Recent rally increases the chance for CB conversion: Ping An issued Ashare convertible bonds on November 22, 2013 and the conversion periodcommenced from May 23, 2014 (six months after the initial issuance date).During the conversion period, if the closing price of the A shares in at least 15out of 30 consecutive trading days is equal to or higher than 130% of theprevailing conversion price (which has been adjusted to RMB41.2, followingdividend and H share issuance), Ping An has the right to redeem theoutstanding CB at the nominal value plus the interest accrued. This effectively means that Ping An has the option to call back the CB and forceinvestors to convert to equity when the return reaches above 30%. Ping An's shares have been trading above the threshold price (RMB53.6) forthe past 10 days, so the likelihood that the company will exercise its callbackoption is gradually increasing over the next couple of weeks. Limited fundamental impact: According to Ping An's announcement, at theend of September, the majority of the company's convertible bonds remainedoutstanding. If we assume that the issue is fully converted by year-end, thiswould increase Ping An's total outstanding shares by 7% (13% of A shares)and dilute EPS by ~7%. There is no further impact on the solvency ratio sincethe CB has been included as solvency capital from the end of 2013. We think this event could overhang Ping An's A shares in the shortterm but has no impact on the H shares.

Result details: Baosteel reported 1Q14 net income ofRmb1.5bn or Rmb0.09/share, down 5% YoY or 28%QoQ. The Rmb280mn exchange loss due to RMBdepreciation contributed to the decline. Excluding this aswell as asset write back and fair value gain results in 3%YoY growth in net income to Rmb0.10/share. Result details: Baosteel reported 1Q14 net income of Rmb1.5bn or Rmb0.09/share, down 5% YoY or 28% QoQ. The Rmb280mn exchange loss due to RMB depreciation contributed to the decline. Excluding this as well as asset write back and fair value gain results in 3% YoY growth in net income to Rmb0.10/share. Benefitting from SOE reform and Shanghai & HongKong “Through train”: The company announced itsequity incentive plan for top management has receivedapproval from SASAC. We believe this will be anincentive for management to continue to improvecompany’s profitability. The stock is also among a groupof A share stocks that will be able to trade on HKEX onthe new “Through train” program, which will fill the voidof HK listed steel stocks that are well managed andprofitable.

Upgrade to OW: We raise our earnings forecast toincorporate the contribution of the 18 injected units. Withhigher earnings estimates, a 15% sell-off since therestructuring (vs a 9% rise in the market) and anexpected 3%+dividend, we move to OW. This is anattractive business: as the world’s largest hydropowerplayer, CYP’s 2010 unit operating cost was only 42% ofthe average of hydropower and 10% of thermal playersin China. At 16x 2011E and 15x 2012E EPS vs. a peergroup average of 25x and 21x, respectively, valuationlooks attractive. Coming asset injection to ensure long-term growth:Yangtze’s parent, the Three Gorges Group, plans tobuild another four large hydropower stations along theJinsha River, with total capacity twice that of Yangtze’send-2010 installed capacity of 21 GW. Of these, theXiangjiaba and Xiluodu stations have begunconstruction and are due to be completed by 2015. Theparent company has promised to inject these assets,which would ensure Yangtze’s long-term potential. Tariff with upside potential: CYP’s tariff isbenchmarked to the average provincial on-grid tariff,which increased by 5.2% CAGR from 2006-09 withoutany corresponding tariff hike for TG units. As coal priceincreases lead to a rising tariff benchmark, we seegreater scope for CYP to ask for a rise in its tariff. What is new: CYP’s 2010 & 1Q11 results were robust,with net profit of Rmb8.2bn in 2010 and Rmb648mn in1Q11, up by 78% and 445% YoY. The managementsbought ~203k shares in March, reflecting theirconfidence in the name. We expect the potential assetinjection, tariff hike and successful penetration into newbusinesses to serve as share price catalysts.

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.