoveryfor coal. Resilient dividends: Based on a 50% payout ratio of our revised earningsestimates, we expect sustained DPS of Rmb0.21, Rmb0.22 and Rmb0.23 for2016e, 2017e and 2018e, implying yields of 3.3%, 3.5% and 3.7%, respectively, onthe current share price. The stock is trading at 14.3x 2017e P/E, still at 9%discount to both global peers and its own historical mean. Key catalysts: In our view, the significant -25% share correction in the last 12months has largely reflected DQR’s weak traffic and earnings performance YTD. A positive sign of monthly traffic recovery could serve as a potential catalyst inthe short term. Moreover, we see the possibility of tariff recovery led byimproving financial conditions of the coal firms. Finally, a potential industryreform should bring long term benefits, such as tariff hikes, managementincentives and meaningful M&A, we think. Key risks: 1) Prolonged demand weakness led by macro headwinds; 2) moresignificant substitution of coal by other energy forms such as solar/hydro/wind;3) the risk of lower dividend payout on weak 2016 earnings.

Opinion on results – Neutral: Net profit increased by 19.5% YoY in 1H16toRmb740mn, 3.6% above our estimate. However, we view the -12.2% and -24.8%YoY weakness in GP and OP, respectively, as disappointing, missing our estimatesby 17.6% and 31.8%. Notably, led by significant challenges in 2Q16, GP and OPplunged by 39.7% and 69.7%, vs. 9.4% and 10.8% growth in 1Q16. Thanks tohigher-than-expected government subsidy income (Rmb531m), net profitincreased slightly, by 2.3% YoY, in 2Q16. Ancillary revenues / Internet initiatives – Positive: In 1H16, ancillary revenuesincreased by 10% to Rmb330.9mn, driving segment GP up by 13% YoY with highersegment margin at 87% (+2ppt YoY). ASP further improved by 5% to Rmb50.4per passenger. Moreover, the company made more effort in fostering onlinesales that drove online revenues up 38% YoY to over Rmb2bn. As of 1H16, thenumber of online registrations reached 21mn while active online members rose18% YoY. The volume of Spring’s App downloads boomed by 328% YoY to 20mn. Passenger services – Neutral: Despite limited capacity growth, RPK increased by7.5% YoY as the company reallocated capacity from domestic routes (-8.7% inRPK) to support international growth (+64.2% in RPK). Passenger revenues rosemarginally, by 0.1% YoY to Rmb3.7bn, amid -6.9% yield weakness. Specifically,yield declined on most routes (Domestic: -7.6%, international: -13.7%; regional: -5.9%). Overall PLF slightly fell, by 0.8ppt to 93%, with lower domestic (-0.02ppt)and international PLF (-1.0ppt). Opinion on margin – Negative: Operating cost rose 3.5% YoY in 1H16, partlydriven by 48% YoY increase in depreciation cost that even offset the low fuelprices. GP fell 12.2% YoY, with -2.6ppt weakness in GP margin to 18.5%. As netfinancial expenses rose 36.2% YoY, OP dropped further, by 24.8% YoY. Opinion on outlook – Positive: While 1H16results could have been hampered bylimited capacity growth with delayed fleet deliveries, we remain positive on 2H16,as the delivery of a total of 14new aircraft should boost overall growth.Moreover, we see a potential recovery in international yields.

We hosted an NDR for GoerTek. Investors are mostly interested inGoerTek's strategic focus and how GoerTek copes with the change. Reiterate OW: 1) VR continues strong momentum: After Sony officially confirmedPSVR launch date in mid-June, our checks with the supply chain suggest Sony isexpecting larger initial volume thanks to the PS4 installed base. Managementguided for strong VR momentum in 2016/2017. 2) Reaffirmed duopoly status inacoustic after the Taiwanese regulator rejected Merry's private placement dealfor Luxshare on June, 30: We note Luxshare has been aggressive in the acousticspace; the potential change in collaboration could hinder Luxshare's progress inacoustic and reaffirm AAC/GoerTek's duopoly. We also see potential upside inGoerTek's 2017 iPhone earpod assembly share allocation, where we previouslyexpected share loss to Luxshare. 3) Valuation is at 25x/18x 2016e/17e P/E. AverageP/E was over 30x when GoerTek delivered 35% earnings CAGR in 2012-14.Management addressing key investor questions: 1) Potential for VR Management guided industry-wide volume for high-end VR to reach 2mn in 2016and GoerTek to take a high percentage of share; in 2017 GoerTek should haveanother 80-100%YoY growth. Management believes it is hard to be replaced inODM side though in the OEM side there could be new competitors. 2) Hard toforecast assembly revenue, which doesn't seem to be stable and has been driven bydifferent products in past few years GoerTek has a product planning team basedin US that reviews the pipeline each quarter, led by CEO himself. GoerTekparticipate in idea generating process and hence there is no need for a OEM tocompletely replace a supplier once trust was built. 3) How to adjust to high SKU,low volume business model GoerTek continues investment in automation toensure quality consistency (2,000+ automation engineers). It is essential toapproach smaller clients on broad basis; once they grow big, there is limitedopportunity to penetrate for assembly, though GoerTek will need to manage therisk of payback and long-term growth potential. 4) Do these recent newinvestments generate sufficient return Mgmt expects the earnings momentum toresume soon after these new investments. (For details please see below.) Management shareholding change: Investors have asked us about the chairman'spersonal holding change back in June 2015, when the chairman appeared to sell1.94% of personal holdings at Rmb33.3. However, these personal holdings wereactually to support employee shareholdings and transferred directly into theemployee shareholding scheme (Home #1) with a block trade (Exhibit 1). Duringthe period of Sep-Dec 2015, senior management collectively increasedshareholdings by ~1.6%. There's no change in management holdings YTD.

As Chinese express firms rush to list in 2016, we expect a valuationboost to Sinoair, whose 50:50 JV with DHL has the largest marketshare in China's international express market. We see 27% upsidepotential to our revised PT of Rmb24.36. Listing of private express firms: After the announcement of the back-doorlisting of STO Express on the A-share market, YTO announced plans to listthrough a similar channel soon. Other major competitors including SF Expressand EMS could follow suit, according to WSJ and Sina Finance (Exhibit 3). Inour view, the potential wave of related IPOs should support the valuation ofSinoair shares, which have significant exposure to the international expressmarket through its DHL JV. Resilient earnings outlook: Given Sinoair's alert of a 50%-80% increase in2015 net profit, we see upside potential to our estimate of 59% earningsgrowth for the year. Moreover, as the oil price remains low, it is generallyoffsetting the potential negative impact from the macro weakness. Overall, bymaking more conservative assumptions, we lower our 2016-17e earningsestimates only slightly by 2.7% and 6.5%; they are in line with consensusestimates. Value emerges: Our previous EW rating on Sinoair was mainly due to ourconcerns with its rich valuation. As its share price has corrected over 24% andunderperformed the market by 6% in the past 6 months, we now see a moreattractive entry level as valuation of 15.8x 2016e P/E is only 7% above the peeraverage at 14.7x, while it enjoys a decent ROE of 15% for 2016-17e. Key risks: 1) failure or delays of IPO deals of some private express firms; 2)sustained macro weakness affects the core business; and 3) loss of marketshare led by greater market competition.

Why OW: Despite our earnings / PT cut led by lower traffic assumptions for2015-17e, we find valuation highly attractive at 9.4x 2016e P/E and 4.6xEV/EBITDA, below the historical means of 15.9x and 8.3x, and GSR-A's at 22.7x2016e P/E and 7.1x EV/EBITDA. More important, we estimate a 5.3% dividendyield for the stock makes it a highly defensive play amid the expectation of afurther rate cut in China. What's in the price: The stock is just 11% above our bear case fair valuepredicated on the assumption of a 15% decline in coal volume on Daqin linesand a 10% cut in coal tariffs. Although macro conditions remain weak in China,we believe such bear case assumptions appear unrealistic. Potential catalysts: 1) We expect a further rate cut by PBOC to support theshare price, which offers a decent dividend yield; 2) positive railway industryreform prompted by the new "13th Five Year Plan" for 2016-20; 3) cyclicalrecovery in demand or stabilization in volume weakness. Earnings adjustment: We are cutting 2015-17e earnings by 3%-28%, inreflection of weaker traffic volumes with a 5% decline in 2016 and 1% growthin 2017. We are even factoring in a conservative 5% decline in ASP in 2016amid a sluggish coal demand outlook. Although the earnings cut leads to a19% lower DCF-based PT at Rmb10.74, it still implies 47% upside potential. Key downside risks: As our assumptions are already conservative, we seelimited downside risk from this level. However, we think a further demandcollapse triggered by a macro hard landing in China would be a remote risk;moreover, a more severe traffic diversion from the new rail lines (mainly theZhangji / Zhunshuo lines) could add pressure on the share performance.

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.

Key market debates: To address various market concerns about the stock, weare introducing three debates: 1) Has the market priced in the competitionrisks from the new railway lines? (We think yes); 2) How significant are therisks from the UHV power lines under construction? (We think the risks areminor); and 3) Will there still be pricing upside after recent hikes? (We thinkyes). Theme play on railway reform: While this has been on the cards for a longtime, we remain confident that China will ultimately restructure the railwayindustry, which suffers from poor services, and low profitability and returns.We think potential SOE reforms would help improve management efficiencyand incentives, while an increase in securitization would imply M&Aopportunities for the three listed railway names. 1H15 preview: Despite an 8.5% YoY decline in coal throughput on the DaqinLine, we expect revenues to increase 4.6% YoY to Rmb27.6bn, thanks to thetariff hike implemented in Feb-15. Following the 5% YoY increase in profits in1Q15, we expect 2Q15 profit to remain flat YoY due to weaker trafficperformance. As result, we expect 1H15 profit to increase 3% YoY toRmb7,377m. Lower PT to Rmb13.33: We cut our DCF-based PT by 4%, based on 20%/17%cuts to 2015-16 earnings estimates led by 17%/16% lower traffic assumptions.We are also introducing 2017 net profit at Rmb16.8bn, implying a CAGR of 6%over 2014-17. Our estimates are 9%, 6% and 4% below consensus for 2015-17 as we are factoring in weaker-than-expected traffic performance in 1H15. Dividend remains attractive: The stock offers a 5.7% 2016 dividend yieldbased on the current price. This is attractive, especially given the prospect offurther rate cuts. While we are projecting a 50% dividend payout for 2015-17,we see significant upside led by sustainable abundant free cash flows (9.7%FCF yield) that add to the strong cash balance. Moreover, the stock is trading atonly 8.8x 2016 P/E and 5.0x EV/EBITDA, significantly below global peers'average levels of 15.4x and 8.3x. Key downside risks: 1) Market risk led by liquidity or shift in investorsentiment; 2) sustained macro weakness in domestic economy; and 3) otherexogenous events.