Will acquire 25% stake in Aebell to enter video surveillance business On Feb 21, GRG announced plans to acquire a 25% stake in Aebell, a New ThirdBoard-listed video surveillance technology vendor, for Rmb48m. Aebell reportedRmb156m of revenue and Rmb11m of earnings in 2015. GRG states that theinvestment will enhance its position in the security industry. GRG already has a largearmed escort business, and we believe adding video surveillance fits its long-termstrategy. Wins equipment contract from ICBC for the first time On Feb 18, GRG announced winning two cash sorter bids from ICBC. The officialcontract will be signed later. This is the first time GRG has won any equipment contractfrom ICBC; it has already built partnerships with almost all other large-scale commercialbanks in China. The value of the cash sorter contracts has not yet been disclosed, butwe view it as a positive sign that demonstrates GRG's market leadership. Hardware and IT service businesses developing neck and neck The two positive announcements underscore our point that GRG's two business lines,financial equipment (mainly ATMs) and IT service, both have good growth potential. Although ATM market growth has decelerated, GRG continues to gain market share. Meanwhile, it is actively expanding into software and IT service sector through strategicinvestment and acquisitions. Valuation: maintain Buy, PT Rmb18.00 The stock trades at 16.5x/14.1x 2017E/2018E P/E, significant discounts compared tothe A-share IT peer group average. We believe the market has underestimated thecompany's growth perspective in the long run. Our price target of Rmb18.00 is derivedfrom DCF assuming WACC of 8.1% and implies 22.6x 2017E P/E. Maintain Buy.

First-ever share incentive plan: 17m restricted shares at Rmb13.47. Aisino announced its first-ever employee share incentive plan draft on 10 Nov: 17m ofrestricted shares, or ~0.9% of the company's current share base, will be issued atRmb13.47, 40% lower than the last close. This discount is in line with similar programsin listed SOEs. All shares are subject to a lock-up period of two years and will beunlocked in batches in the following three years. Share incentive plan implies ~16% revenue CAGR for 2016-19 In order to unlock all restricted shares, Aisino must deliver a 20% revenue CAGR in2016-19, based on average revenue of 2013-15. That translates into a ~16% revenueCAGR if 2015 is used as the basis year. As of now, we expect Aisino to deliver ~12%revenue growth for 2016-19. The plan also set up requirements on ROE and EVA butwe believe they are relatively easy to meet. The question is: Who is the "peer group" of enterprises? Aisino's share incentive plan requires the company's revenue growth and ROE level tobe no worse than at least 75% of "peer group" enterprises. If "peer group" meanslisted software peers or IT industry SOE peers, it seems like an ambitious target. However, the plan draft did not provide any details on the identity of "peer group"enterprises and we will wait for further disclosure. Valuation: Maintain Buy, PT of Rmb29.00 Aisino is trading at 21x/17x 2016E/2017E P/E, much lower than the A-share softwaresector average. However, we believe Aisino's growth momentum is in line with the Asharepeer average. The revenue target set in the share incentive plan is better than ourestimate but we need to wait for more details. Our price target of Rmb29.00 is derivedfrom DCF (7.1% WACC) and implies 22x 2017E P/E. We maintain our Buy rating.

Lower our 2016-18 earnings estimates on fiercer competition in ATM market. In Q1-Q316, GRG Banking Equipment's (GRG) revenue grew ~23% YoY, slightly belowour previous estimate of 25-28%. Management said China's ATM market growth hasdecelerated, and there is pressure from price competition. A major competitor,Cashway, is planning an A-share IPO, which may put new pressure on GRG's marketshare. Considering all these negative factors, we lower our 2016/2017/2018 EPSestimates by 9%/8%/9%. Q1-Q316 results not bad if tax impact is excluded. GRG's Q1-Q316 earnings only grew 6% YoY, but we think investors should not panic. It was mainly due to a YoY drop in the value-added tax (VAT) rebate and a rise in thecorporate tax rate. We expect such impact from taxes to be short-lived and corrected inend by 2017. Meanwhile, the company's Q1-Q3 operating profit rose ~20% YoY. Despite market headwinds, we still believe GRG can deliver a ~24% earnings CAGR in2016-18. Strategic cooperation with DCH could begin in 2017. During Digital China Holdings' (DCH) special shareholders' meeting on 25 October,GRG voted "Yes" to equity issuances for DCH's management and core employees. GRG said that after communication with DCH management, it believes such a planwould be positive for DCH's long-term growth. We think this may symbolise thebeginning of strategic cooperation with DCH and GRG. DCH's strength in bankingindustry IT solutions will be crucial for GRG's sustainable growth, and we expectsynergy in 2017 and beyond. Valuation: maintain Buy; lower price target from Rmb23.75 to Rmb21.40. Trading at 22x/16.9x 2016E/2017E PE, GRG's valuation is much lower than the A-sharepeer average. The stock has fallen ~27% YTD, in line with the A-share IT index. Webelieve the market is overly concerned about short-term industry headwinds. We baseour price target on DCF, assuming a WACC of 8.1%. We maintain a Buy rating.

Disappointing Q316 results, partially due to tax impact. Aisino's revenue increased 14% but net profit declined 23% in 9M16, partially due to a62% YoY decline of non-operating income (mainly VAT refunds), while the businessincome tax rate increased to 21.2% from 16.7% in 9M15, quite common among listedsoftware companies. The reason may have been because the tax regulator has beenbusy pushing for tax reform while overlooking implementation of certain preferentialtax policies. Since there have been no changes in the preferential tax policiesthemselves, we believe this situation could improve by end-2016. Excluding thesefactors, Aisino's 9M16 net profit would have remained flat YoY. Tax reform at a critical stage, with lots of work possibly delayed to 2017. This is a critical year for "business to value-added" tax reform and the State Councilrequested the completion of it by end-2016. However, this target will be difficult toachieve due to the many enterprises involved. As the largest VAT anti-fraud systemdeveloper in China, Aisino has been affected and the company is benefitting from taxreform slower than expected. However, we believe business growth driven by taxreform simply has been partially postponed to 2017, while its market position and longtermgrowth potential have not been affected. Strong software and system integration growth; acquisitions to be completed. Aisino's software and system integration revenue increased 55% YoY in H116 – weestimate Q316 revenue growth was also mainly driven by software and systemintegration. The company's acquisitions of Sinobest and Aerospace Golden Shield wereapproved by the CSRC on 19 Sept. If the acquisitions are completed in Q416, Aisino'ssoftware and system integration business will be significantly strengthened, which willensure its sustained growth despite tax reform progress uncertainties. Valuation: Maintain Buy rating and PT of Rmb29.00. Aisino is trading at 20.3x/16.7x 2016E/17E PE, significantly lower than the industryaverage and lower than its historical valuation. Our price target of Rmb29.00 is basedon DCF, assuming WACC of 7.1%, and implies 22.7x 2017E PE.

DCH management made public its position on GRG's investment in the firm At its interim results briefing on 31 August, DCH (Digital China Holdings, 0861.HK)chairman Guo Wei said that the company is actively communicating with GRG, withthe management from the two companies meeting frequently. He added that thecooperation between both companies has been developing positively and he hasconfidence in the future. This is the first time DCH's management has made public itsposition on GRG's investment in the company, which is consistent with GRG's positiondisclosed in previous announcements: GRG is not carrying out a hostile takeover;rather, it has stated that it wants to collaborate with DCH to create synergies. Parties disagree on approaches to employee incentives/new businesses Mr. Guo said that GRG's investment in the company has to some extent disrupted itsplans, as it has been exploring bringing in strategic investors, introducing employeeincentives, and adjusting its corporate culture. Currently, the main differences betweenthe two parties lie in their approaches to employee equity incentives and nurturing newbusinesses (including smart cities and financial services). DCH wants to improveemployee efficiency by reducing basic salaries and increasing equity incentives, and it isactively exploring concrete solutions with GRG. Cooperation between GRG and DCH has promising outlook DCH's long-term plan is to make its software and information services business bigger,stronger and more hi-tech in order to take advantage of the opportunities arising fromthe shift towards made-in-China software, which is consistent with GRG's long-termstrategy. In our view, if the two parties achieve substantive cooperation, GRG will beable to capitalise on DCH's strong R&D capabilities to build its own software andinformation services business. GRG's experience and relationships with clients in thebanking sector could also help DCH develop in the field of financial software. Valuation: Maintain Buy rating, PT of Rmb23.75 We believe DCH's message is a positive one. The cooperation, if successful, should helpGRG's long-term development. GRG is trading on 20x/16x 2016E/17E PE, far below theA-share IT industry's average, which we think may be because investors have yet toconsider the synergies that could be produced between GRG and DCH. Our price targetof Rmb23.75 is based on a 3-stage DCF model (8.1% WACC) and implies 25x 2017EPE. We maintain our Buy rating.

1H16 revenue grew 23% YoY, operating profit grew 22% YoY. GRG announced 1H16 results. Revenue and earnings grew 23% and 3% YoY,respectively. Although the earnings growth looks weak, this was mainly because of adrop in non-operating income, which mainly includes VAT (value-added tax) rebates. We believe the tax bureaus deferred payment of these rebates in 1H16. Operatingprofit grew by 22% YoY, in line with revenue growth. Services and accessories are the new growth engines. In 1H16, GRG's ATM equipment revenue grew only 5% YoY; meanwhile, its ATMservice and accessories revenue grew 52% and 83% YoY, respectively. Servicesaccounted for 27% of revenue in 1H16, up from 22% in 1H15. We like the company'seffort to shift its focus from equipment to services. Revenue from ATM services andaccessories is mostly recurring and stable, in our view. GRG seeking "industry cooperation and co-development" with DCH. GRG held a 19.05% stake in DCH (Digital China Holdings) as of 15 August. Thecompany indicated that it invested in DCH for "industry cooperation and codevelopment";it is optimistic about DCH's growth potential and will actively seek tobuild synergies between the two parties. However, it has provided no more details. Valuation: Maintain Buy rating, PT of Rmb23.75. Although 1H16 earnings growth of 3% seems low, the company's operating profitmaintained robust growth. We believe the VAT rebates will be paid in full in 2H16. Trading at 20x/16x 2016/17E PE, the stock looks cheap given its long-term growthpotential. Our price target of Rmb23.75 is based on DCF with WACC of 8.1% andimplies 25x 2017E PE. We maintain our Buy rating.

Cash sorter contract from CCB is a positive sign for the future. GRG announced that it has won the bidding for CCB's cash sorter contract for 2016-17. The contract value was not disclosed, but we estimate it could exceed Rmb100mbased on past contracts. This is the third cash sorter contract GRG has won this year,after one from Mingsheng Bank and one from BoCOMM. Due to the issuance of newRMB notes in 4Q15, many banks deferred cash sorter procurement. We see the CCBcontract as a positive sign and believe GRG will win more such contracts in 2H16. Guangdong SOE reform will possibly bring new opportunities. On Aug 8, Guangdong State-owned Asset Supervision and Administration Commission(SASAC) told Economic Information Daily that Guangdong will promote SOE reform byencouraging mixed ownership, improving R&D and restructuring. We believe this ispositive for GRG, a Guangdong SOE. After introducing an employee shareholdingprogram last year, GRG is actively exploring further reforms. Increased stake in Digital China Holdings. On Aug 6, GRG announced that at Jul 29, it owned an 18.33% stake in Digital ChinaHoldings (DCH, 0861.HK), up from 17.29% at Jul 27. In other words, GRG increased itsDCH stake by 1.04% in two trading days. This indicates GRG's determination to investin DCH and create synergy between the two parties, in our view. However, it isuncertain if any synergy can be created as GRG has not yet gained control of DCH. Maintain Buy, PT Rmb23.75. The stock is trading at 20x/16x 2016E/2017E P/E, much lower than A-share technologyhardware and software peers' average. We believe the market has underestimatedGRG's long-term growth potential. Our price target of Rmb23.75 is based on a DCFmodel and implies 24.7x 2017E P/E. Maintain Buy rating.

GRG holds 17.29% of DCH stake; already the largest shareholder On Aug 3, GRG announced that it had increased stake in DCH (Digital China Holdings,0861.HK) to 17.29%. The company has been DCH's largest shareholder since Mar2016. We estimate that GRG has enough cash reserve to buy another 5-10% of DCH'sstake. GRG defines itself as a friendly investor. It believes that synergy can be createdbetween DCH's financial software business and GRG's hardware business. Will GRG gain control on DCH's strategy and operations In Jun 2016, GRG announced that as the largest shareholder, it cannot control theoperations of DCH. In the annual shareholder meeting held that month, two nonexecutivedirectors of DCH resigned and the vacancies have not been filled so far. Wewill continue to watch the board vacancy filling progress. Rmb216m investment in environment technology business GRG announced on Aug 2 that it would invest up to Rmb216m to GRG Metrology, theenvironment technology subsidiary of its parent company Guangzhou Radio Group.GRG Metrology will list separately on the New Third Board. Although environmenttechnology is not related to GRG's core business, it has big growth potential and maybe a good financial investment target, in our view. Maintain Buy, PT Rmb23.75 Trading at 20x/16x 2016E/2017E P/E, GRG's valuation is significantly lower than themean level of A-share software and hardware companies. Our 2016-18E EPS are muchhigher than market consensus. Our price target of Rmb23.75 is derived from DCFmodel (WACC=8.1%) and implies 24.7x 2017E P/E. Maintain Buy rating.