China Tech

September 25, 2015

China: Technology: Software

Equity Research

Local leaders in fast-growing niches set to flourish; initiate on Aisino (CL-Buy), Yonyou (Sell)

A small, but fast growing market

China’s software / IT services industry is small in a

global context at US$25 bn - only 5% of the US. It is

also low relative to GDP at 0.3% (vs 3% in the US)

and makes up only 7% of China’s overall IT spend,

vs a global average of 34%. We see two reasons for

this under-penetration: a bias to Manufacturing in

the economy; and low pricing. We expect the gaps

to narrow, however, as Services raises its share of

GDP and as China firms look to harvest efficiencies

to compete globally. Gartner forecasts 10% CAGR

in China software / IT services over 2014-19 (vs 3%

globally), with spending reaching US$41bn in 2019.

Identifying home-grown winners

The public sector makes up 50% of spending, but

private firms are starting to value the benefits of

developing IT systems. Provision of service is very

fragmented, but foreign firms dominate: the top 30

software vendors take 65% market share, with local

firms only 13%. With fierce competition, we prefer

leaders in fast-growing niches with high barriers

to entry — those with a broad customer base and

needing localized knowledge. Our framework flags

eight sectors where local firms should flourish.

Stock picks in focus

We initiate on Aisino at CL-Buy for its monopoly

in tax control, which we estimate to grow at 25%

CAGR over 2014-20, driven by a broadening of

VAT. It trades at a coverage low of 21x 2016 PE.

We upgrade iFLYTEK to Buy for its 58% share in

Chinese language intelligent speech recognition,

which we think will grow fastest at 37% CAGR.

We initiate on Yonyou at Sell, as we think that

trading at 57x 2016E P/E it is overvalued, given it

operates in the slower-growth ERP segment (15%

CAGR) and its newer businesses are still nascent.

We initiate with Neutral on Shiji and Hundsun,

both of which take c. 50% in restaurants & hotels

(15% CAGR) and financial securities (20% CAGR),

respectively. Both are trading at fuller valuations.

We stay Neutral on mapping & navigation leader

Navinfo, with its 40% segment market share.

We downgrade Ultrapower to Neutral on sluggish

growth in its core IT service business and limited

contribution from its mobile game business in the

near term.

RATING AND TARGET PRICE SUMMARY

*on Conviction List. Given the comparative

underdevelopment of the China software and IT services

sector, we base our 12-month target prices on 2020 EPS,

then discount back to 2016.

Source: Datastream, Gao Hua Securities Research.

SOFTWARE + IT SERVICES SPEND/GDP, 2014

Source: CEIC, Gartner.

Carol Jin +86(10)6627-3467 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies

covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

New OldAisino 600271.SS Buy* n.a. 78.60 55%

iFLYTEK 002230.SZ Buy Neutral 38.60 37%

Shiji 002153.SZ Neutral n.a. 96.30 9%

Hundsun 600570.SS Neutral n.a. 47.90 5%

Ultrapower 300002.SZ Neutral Buy 10.00 -9%

NavInfo 002405.SZ Neutral Neutral 21.70 -15%

Yonyou 600588.SS Sell n.a. 14.10 -45%

Company TickerUpside

DownsideTP (Rmb)

Rating

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00% Software+IT services spending/GDP

September 25, 2015 China: Technology: Software

Goldman Sachs Global Investment Research 2

Contents

China software/IT services industry in six charts 3

How we identify potential local winners: Overview of segments and key participants 4

China underspends on software and IT services – ripe for growth 6

Change is on the way, leading to a fast-growing software/IT market 11

Identifying local leaders — you’ll find them in niche and high-growth markets 20

Valuation: Long-term discounted P/E: We favor leaders in faster growing subsectors 23

Industry Risks 31

Company profiles 31

Aisino (600271.SS): Tax control system leader to benefit from VAT reform; initiate CL-Buy 32

iFLYTek (002230.SZ): Upgrade to Buy; clear leader in China intelligent speech 34

Yonyou (600588.SS): A challenge to gain share in ERP market; new business unclear; Sell 38

Ultrapower (300002.SZ): ITSM slowdown, and no near-term catalysts; down to Neutral 42

Shiji (002153.SZ): Leader in high-end hotel & restaurant systems, stable growth: Neutral 46

Hundsun (600570.SS): financial software leader forays into cloud-based solution; Neutral 52

NavInfo (002405.SZ): Telematics to fuel growth; Neutral on fair valuation 58

Disclosure Appendix 62

Priced as of the September 22, 2015 market close unless indicated otherwise. The author would like to thank Jason Xu for his contribution to this report.

Exhibit 1: Our Buy ideas in China software / IT services are Aisino (on Conviction List) and iFLYTek

Our A-share technology coverage comp sheet, Rmb

*Denotes stock is on our regional Conviction List.


15E 16E 17E 15E 16E 17E 15E 16E 17EA‐share stocksAisino 600271.SS Buy* 7,340 78.6 50.68 55% 27.8 21.4 16.4 6.2 5.4 4.7 1.8% 2.4% 3.1%Hikvision 002415.SZ Buy* 20,965 51.0 32.85 55% 19.7 14.9 12.2 6.9 5.3 4.1 1.8% 2.3% 2.9%Joyson 600699.SS Neutral 2,478 34.3 24.84 38% 30.4 24.4 18.7 5.6 4.7 3.9 0.7% 0.8% 1.1%iFLYTek 002230.SZ Buy 5,657 38.6 28.10 37% 61.8 41.4 27.8 5.8 5.3 4.7 0.5% 0.8% 1.2%Dahua 002236.SZ Neutral 6,092 43.6 33.19 31% 28.9 21.9 17.2 6.1 4.9 4.0 0.5% 0.7% 0.9%Shiji 002153.SZ Neutral 4,290 96.3 88.49 9% 65.1 43.9 30.8 12.1 9.9 7.9 0.2% 0.5% 0.7%Hundsun 600570.SS Neutral 4,432 47.9 45.74 5% 82.1 65.6 37.6 13.2 11.6 9.6 0.4% 0.5% 0.9%Ultrapower 300002.SZ Neutral 3,420 10.0 10.96 ‐9% 25.2 29.8 24.4 4.0 3.6 3.3 1.0% 0.9% 1.0%NavInfo 002405.SZ Neutral 2,779 21.7 25.62 ‐15% 104.9 75.1 52.6 6.9 6.5 5.9 0.3% 0.4% 0.6%Yonyou 600588.SS Sell 5,895 14.1 25.76 ‐45% 71.2 57.2 48.3 6.4 6.1 5.7 0.7% 0.9% 1.0%

Average 51.7 39.6 28.6 7.3 6.3 5.4 0.8% 1.0% 1.3%Median 46.1 35.6 26.1 6.3 5.4 4.7 0.6% 0.8% 1.0%

Dividend yield12‐m TP

Currentprice

Upside/downside

P/E (X) P/B (X)Company name Ticker Rating

Market cap($ mn)



China software/IT services industry in six charts

Exhibit 2: China software/IT services spending is lower than DMs in $ term…

Software/IT services spending by region – US$, 2014

Exhibit 3: …and in terms of penetration

Software/IT services spending penetration, 2014

Source: Gartner.

Source: Gartner, CEIC.

Exhibit 4: One reason is the smaller share of Services in the economy…

US, India and China GDP decomposition

Exhibit 5: …and another reason is low product pricing due to low IT wages

Yearly wage comparison, 2014

Source: CEIC, Wind.

Source: CEIC, National Bureau of Statistics of China, Bureau of Labor Statistics

‐

200,000

400,000

600,000

800,000

1,000,000

1,200,000

China India Japan WesternEurope

US

(USD mn) Software IT services

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%


0%10%20%30%40%50%60%70%80%90%100%

US India China US India China

Agriculture Industry Services

2000 2014

010,00020,00030,00040,00050,00060,00070,00080,00090,000

Allindustry

IT Allindustry

IT Allindustry

IT

China Japan US

(USD)

US: 5X of China



Exhibit 6: China software+IT services is smaller than other IT segments but is

growing fastest China IT spending, 2019 vs 2014

Exhibit 7: China software market is crowded and dominated by global giants

Market share for Top 30 software vendors in China, 2014

Source: Gartner.

Source: Gartner.

How we identify potential local winners: Overview of segments and key participants

Despite many challenges and intense competition in the sector, we see opportunities in some niches with higher entry barriers and

stronger growth. We identify eight verticals that meet our two key selection criteria:

(a) Stronger growth than the overall software/IT system in the next five years.

(b) Highly local characteristics and a fragmented customer bases that set higher barriers to entry for global firms and new

entrants. These segments have a higher concentration of top 3 players, which imply a higher entry barrier for small firms.

Within these eight subsectors, we find tax control, mapping & navigation, intelligent speech, financial - securities, and restaurants &

hotels have higher market concentration than the other three. We initiate coverage on: Aisino with CL-Buy for its solid growth in

tax control system and attractive valuation, and Neutral on Hundsun and Shiji Info on their fuller valuation. We initiate on Yonyou

with Sell on its demanding valuation and low visibility in its new business. We upgrade iFLYTek to Buy from Neutral on the rapid

ramp up in the intelligent speech market and downgrade Ultrapower to Neutral from Buy on slowdown in its core ITSM segment

and its lack of long-term growth driver.

Microsoft, 19.9%

IBM, 8.9%

Oracle, 6.1%

Yonyou, 4.0%

SAP, 3.6%

Founder, 3.0%

EMC, 2.2%Inspur

Genersoft, 1.9%

Kingdee, 1.6%

Neusoft, 1.4%Kingsoft , 1.1%

Other oversea vendors, 13.8%

Domestic



Exhibit 8: Our framework for identifying niche leaders

Note: Total market size and growth for ERP in SME, restaurants & hotels, tax control, mapping & navigation, the growth for healthcare and financials are all GS forecasts; market size

for healthcare and financials, plus market size and growth for security software are from Gartner; market size and growth for intelligent speech are from ETIRI. Ultrapower does not

operate in a niche market. ERP stands for Enterprise resource planning; BYOD stands from bring-your-own-device. Gross margin (GM) and operating margin (OPM) range represents

the business-as-usual margin range of top players during the past three years.

Source: Company data, Gartner, ETIRI, Gao Hua Securities Research.

Vertical sector Market size Market growth GM OPM Top 3 players Market share Global peersHighly local Fragment High growth 2014 ($ mn) (2014‐20E CAGR) (%) (%) in China in China (2014)

Yonyou 11%Kingdee 8%Grasp c. 5%NeuSoft 9%Wonders 7%Winning 5%Venustech 27%NsFocus 16%VRV 6%Aisino 90%

Beijing Watertek 4%Hengbao 4%NavInfo 41%AutoNavi 35%eMapgo 22%iFLYTEK 58%Baidu 13%Apple 12%

Hundsun 51%Kingdom Sci‐tech 34%

Apexsoft 8%Shiji Info 49%

Joint Winsdon 5%Armitage 5%

Banking 4,342 13.4% 70‐80% 5‐10% SinoData c.1% Fiserv, FIS, EXLSManufacturing 5,606 10.3% 50‐70% 0‐10% Baosight 4% Oracle, SAP

Utility 1,647 10.9% 30‐50% 15‐25% YGSoft 3% Oracle, SAPOthers 7,542 0.6% Oracle, SAPTotal 25,148 10%

Symantec, Intel (McAfee), IBM

McKessen, Cerner, Siemens, Epic, Allscript,

Express Scripts,

N.A.

Oracle, SAP, Intuit, Salesforce

Google, Nokia, TomTom, Coherent Navigation

5‐10%65‐80%22.0%

20.0% 80‐90% 10‐20% Fiserv, FIS, EXLS

Nuance

Healthcare HIS, CIS, EMR, PBM, chronic disease

treatment 1,150

565 IoT, telematics, O2O

Security software

Mapping & navigation

Financials ‐ securities Fintech 356

37.0% 50‐60% 0‐20%Intelligent speech IoT, telematics 494

60‐85% 6‐15%

E‐invoice and credit investigation

581 25.0% 40‐46% 10‐13%

624 Advanced Persistent

Threats, BYOD

15.0% 70‐75% 20‐30%

10‐25%70‐80%10.0%

Opportunity exposure

Restaurants & hotels Internet O2O requires

more IT system 323 15.0% 70% 34% Oracle, Sabre, Amadeus

Tax control

ERP for SME Credit investigation, cloud computing

2,242 15.0%



China underspends on software and IT services – ripe for growth

While China has a lively smartphone and e-commerce market, it spends less on software and IT services as a share of GDP than

many other large regional and global markets, including India. We attribute this to its economy being more oriented to

manufacturing (labor intensive) and to its lower software/IT services pricing.

However, as China’s economic model develops to being more services oriented and with pricing rising, Gartner expects China

software/IT services spending to grow at 10% CAGR in 2014-2019, indicating growth from US$25bn in 2014 to US$41bn in 2019.

China software and IT spending — small in real terms and as a share of GDP and overall IT spend

Gartner estimates that US$25 billion was spent on software (US$8bn) and IT services (US$17bn) in China in 2014 — making up only

2% of global spending and equivalent to 5% of US spending. This is considerably less proportionally than its share of GDP — 14% of

Global GDP and equivalent to 58% of US GDP (Exhibits 9 & 11). This US$25 billion on software/IT services made up only 7% of

China’s total overall IT spending, compared with 34% worldwide, 47% for the US, 42% for Japan, and 22% for India (Exhibit 10).

A useful way to illustrate the variance between countries is to assess spending as a share of GDP — as it removes the impact from

pricing differences. China software/IT services spending as a share of GDP, at 0.3%, is a third of that in India, and around a tenth of

that in the US. Although India is renowned for its IT outsourcing — which may have some positive impact on domestic software/IT

services spending for infrastructure construction — we do not think it makes up the entire differential in spending between India and

China as outsourcing is growing in China and the rapidly growing e-commerce sector requires growing IT infrastructure. We also

note that the ratio in Thailand is also three times that of China. On this basis, we believe China is underpenetrated in software/IT

services, and that the sector is ripe for growth as the economy transitions to a greater contribution from Services.

Two main reasons for the current under-penetration

We see China’ relative under-penetration in software/IT services stemming from two causes – representing 60% and 40%,

respectively, of the gap with the US:

Weaker overall demand due to the structure of its economic model – with a greater weighting towards Manufacturing

than Services.

Lower product pricing for software/IT services in China, which is often a function of China’s relatively low wages for

software technicians.



Exhibit 9: China software/IT services spending is considerably smaller in

absolute terms than US and Europe... Software/IT services spending by region – US$, 2014

Exhibit 10: ... and in relative terms as a share of total IT spending

IT spending by types/countries, 2014

Source: Gartner.

Source: Gartner.

Exhibit 11: China software+IT services account for only 3% of global total…

Software/IT services spending market share by regions, 2014

Exhibit 12: …and is a much smaller percentage as a share of GDP

Software/IT services spending penetration, 2014

Source: Gartner

Source: Gartner, CEIC.

‐

200,000

400,000

600,000

800,000

1,000,000

1,200,000

China India Japan WesternEurope

US

(USD mn) Software IT services

0%10%20%30%40%50%60%70%80%90%100%

Telecomservices

DatacentersystemsDevices

IT services

Software

North America43%

Western Europe29%

Greater China3%

Mature Asia/Pacific

5%

Emerging Asia/Pacific

2% Japan10%

Others8%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%




Weaker demand due to low services contribution to GDP and lower labor cost

We believe this weaker demand in China relative to other economies is due to two main reasons:

Services make up a smaller proportion of GDP. Although the contribution of services to China’s GDP has risen to 48% in

2014 from 40% in 2000, China still lags the US and India in this regard in 2014 — with a proportion of 53% in India and 76%

in the US (Exhibit 13). The service sector places natural emphasis on IT systems to improve productivity and efficiency,

whereas in manufacturing industries competitiveness can be achieved by cutting costs in raw material, labor, natural

resources, energy, etc — which have been the platform on which China has developed its economy over the past few

decades. Taking labor cost as an example, the fully loaded hourly rate in China was much lower than developed countries

and regions, and also lower than Taiwan (Exhibit 14). There is upward pressure emerging on wages, however, and China is

not as low cost for labor as many countries in Southeast Asia.

Many Chinese enterprises have not made it a focus to develop longer-term strategies. Over the past two decades, the

industrial sector in China has benefiting from multiple advantages — such as favorable government policies, lower labor

cost, cheaper energy and raw material cost, and limited focus on environmental protection — which have allowed it to

compete with more developed countries and regions. This provided multiple opportunities and led to many growing rapidly,

without the impetus to develop long-term strategies to compete with global players. This meant that little attention has yet

been paid to enhancing productivity and building out IT systems.

Exhibit 13: Although the services segment is growing, industry still

contributes more to GDP than in India or the US… GDP decomposition of US, India and China, 2010 and 2014

Exhibit 14: …while low labor cost have suppressed the motivation to

improve efficiency and productivity via better IT Labor cost of countries/regions, 2014

Source: CEIC, Wind.

Source: CEIC, BEA.

0%10%20%30%40%50%60%70%80%90%

100%

US India China US India China

Agriculture Industry Services

2000 2014

05

101520253035404550

Fully lo

aded

hou

rly ra

te (U

SD)



Lower pricing for software/IT service products

China’s lower labor cost is also a key reason behind the smaller market size for software/IT service — lower pricing. Engineers’

salaries make up the main cost for providing software and IT services and therefore make up the lion’s share of product prices —

this is especially so for IT services, which are normally charged by engineer’s hours spent on the project. Although IT average

wages are higher than the all-industry average wage, China still has a significantly lower IT average-wage than Japan and the US.

We believe this lower relative cost for labor lead to lower charges for headcount-based consulting and outsourcing services (Exhibit

15). For example, we estimate that Yonyou charges 68% less than Accenture for IT services (Exhibit 16). We acknowledge that the

branding may also contribute to the pricing differential, but consider this to be a small portion.

It is similar for software products. Although it is more difficult to compare software products between companies given different

functions, our analysis indicates Chinese software products are normally priced at a significant discount to global peers’. Comparing

ERP products with similar functionality and user ranges, we find that Yonyou and Kingdee, two leading Chinese ERP vendors, price

their products below US$1000 per set, whereas products from global peers are above US$2600.

Exhibit 15: China’s IT professional wage is only a fifth of that in the US,

meaning lower charges for man-hour based IT consulting/outsourcing

services Yearly wage comparison, 2014

Exhibit 16: Yonyou charges 68% less than Accenture for IT services

IT consulting man-hour charge comparison, 2014

Source: CEIC, National Bureau of Statistics of China, Bureau of Labor Statistics.

Source: Company data, Goldman Sachs Global Investment Research, Gao Hua Securities Research

010,00020,00030,00040,00050,00060,00070,00080,00090,000

Allindustry

IT Allindustry

IT Allindustry

IT

China Japan US

(USD)

US: 5X of China

‐

20

40

60

80

100

120

140

160

Accenture Yongyou

(USD per man hour)



Exhibit 17: ERP software products from Chinese companies have lower prices than those offered by global firms ERP product pricing as of 2014

Source: Top10ERP, Company data.

Company Product User range PriceYonyou T3 50‐300 $600‐800Kingdee KIS 50‐300 $500‐700Sage Sage ERP X3 20‐1000+ $2600/userInfor Infor VISUAL 5‐500 $12k‐$100kSAP Business One 25‐1000 $25k‐$250kOracle E‐Business Suite 25‐1000+ $12k‐$350kMicrosoft Dynamics GP 25‐500 $10k‐$100kGlobal Shop Solutions Global Shop Solutions 3‐300 $5k‐$500kRootstock Rootstock 10‐400 $150/user/moSAP SAP Business ByDesign 10 to unlimited $150/user/mo



Change is on the way, leading to a fast-growing software/IT market

However, we see a confluence of two trends spurring growth in the China software/IT sector in the next decade:

The technology itself has developed sufficiently to enable more flexible business models to provide products and services

to a variety of clients across many sectors; and

With changes in the economy and with China moving up the value curve, Chinese enterprises are now looking to compete

in global markets.

Software/IT services to grow faster than other IT spending

According to Gartner, global software/IT service industry growth (5%/3% 2014-19E CAGR respectively) should outpace hardware

(slightly decrease) in 2014-2019. Gartner expects China software/IT services spending to grow at c. 10% CAGR in 2014-2019, flat for

devices, 5% for data center systems and 6% for telecom services (Exhibit 18 and 19).

We believe the relatively fast growth in China software/IT service spending is mainly due to three main reasons:

Requirement to improve productivity

As China’s economy develops, the service sector will continue to grow and contribute a greater share of GDP. We expect this to

drive greater demand for software/IT service in order to improve productivity. Moreover, although higher wages have put pressure

on all sectors in China, wages in the service sector have risen more rapidly than in other sectors. Since 1999, China the average

urban wage for service sector has increased at 8-25% yoy (except 2014). However, service sector wages per unit of output have

remained flat or increased slightly via improvements in productivity (Exhibit 20). Going forward, our economists note that labor’s

contribution to GDP is diminishing (Exhibit 21), which will encourage stakeholders to seek improvement in productivity to grow the

economy and to offset the impact from increasing urban wages.

Even for industrial sector, there is significant upside potential for productivity improvement via software/IT system to better allocate

resources and manage business operation. Alongside labor rising costs, Chinese manufacturers are also facing new pressures to

comply with environment protection regulation, more generous labor benefit systems, and less favorable taxation. According to a

2012 survey conducted by the Pew Research Center, the Chinese people are increasingly aware of environmental and health issues.

They now hope for and expect a better lifestyle (Exhibit 22). With over 90% of people surveyed by Pew evaluating themselves as

having a better standard of living than their parents had at a similar age, we think many Chinese people believe the country can now

afford to improve working and environmental conditions.

With more people becoming concerned about the welfare of society and the environment, China’s leaders appear to be responding.

President Xi Jinping has set out the ‘Chinese dream’ — to build a prosperous society and realize national rejuvenation. Since the

start of 2013, the government has also paid increasing attention to food safety, environmental protection and being more judicious

in conserving resource.



Cloud computing is changing the rules of the game

China is catching up with global new technology trends, such as cloud computing, which is broadening the potential client base and

changing the business models. Cloud computing has been available in the US for 6-7 years, and server visualization and software as

a service (SaaS) have been adopted widely. However, we believe China is still at an early stage of cloud computing. Gartner projects

that China’s public cloud services end-user spending to grow at 20% over 2014-2019 CAGR, vs. 16% for the US (Exhibit 23). We see

the growth in cloud computing bringing two key changes to the industry:

Pricing and payment for software/services. Cloud computing and storage solutions allow users and enterprises to store

and process their data at third-party centers. For those enterprises, data management costs have become an operating

expenditure rather than a capital expenditure, and they now pay monthly subscription fee. Cloud computing / storage

reduces the cost of installment and allows enterprises (especially smaller ones) to try out software and services at much

lower upfront cost. We believe this will lower the entry barrier for many enterprises to adopt new software and services —

motivating demand. The monthly payment method also changes software/service vendors’ business models, with recurring

revenue rather than one-off license fees.

Business model for software/service providers. Cloud computing allows some software/service providers to transform

from being solely a product/service provider to a platform operator. IaaS (infrastructure-as-a-service), PaaS (platform-as-a-

service) and SaaS (software-as-a-service) all run like platforms, which may provide more value-add and flexible services by

analyzing the underlying data running in the platform (with end-user permission).

New and localized application and demand for mobile internet

China has a vibrant mobile internet and we think there will be increasing need for new and localized applications. While many

current mobile applications are likely to remain online — such as mobile gaming, online shopping, etc —we see the increasing use

of O2O (online to offline) models and growing demand from traditional business to move online. As more data is collected and

stored online, we expect business operators will increasingly want sophisticated data analytics to reveal business intelligence and

drive revenue/profit. Such demand will create the needs for value-add applications and this therefore should benefit software/IT

services companies.



Exhibit 18: Globally, software + IT Services exhibit the best growth potential

Worldwide IT spending, 2019 vs 2014

Exhibit 19: China Software + IT services is small but growing fastest

China IT spending, 2019 vs 2014

Note: Bubble size and numbers in boxes represent market size in 2014.

Note: Bubble size and numbers in boxes represent market size in 2014.

Exhibit 20: Productivity growth is key to containing wage/output increases China services industry wage and productivity analysis

Exhibit 21: Our economists see labor’s contribution to growth falling off China economy growth factor contribution

Note: services productivity=total service output value/total service employees.

Source: Wind.

Source: Wind, UN population data, Goldman Sachs Global Investment Research.

‐10%

‐5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Avg services urban wage growthServices productivity growth

Wage/output

‐2

0

2

4

6

8

10

12

‐2

0

2

4

6

8

10

12

1980‐89 1990‐99 2000‐04 2005‐09 2010‐14 2015‐19E 2020‐24E

LaborCapitalTotal factor productivity

Percent Percent



Exhibit 22: According to the Pew Research Center, many Chinese are turning their attention to quality of life concerns; taxes are

rising too

% of Chinese who view these issues as a “very big problem”; effective tax rate for listed non-financial companies

Source: Pew Research Center.

Exhibit 23: China has large potential for cloud spending

Public cloud services end-user spending relative to the US

Exhibit 24: China already has a number of public cloud service vendors

Global and China cloud services vendors

Source: Gartner.

Source: Company data, Gao Hua Securities Research.

0

5

10

15

20

25

30

35

40

45

50

Food safety Quality of

manuf. goods

Safety of

medicine

Old age

insurance

Health care Conditions for

workers

Air pollution Water

pollution

Effective tax

rate

2008 2012

Product safety & quality Environment TaxesLabor benefits

0%

5%

10%

15%

20%

25%

30%

35%

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000

2013 2014 2015E 2016E 2017E 2018E 2019E

(USD mn)United States

ChinaUS yoy

China yoy

IaaS PaaS SaaS

Global players

Amazon AWSIBM SoftLayerMicrosoft Azure

Google Compute EngineOracle IaaSHP Cloud

VMware vCloud Air

Salesforce1Microsoft Azure

Amazon AWS Elastic Beanstalk and more

Google App EngineIBM Bluemix

Red Hat OpenShiftHP

Oracle PaaS

SAP, Infor, Oracle, Salesforce

Chinese players

Alibaba AliyunTencent Qcloud

21vianet Via CloudGrandcloud

ChinaCache CloudChina Mobile Ecloud

Yonyou Cloud

Alibaba ACESina SAEBaidu BAE

JAEChina Mobile App Engine

Yonyou App Engine

Yonyou, Kingdee, 800App



Assessing China’s software/IT services market relative to the US and India

By comparing the structure of the market in China relative to developments in the US and India, we can make judgements about the

potential structural changes amid rapid industry growth in China. We look at vertical sector distributions, product mix, and client

base mix, to understand where China stands relative to global peers.

China spending is still weighted towards Industry, as of 2014

We divide software/IT services into four verticals.

Manufacturing, utilities and transportation: China spends 33% on these sectors which are more resource intensive and

labor intensive, vs. 21% in India and 19% in the US. This is in line with China’s larger GDP weighting to industry. We see the

higher the GDP contribution is from Service sector, the smaller software/IT service spending weighting is on Industry sector.

Communications, media and services: Spending on this vertical is also over-indexed in China compared to in the US (18%

vs. 13% respectively). We believe as an economy matures, spending on this sector will shrink.

Financials: Spending on this vertical at 21% is lower than the 27% in the US

Consumption & government: This vertical is also still under-indexed in China (49%) vs. 64% in the US.

The financials and consumption/government verticals are generally considered as service sectors and are underdeveloped in China

relative to the US – in line with finding in the previous section.

China is spending more on infrastructure and basic enterprise application software

We divide software products into two general categories — enterprise application and infrastructure. Enterprise application also

breaks down to three levels, by: (a) function and end-user, individual productivity and efficiency, (b) corporate productivity and

efficiency (c), and scale and flexibility.

China is spending more on infrastructure software, 62% vs. 56% in the US, indicating China is still building up its IT infrastructure.

For enterprise application software, China is spending more on basic enterprise application software, like productivity improving

software, including ERP (enterprise resource planning), supply chain management, etc. The US is moving on to scale and flexibility

improving software, like CRM (client relationship management) (8% of total), while China only spends 3% on CRM.

For IT services, China is spending more on consulting, implementation and product support, but less on outsourcing services.

Outsourcing services spending in China in 2014 only accounts for 21% of total IT services spending, vs. 40% in India and 52% in the

US. We believe Chinese enterprises still prefer in-house IT systems and operations due to low relative cost of building an IT team

internally.



Government, SOE and multinationals are still key customers, but demand from private companies to catch up

We divide end-users into three general categories — enterprises, government, and individual business. For enterprises, we sub-

divide into private, SOE and foreign. We estimate government spending accounts for 16% of total Software and IT services spending,

and SOE 34%. Although individual business and private enterprises are the major entities in the market (68mn in all and 94% of

total), they make up on 42% of spending. We believe this leaves significant room for growth as demand from private companies

should catch up as the imperative to improve productivity and efficiency become clearer.

Exhibit 25: Government, SOE and MNC are still the key customers

Software and IT services spending by customer, 2014

Source: SAIC, Gartner, Gao Hua Securities Research.

Government, 16%

Individual business, 14%

Private, 28%

SOE, 34%

Foreign, 8%

Enterprise, 70%



Exhibit 26: China spending is still weighted towards industrials Software+ IT services spending by vertical sectors, 2014

Source: Gartner.

Manufacturing & natural resources



Utilities

Utilities Utilities

Transportation

Transportation Transportation

Communications, media & services



Banking & securities Banking & securities

Banking & securities

InsuranceInsurance

Insurance

GovernmentGovernment

Government

EducationEducation

Education

Healthcare providersHealthcare providers

Healthcare providers

Retail RetailRetail

Wholesale trade Wholesale trade Wholesale trade

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China India US

Manufacturing,utilities, transportation


Consumption, government

Financials



Exhibit 27: Chinese enterprises are still building up their IT infrastructure and productivity, but spend less on application software

and scale expansion tools (like CRM)

Software spending breakdown by product, 2014

Source: Gartner

Office suites Office suites Office suites

Web collaboration suites Web collaboration suites Web collaboration suites

Enterprise resource planning (ERP)



Project and portfolio management

Project and portfolio managementProject and portfolio management

Business intelligence and analytics



Supply chain management

Supply chain management

Supply chain managementCustomer relationship mgmt. (CRM)

Customer relationship mgmt. (CRM)

Customer relationship mgmt. (CRM)Digital content creationDigital content creation

Digital content creation

Enterprise content managementEnterprise content management

Enterprise content managementOther application softwareOther application software

Other application softwareVirtualization infrastructure softwareVirtualization infrastructure software

Virtualization infrastructure software

Data integration/quality toolsData integration/quality tools

Data integration/quality toolsDatabase management systems Database management systems

Database management systems

Application infrastructure and middleware

Application infrastructure and middleware Application infrastructure and

middleware

IT operations IT operationsIT operations

Security SecuritySecurity

Storage management Storage managementStorage management

Application developmentApplication development Application development

Operating systemsOperating systems Operating systems

Other infrastructure software Other infrastructure software Other infrastructure software

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China India US

Individualproductivity and efficiency

Scale and flexibility

Slowly growing infrastructuresoftware

Fast growing infrastructure software

Corporateproductivity and efficiency



Exhibit 28: Chinese companies are spending more on building in-house IT, and rely less on outsourcing

IT services spending by product, 2014

Source: Gartner.

Consulting

ConsultingConsulting

Implementation

Implementation

Implementation

IT outsourcing

IT outsourcing

IT outsourcing

Business process outsourcing Business process outsourcingBusiness process outsourcing

Software support

Software support

Software supportHardware support

Hardware support

Hardware support

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China India US

Consulting

Implementation

Product support

Outsourcing services



Identifying local leaders — you’ll find them in niche and high-growth markets

Gartner forecasts c.10% CAGR in China software/IT service market over the next five years. We believe some players are better

positioned and should therefore be able to capture a high growth rate than the overall market. We think the market is already

crowded, with global leaders dominating in key subsectors. According to MIIT, there are 38,695 software/IT services vendors in

China, and Gartner estimates software/IT services spending of US$25bn in 2014. This implies only US$0.65mn average TAM for

each player. Of the larger firms, most are foreign. The top 30 software vendors in China account for c. 65% market share, with

Chinese players only accounting for 13%. The top 30 IT services vendors in China account for c. 63% market share, with Chinese

companies accounting for only 12%. We believe there are three reasons for overseas firms’ dominance in many parts of the market.

Early mover advantage: Global players entered the China market in the early 1990s, when domestic players were still at an

early stage of development stage and not as competitive as global firms. Their early penetration into China helped global

leader to gain some large customers with complex demands, such as SOEs and multinationals. The high stickiness for

software applications subsequently helped those early movers to strengthen their franchise in China.

Capital & talent/engineer advantage: There are high barriers to entry for high-end and complex systems/services for

multiple verticals. Global firms have strong consulting capability and comprehensive products in multiple vertical, which

are difficult for small companies to match.

Piracy: Protection of intellectual property rights has been challenging in China. The high cost to protect intellectual property

rights can be prohibitive for small-scale companies and put their operations in jeopardy if their IP is copied.

Exhibit 29: Chinese software vendors account for only 13% market share Market share for Top 30 software vendors in China, 2014

Exhibit 30: Chinese IT services vendors account for only 12% market share Market share for Top 30 IT services vendors in China, 2014

Source: Gartner

Source: Gartner

Microsoft, 19.9%

IBM, 8.9%

Oracle, 6.1%

Yonyou, 4.0%

SAP, 3.6%

Founder, 3.0%

EMC, 2.2%Inspur

Genersoft, 1.9%

Kingdee, 1.6%

Neusoft, 1.4%Kingsoft , 1.1%

Other oversea vendors, 13.8%

Domestic

IBM, 8.1%Samsung SDS,

4.5%

HP, 4.4%

Digitalchina, 4.3%

Deloitte, 4.3%KPMG

International, 3.5%PwC, 3.2%Neusoft, 2.3%

Accenture, 2.2%

Lenovo, 2.0%

TsingHua TongFang,

1.0%

Changjiang, 1.0%

Huawei, 0.9%

Other oversea vendors, 21%

Domestic



Identifying local winners in eight segments

Despite the challenges and intense competition, we see opportunities in some niches with higher entry barriers and stronger growth.

We identify eight verticals that meet our two key selection criteria:

(a) Stronger growth than the overall software/IT system in the next five years; and

(b) Highly local characteristics and a fragmented customer bases that set higher barriers to entry for global firms and new

entrants. These segments have a higher concentration of top 3 players, which imply a higher entry barrier for small firms.

ERP for SMEs: While current ERP revenue mainly comes from SOEs, large multinationals, and large to midsize private companies,

we believe ERP for small and medium-sized enterprises is still at an early stage, with low penetration. The market is also very

fragmented and highly local due to the large user base all over China. We forecast the market to grow at 15% CAGR over the next 5

years on the back of greater penetration, facilitated by cloud computing, as well as by new value-add businesses such as credit

investigation for SME.

Healthcare: IT systems for the healthcare sector are underdeveloped in China and many hospitals and clinics in tier-3 and tier-4

cities do not have comprehensive HIS/CIS (hospital information system/clinic information system) nor an electronic medical record

(EMR) system for patients. There is also much room for improvement in the social medical insurance system, where IT systems can

help with PBM (pharmacy benefit management) and chronic disease treatment. We expect the market to grow at 15% CAGR in the

next 5 years.

Security software: Security software has strong local characteristic. The government intends to reduce reliance on non-Chinese

vendors in government institutions and critical SOEs in the interests of national security. We expect local security software players

to benefit from this. We expect the market to grow at 10% CAGR in the next 5 years.

Tax control: As China government rolls out tax reform — replacing business tax with value-added tax for service sectors — in more

sectors (property, finance and insurance industries), and as the requirement to install a VAT invoice system is expanded to all small-

scale taxpayers, we forecast VAT invoice system users to increase fivefold over 2014-2020E. We expect tax control related business

to grow at 25% CAGR in the next 5 years.

Mapping & navigation: We forecast the mapping and navigation market to grow at 22% CAGR in the next 5 years on the back of

higher penetration of navigation in autos and increasing new applications in telematics such as traffic information, location-based

services, etc. The broader Internet of Things (IoT) will further increase application of location-based services, and therefore of

demand for mapping & navigation.

Intelligent speech: Intelligent speech technology is likely to be increasingly employed when inputting information into computers

by writing is impossible or inconvenient. We expect greater application of this technology in smartphones and autos, as well as in

education, and expect a 37% CAGR in the next 5 years.

Financials - securities: With accelerating reform in the financial space and increasing innovation in equity markets, we believe

Fintech will experience fast growth over the next 5 years. Although the recent market correction has added concerns around the



pace of financial, and CSRC has turned more cautious on financial innovation, such as margin trading, we believe the trend remains

intact in the mid-to-long term. We expect software/IT services for the securities sector to grow at 20% CAGR in the next 5 years.

Restaurants & hotels: Although IT systems are commonly used in high-end restaurants and hotels, mid-to-low end restaurants,

hotels and merchants are not well covered yet. We expect software/IT services for restaurants & hotels to grow at 15% CAGR in the

next 5 years, with improving coverage in mid-to-low end via SaaS product offering, and new demand from O2O business upgrading.

Concentration ratios: In these subsectors, tax control, mapping & navigation, intelligent speech, financial - securities, and

restaurants & hotels have higher market concentration. We initiate coverage on Aisino (CL-Buy), Hundsun, Shiji Info and Yonyou

(Sell), which are the leaders in their subsector. NavInfo and iFLYTek (Buy) are also leaders in their own subsectors.

Exhibit 31: Our framework for identifying niche leaders

Note: Total market size and growth for ERP in SME, restaurants & hotels, tax control, mapping & navigation, the growth for healthcare and financials are all GS forecasts; market size for healthcare and financials, plus market size and growth for security software are from Gartner; market size and growth for intelligent speech are from ETIRI. Ultrapower does not operate in a niche market. ERP stands for Enterprise resource planning; BYOD stands from bring-your-own-device. Gross margin (GM) and operating margin (OPM) range represents the business-as-usual margin range of top players during the past three years.

Source: Company data, Gartner, ETIRI, Gao Hua Securities Research.

Vertical sector Market size Market growth GM OPM Top 3 players Market share Global peersHighly local Fragment High growth 2014 ($ mn) (2014‐20E CAGR) (%) (%) in China in China (2014)

Yonyou 11%Kingdee 8%Grasp c. 5%NeuSoft 9%Wonders 7%Winning 5%Venustech 27%NsFocus 16%VRV 6%Aisino 90%

Beijing Watertek 4%Hengbao 4%NavInfo 41%AutoNavi 35%eMapgo 22%iFLYTEK 58%Baidu 13%Apple 12%

Hundsun 51%Kingdom Sci‐tech 34%

Apexsoft 8%Shiji Info 49%

Joint Winsdon 5%Armitage 5%

Banking 4,342 13.4% 70‐80% 5‐10% SinoData c.1% Fiserv, FIS, EXLSManufacturing 5,606 10.3% 50‐70% 0‐10% Baosight 4% Oracle, SAP

Utility 1,647 10.9% 30‐50% 15‐25% YGSoft 3% Oracle, SAPOthers 7,542 0.6% Oracle, SAPTotal 25,148 10%

Symantec, Intel (McAfee), IBM

McKessen, Cerner, Siemens, Epic, Allscript,

Express Scripts,

N.A.

Oracle, SAP, Intuit, Salesforce

Google, Nokia, TomTom, Coherent Navigation

5‐10%65‐80%22.0%

20.0% 80‐90% 10‐20% Fiserv, FIS, EXLS

Nuance

Healthcare HIS, CIS, EMR, PBM, chronic disease

treatment 1,150

565 IoT, telematics, O2O

Security software

Mapping & navigation

Financials ‐ securities Fintech 356

37.0% 50‐60% 0‐20%Intelligent speech IoT, telematics 494

60‐85% 6‐15%

E‐invoice and credit investigation

581 25.0% 40‐46% 10‐13%

624 Advanced Persistent

Threats, BYOD

15.0% 70‐75% 20‐30%

10‐25%70‐80%10.0%

Opportunity exposure

Restaurants & hotels Internet O2O requires

more IT system 323 15.0% 70% 34% Oracle, Sabre, Amadeus

Tax control

ERP for SME Credit investigation, cloud computing

2,242 15.0%



Valuation: Long-term discounted P/E: We favor leaders in faster growing subsectors

We base our valuation methodology around three attributes of the sector:

Compared with other technology names (hardware or electronics), software names tend to be less cyclical. They have high

client retention rates due to significant switching costs, enabling them to generate stable and recurring revenue.

While Chinese companies in some sectors are closing the gap or even surpassing global peers, we see domestic software

names still lagging global peers in both scale and market cap.

Software development often requires long-term R&D, and this creates a substantial barrier to entry. As such, we believe it

is appropriate to look at longer-term growth. We see China software names are often given high P/E multiples in the A-

share market (2016E P/E averaged 48X for our coverage), as the market prices in sustainable high growth.

Valuation methodology – step by step

We project our company estimates to 2020. For each company, we conduct a qualitative and quantitative assessment to

underpin our assessment of longer-term earnings.

We apply an exit P/E multiple to 2020 earnings for each company — based on where global peers are trading at now on

2016 estimates. We apply 21x for lower growth companies and 25x for higher growth ones (see below for detail).

Using the resulting valuation — 2020E EPS times exit P/E — we discount back to 2016 using each company’s cost of equity.

In our view, this methodology: 1) capture each company’s long-term growth potential; 2) differentiates between stocks on multiple

based on their growth projection; 3) evaluates China software in a global context – with consideration for its current relative lack of

development.

Exhibit 32: Aisino (CL-Buy) is our top pick for its greatest upside; we like iFLYTek (Buy) for its high growth, but have a Sell on Yonyou due to its expensive

valuation and only modest growth Valuation summary table, 12-month target prices

*on our regional Conviction List. Pricing currency is Rmb; EPS CAGR is for the period of 2016E-2020E.


Current 12‐m Potential RatingsTicker Company price TP up/downside New Old EPS Current PE TP‐impled PE EPS EPS CAGR Exit P/E Scoring Beta COE

600271.SS Aisino 50.68 78.60 55% Buy* n.a. 2.37 21.4 33.2 5.10 21% 21.00 4.6 0.8 8.0%002230.SZ iFLYTEK 28.10 38.60 37% Buy Neutral 0.68 41.4 56.8 2.09 33% 25.00 3.9 0.8 7.9%002153.SZ Shiji 88.49 96.30 9% Neutral n.a. 2.02 43.9 47.7 5.44 28% 25.00 4.1 1.0 9.0%600570.SS Hundsun 45.74 47.90 5% Neutral n.a. 0.70 65.6 68.7 2.76 41% 25.00 3.8 1.1 9.6%300002.SZ Ultrapower 10.96 10.00 ‐9% Neutral Buy 0.37 29.8 27.2 0.68 16% 21.00 2.5 1.0 9.0%002405.SZ NavInfo 25.62 21.70 ‐15% Neutral Neutral 0.34 75.1 63.6 1.25 39% 25.00 3.8 1.1 9.6%600588.SS Yonyou 25.76 14.10 ‐45% Sell n.a. 0.45 57.2 31.3 0.93 20% 21.00 2.9 0.9 8.4%

2016E 2020E



Exhibit 33: We revise our EPS estimates on three stocks already under coverage

iFLYTek, Ultrapower and NavInfo revision summary

Source: Gao Hua Securities Research.

Assessing the long-term growth potential and competitiveness

In assessing a company’s long-term growth potential and competitiveness, we have developed a framework assessing 5 key criteria.

For four of the criteria, we use a quantitative scale to assign a score. For competitiveness, however, we apply a qualitative-based

score reflecting our overall assessment of each company’s technology leadership and the barriers to entry in its industry segment.

Exhibit 34: We give equal weighting to our 5 key criteria in assessing the companies’ relative positioning Our rationale table


Company EPS revision Reasons

New Old %Change 2015E 2016E 2017E

iFLYTek 38.60 20.80 86% -3% 9% 26%

Ultrapower 10.00 15.18 -34% 0% -31% -29%

NavInfo 21.70 18.70 16% -19% -23% -23%

We see its major ITSM business to slow down and lack of other earnings

catalysts

We turn more optimistic about the industry outlook and expect iFLYTek to

benefit from wider industry application opportunities

We remain positive on telematics market development but revise down

earnings due to unclear monetization opportunity

12-m TP revision

Measure Rationale Calculation

Revenue opportunity Industry growth Industry growth is essential to the company's future growth potentialCalculated through 5 year industry growth. Scoring: CAGR>=25%=5, 20‐24%=4, 15‐19%=3, 10‐14%=2, less than 10%=1

Incremental marginIncremental margins to revenue expansion: Scoring: Over 70%=5, 50‐70%=4, 30‐50%=3, 10‐30%=2, less than 10%=1.

Potential for additional monetization

Level of revenue contribution from new businesses in 5 years. Scoring: over 20% of revenue=5, 15‐20%=4, 10‐15%=3, 5‐10%=2, less than 5%=1

Market shareMarket share within the industry: Scoring: over 40%=5, 30‐40%=4, 20‐30%=3, 10‐20%=2, less than 10%=1

Market concentrationTop 3 players market share: Scoring: over 70%=5, 50‐69%=4, 30%‐49%=3, 10‐29%=2, less than 10%=1

Competitiveness Competitive strengthA company's competitiveness determines whether it can sustain its business and cope with the changing environment, to survive and succeed in the long run.

Qualitative judgement on competitiveness

Access to capital Cash reserve and free cash flowAccess to capital indicates whether the company has sufficient resources to invest into new business/technology while keeping its financial position solid.

Ranking of net cash + FCF over next 3 years: No.1=5, No.2‐3=4, No.4‐5=3, No.6‐7=2, No.8=1.

As a measure of operating leverage, we take in consideration two factors: (1) required cost level of expanding current business, and (2) how much the existing business can be leveraged to create a new business.

A company's current market share and the market structure dictates the company's ability to capture the growth in industry

Profit opportunity

Ability to capture



Each criterion is given equal weighting. iFlytek (speech recognition) and Aisino (Tax control) score highest on industry growth.

Navinfo and Hundsun score highest on profit opportunity given they operate in high-margin businesses, with potential for a

broadening in application. Most companies (bar Ultrapower and Yonyou) have strong/dominant market positioning to fully capture

industry growth. Shiji and Aisino are clear leaders in their niches, where we see little chance of any challengers, and therefore score

highly on competitiveness. On access to capital, Shiji and Aisino are relatively strong as they require less-intensive R&D spending to

maintain their leading positions.

Exhibit 35: Aisino and Shiji score highest among our coverage for their relative positioning


Evaluating China A-share software names in a global perspective

In determining our exit multiple in 2020 for our coverage, we use where global peers are trading at on 2016 — on the assumption

that Chinese software companies will more closely resemble global companies after a few years of development.

For lower-growth Aisino, Ultrapower and Yonyou, we apply the global median 2016 P/E of 21X.

For high-growth names, with earnings over 25% EPS/net income CAGR in 2015E-2020E — NavInfo, iFLYTek, Shiji and

Hundsun — we apply an exit multiple of 25x, which we derive from the median of current high-growth global names: Sabre,

Orbitz, Priceline, Ctrip, Salesforce, SAP, Intuit, SS&C, Temenos, and TomTom

Revenue exposure SoftwareNavInfo IFLYTek Ultrapower Shiji Yonyou Aisino Hundsun

Subsector 2016E‐2020E subsector growth 002405.SZ 002230.SZ 300002.SZ 002153.SZ 600588.SS 600271.SS 600570.SSSoftware + IT servicesERP for SME 15% 100%Restaurants & hotels IT 15% 100%Tax control system 25% 50%Mapping & navigation 22% 100%Speech recognition 37% 100%Financials IT 20% 100%Others 10% 100% 50%

Growth evaluationNavInfo IFLYTek Ultrapower Shiji Yonyou Aisino Hundsun

Company level Influencing factors 002405.SZ 002230.SZ 300002.SZ 002153.SZ 600588.SS 600271.SS 600570.SSRevenue opportunity Industry growth 4 5 2 3 3 5 4Profit opportunity Incremental margin 5 4 5 5 4 3 5

Potential for additional monetization 5 5 3 3 5 5 5Average 5.0 4.5 4.0 4.0 4.5 4.0 5.0

Ability to capture Market share 5 5 2 5 2 5 5Market concentration 5 5 1 4 2 5 5Average 5.0 5.0 1.5 4.5 2.0 5.0 5.0

Competitiveness Competitive strength 3 4 2 5 3 5 4Access to capital Cash reserve and free cash flow 2 1 3 4 2 4 1Total average score 3.8 3.9 2.5 4.1 2.9 4.6 3.8



Exhibit 36: Global software peers are trading at c. 21X at the median on 2016E P/E, while select high-growth names trade at a

median of 25X

Global comp sheet

*on our regional Conviction List. Priced as of Sep 22, 2015, market close; C.S. stands for Coverage Suspended.

Source: Bloomberg, Datastream, Gao Hua Securities Research, Goldman Sachs Global Investment Research.

EBITDA CAGR EPS CAGR15E 16E 17E 15E 16E 17E 15E 16E 17E 15E 16E 17E 2015E‐17E 2015E‐17E

SoftwareBeijing Shiji Information 002153.SZ Neutral 4,290 88.49 65.1 43.9 30.8 56.2 37.2 25.9 12.1 9.9 7.9 20% 25% 29% 45% 45%Aisino 600271.SS Buy* 7,340 50.68 27.8 21.4 16.4 14.9 11.3 8.4 6.2 5.4 4.7 24% 27% 31% 31% 30%Yonyou Network Technology 600588.SS Sell 5,895 25.76 71.2 57.2 48.3 63.7 55.8 48.3 6.4 6.1 5.7 11% 11% 12% 18% 22%Hundsun Technologies Inc. 600570.SS Neutral 4,432 45.74 82.1 65.6 37.6 91.7 65.0 41.6 13.2 11.6 9.6 17% 19% 28% 48% 48%Beijing Ultrapower Software 300002.SZ Neutral 3,420 10.96 25.2 29.8 24.4 37.4 30.0 24.1 4.0 3.6 3.3 17% 13% 14% 23% 1%NavInfo Co. 002405.SZ Neutral 2,779 25.62 104.9 75.1 52.6 39.8 26.0 17.7 6.9 6.5 5.9 7% 9% 12% 53% 41%Anhui USTC iFLYTEK 002230.SZ Buy 5,657 28.10 61.8 41.4 27.8 45.0 30.9 20.4 5.8 5.3 4.7 11% 13% 18% 53% 51%

Hospitality solutionSabre Corp. SABR Buy* 7,792 27.92 23.2 23.0 17.7 10.9 9.0 7.7 19.3 12.7 7.4 129% 77% 59% 14% 26%Amadeus IT Holding SA AMA.MC Buy* 17,684 36.46 20.4 17.7 16.1 11.7 10.2 9.0 8.4 6.9 5.8 42% 43% 39% 11% 12%Global median 21.8 20.4 16.9 11.3 9.6 8.4 13.9 9.8 6.6 85% 60% 49% 13% 19%OTAExpedia Inc. EXPE Neutral 16,563 124.88 20.9 45.4 37.1 14.1 12.0 9.7 6.4 6.1 5.1 36% 14% 15% 13% (25%)Priceline.com Inc. PCLN Buy 67,835 1288.95 27.9 21.8 18.2 18.9 14.5 11.5 6.5 4.9 3.9 26% 26% 24% 23% 26%Ctrip.com International CTRP Neutral 10,180 66.61 73.6 37.4 24.6 37.2 17.2 10.9 6.3 5.7 4.7 9% 17% 21% 79% 81%Global median 24.4 29.6 30.8 18.9 14.5 10.3 6.4 5.3 4.3 26% 17% 21% 23% 26%Transaction processAutomatic Data Processing Inc. ADP Neutral 37,124 79.19 25.8 22.7 19.6 15.1 13.3 11.4 7.1 6.0 5.2 26% 29% 29% 12% 13%Paychex Inc. PAYX Neutral 16,778 46.03 23.5 21.3 19.2 13.1 12.0 10.8 9.1 8.4 7.8 39% 41% 42% 10% 11%Fidelity National Information Services FIS Not Rated 19,399 68.21 20.6 19.2 17.7 11.8 11.0 10.2 3.0 2.9 2.7 12% 12% 13% 5% 6%Fiserv Inc. FISV Neutral 20,742 86.28 22.4 20.1 18.2 13.4 12.1 11.1 6.5 6.4 6.3 22% 27% 29% 6% 7%Equifax Inc. EFX Neutral 11,591 97.73 28.6 24.5 21.9 13.9 12.4 11.3 5.4 5.4 5.5 19% 23% 26% 8% 11%Global median 22.2 19.6 18.0 13.2 12.1 10.9 6.1 5.5 4.9 26% 27% 27% 7% 10%Credit agencyEquifax Inc. EFX Neutral 11,591 97.73 28.6 24.5 21.9 13.9 12.4 11.3 5.4 5.4 5.5 19% 23% 26% 8% 11%Experian EXPN.L Neutral 15,459 1031.00 17.2 16.0 14.9 11.0 10.1 9.1 5.6 4.9 4.3 32% 33% 31% 6% 7%Global median 26.2 21.3 19.0 13.9 12.3 11.2 5.6 5.4 5.5 19% 23% 26% 8% 11%ERP & CRMOracle Corp. ORCL Buy 159,670 36.19 17.1 16.5 14.6 8.2 7.8 6.9 3.2 3.0 2.8 24% 23% 23% 2% 1%Salesforce.com Inc. CRM Buy* 48,676 71.65 NA 476.8 176.2 29.3 21.7 16.5 10.1 9.0 7.8 11% 13% 15% 28% 39%SAP SAP Buy 75,700 63.40 29.6 21.0 18.6 16.1 12.6 11.3 3.0 2.7 2.5 16% 18% 17% 16% 24%Intuit Inc INTU.US C.S. 24,084 86.85 34.3 25.4 20.2 17.6 13.9 11.5 11.4 9.2 7.9 22% 34% 42% 24% 30%Global median 29.6 23.2 19.4 16.9 13.2 11.4 6.7 6.0 5.3 19% 20% 20% 20% 27%Financials solutionsFidelity National Information Services FIS Not Rated 19,399 68.21 20.6 19.2 17.7 11.8 11.0 10.2 3.0 2.9 2.7 12% 12% 13% 5% 6%Fiserv Inc. FISV Neutral 20,742 86.28 22.4 20.1 18.2 13.4 12.1 11.1 6.5 6.4 6.3 22% 27% 29% 6% 7%SS&C Technologies Holdings Inc SSNC.US Not covered 7,219 72.62 28.4 23.6 20.1 15.9 11.5 10.0 2.9 2.8 2.4 11% 12% 12% 26% 19%Temenos TEMN.S Neutral 2,679 39.80 44.9 22.4 18.8 17.0 13.0 11.2 8.2 6.5 5.7 18% 32% 32% 17% 51%ExlService Holdings EXLS Neutral 1,307 38.36 19.9 17.2 14.6 9.9 7.8 6.3 2.8 2.6 2.3 11% 12% 13% 16% 15%Silverlake Axis Ltd SILV.SP Not covered 1,083 0.58 16.3 14.9 14.1 42.3 42.4 40.1 7.5 7.3 7.0 46% 45% 46% 3% 8%Oracle Financial Services Soft OFSS.IN Not covered 4,817 3752.60 24.9 22.6 19.9 18.8 15.3 13.6 5.8 7.0 6.0 19% 36% 34% 17% 12%Jack Henry & Associates Inc JKHY.US Not covered 5,580 69.56 26.9 25.0 22.4 12.4 11.7 10.8 NA NA NA 19% 20% 22% 7% 10%Global median 23.8 22.4 18.5 13.4 11.7 10.8 4.8 4.7 5.7 18% 20% 25% 10% 11%NavigationGarmin Ltd. GRMN Neutral 6,878 35.90 14.9 12.4 11.1 6.7 6.0 5.3 2.1 2.1 2.0 14% 17% 18% 8% 13%TomTom NV TMOAF.US Not covered 2,503 10.91 46.4 29.0 21.2 15.5 11.8 9.6 2.4 2.3 2.1 3% 7% 10% 27% 48%Global median 30.6 20.7 16.2 11.1 8.9 7.4 2.3 2.2 2.0 9% 12% 14% 18% 31%Speech recognitionNuance Communications Inc NUAN.US C.S. 5,288 17.07 13.9 12.4 11.7 9.5 8.8 NA 2.3 2.3 2.1 15% 16% 19% NA 9%Global median 13.9 12.4 11.7 9.5 8.8 NA 2.3 2.3 2.1 15% 16% 19% NA 9%Global average 24.6 32.7 24.8 15.3 12.8 11.0 5.5 5.1 4.6 26% 27% 27% 14% 16%Global median 22.8 21.3 18.4 13.4 12.1 10.8 5.8 5.4 4.8 19% 23% 25% 10% 11%

ROECompany name Ticker Rating

Market cap($ mn)

Current price

P/E (X) EV/EBITDA (X) P/B (X)



Target price sensitivity analysis favors Aisino and iFLYTek

Exhibit 37: Aisino’s valuation skewed towards the upside

Aisino TP sensitivity table

Exhibit 38: Shiji’s valuation is evenly distributed

Shiji TP sensitivity table



Exhibit 39: iFLYTek’s valuation skewed towards the upside iFLYTek TP sensitivity table

Exhibit 40: Ultrapower’s valuation skewed towards the downside Ultrapower TP sensitivity table



AisinoImplied valuationRmb/sh 78.60 7.0% 7.5% 8.0% 8.5% 9.0%

12.0X 46.6 45.7 44.9 44.1 43.315.0X 58.2 57.2 56.1 55.1 54.118.0X 69.9 68.6 67.3 66.1 64.921.0X 81.5 80.0 78.6 77.1 75.724.0X 93.2 91.5 89.8 88.1 86.5

Upside/downside7.0% 7.5% 8.0% 8.5% 9.0%

12.0X -8% -10% -11% -13% -15%15.0X 15% 13% 11% 9% 7%18.0X 38% 35% 33% 30% 28%21.0X 61% 58% 55% 52% 49%24.0X 84% 81% 77% 74% 71%

Cost of equity

2020E target PE

Cost of equity

2020E target PE

ShijiImplied valuationRmb/sh 96.30 8.0% 8.5% 9.0% 9.5% 10.0%

16.0X 63.9 62.8 61.6 60.5 59.419.0X 75.9 74.5 73.2 71.9 70.622.0X 87.9 86.3 84.7 83.2 81.725.0X 99.9 98.1 96.3 94.5 92.828.0X 111.9 109.9 107.8 105.9 104.0

Upside/downside8.0% 8.5% 9.0% 9.5% 10.0%

16.0X -28% -29% -30% -32% -33%19.0X -14% -16% -17% -19% -20%22.0X -1% -2% -4% -6% -8%25.0X 13% 11% 9% 7% 5%28.0X 26% 24% 22% 20% 18%

Cost of equity

2020E target PE

Cost of equity

2020E target PE

iFLYTekImplied valuationRmb/sh 38.60 6.9% 7.4% 7.9% 8.4% 8.9%

16.0X 25.6 25.2 24.7 24.2 23.819.0X 30.4 29.9 29.3 28.8 28.322.0X 35.2 34.6 34.0 33.3 32.725.0X 40.1 39.3 38.6 37.9 37.228.0X 44.9 44.0 43.2 42.4 41.7

Implied valuationRmb/sh 6.9% 7.4% 7.9% 8.4% 8.9%

16.0X -9% -10% -12% -14% -15%19.0X 8% 6% 4% 2% 1%22.0X 25% 23% 21% 19% 16%25.0X 43% 40% 37% 35% 32%28.0X 60% 57% 54% 51% 48%

Cost of equity

2020E target PE

Cost of equity

2020E target PE

UltrapowerImplied valuationRmb/sh 10.00 8.0% 8.5% 9.0% 9.5% 10.0%

12.0X 6.0 5.8 5.7 5.6 5.515.0X 7.4 7.3 7.2 7.0 6.918.0X 8.9 8.8 8.6 8.5 8.321.0X 10.4 10.2 10.0 9.9 9.724.0X 11.9 11.7 11.5 11.3 11.1

Implied valuationRmb/sh 8.0% 8.5% 9.0% 9.5% 10.0%

12.0X -45% -47% -48% -49% -50%15.0X -32% -33% -34% -36% -37%18.0X -19% -20% -22% -22% -24%21.0X -5% -7% -9% -10% -11%24.0X 9% 7% 5% 3% 1%

Cost of equity

2020E target PE

Cost of equity

2020E target PE



Exhibit 41: Hundsun’s valuation skewed towards the downside

Hundsun TP sensitivity table

Exhibit 42: Yonyou’s valuation skewed towards the downside

Yonyou TP sensitivity table



Exhibit 43: NavInfo’s valuation skewed towards the downside NavInfo TP sensitivity table


HundsunImplied valuationRmb/sh 47.90 8.6% 9.1% 9.6% 10.1% 10.6%

16.0X 31.8 31.2 30.6 30.1 29.619.0X 37.8 37.1 36.4 35.7 35.122.0X 43.7 42.9 42.1 41.4 40.625.0X 49.7 48.8 47.9 47.0 46.228.0X 55.6 54.6 53.6 52.7 51.7

Upside/downside8.6% 9.1% 9.6% 10.1% 10.6%

16.0X -30% -32% -33% -34% -35%19.0X -17% -19% -20% -22% -23%22.0X -4% -6% -8% -9% -11%25.0X 9% 7% 5% 3% 1%28.0X 22% 19% 17% 15% 13%

2020E target PE

Cost of equity

2020E target PE

Cost of equityYonyouImplied valuationRmb/sh 14.10 7.4% 7.9% 8.4% 8.9% 9.4%

12.0X 8.4 8.2 8.1 7.9 7.815.0X 10.5 10.3 10.1 9.9 9.718.0X 12.6 12.3 12.1 11.9 11.721.0X 14.7 14.4 14.1 13.9 13.624.0X 16.8 16.4 16.1 15.8 15.6

Upside/downside7.4% 7.9% 8.4% 8.9% 9.4%

12.0X -67% -68% -69% -69% -70%15.0X -59% -60% -61% -62% -62%18.0X -51% -52% -53% -54% -55%21.0X -43% -44% -45% -46% -47%24.0X -35% -36% -38% -39% -39%

2020E target PE

Cost of equity

2020E target PE

Cost of equity

NavInfoImplied valuationRmb/sh 21.70 8.6% 9.1% 9.6% 10.1% 10.6%

16.0X 14.4 14.2 13.9 13.7 13.419.0X 17.1 16.8 16.5 16.2 15.922.0X 19.8 19.5 19.1 18.8 18.425.0X 22.5 22.1 21.7 21.3 21.028.0X 25.3 24.8 24.3 23.9 23.5

Upside/downside8.6% 9.1% 9.6% 10.1% 10.6%

16.0X -44% -45% -46% -47% -48%19.0X -33% -34% -36% -37% -38%22.0X -23% -24% -25% -27% -28%25.0X -12% -14% -15% -17% -18%28.0X -1% -3% -5% -7% -8%

Cost of equity

2020E target PE

Cost of equity

2020E target PE



Key returns analysis

Exhibit 44: Aisino and Hundsun to generate 1st tier adjusted CROCI in 2015E-17E

Note: Adjusted CROCI is calculated by adding back R&D expenses to debt-adjusted cash flow (DACF), the numerator, and includes net cash and 5-yrs rolling R&D in Gross Capital Invested (GCI), the denominator. Shading: 1st quartile (dark blue); 2nd quartile (medium blue); 3rd quartile (light blue); 4th quartile (grey).


Exhibit 45: Aisino and Shiji to generate 1st tier ROE in 2015-17E


Exhibit 46: EPS progression and CAGRs – 2015E-2020E

Note: Ultrapower CAGR calculation is based on EPS of Rmb0.3 in 2015E, excluding Rmb0.13/share one-off investment gain


Adjusted CROCI 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ENavinfo 32% 41% 44% 27% 21% 12% 14% 15% 20% 23% 26% 28% 28% 28%iFLYTek 43% 24% 20% 16% 22% 20% 15% 21% 19% 21% 26% 27% 27% 26%Ultrapower 88% 65% 26% 17% 15% 17% 16% 15% 17% 14% 15% 16% 16% 16%Aisino 15% 21% 21% 28% 19% 22% 19% 27% 27% 29% 30% 28% 29% 26%Shiji 31% 27% 21% 30% 28% 26% 32% 20% 23% 25% 28% 28% 28% 26%Hundsun 31% 25% 24% 10% 23% 33% 32% 26% 31% 26% 30% 30% 30% 31%Yonyou 12% 15% 24% 21% 38% 19% 22% 19% 14% 15% 16% 17% 18% 19%

ROE 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020ENavinfo 33% 31% 18% 13% 6% 4% 5% 7% 9% 12% 16% 19% 21%iFLYTek 20% 14% 16% 14% 14% 12% 11% 11% 13% 18% 21% 24% 24%Ultrapower 66% 22% 14% 13% 14% 15% 15% 17% 13% 14% 15% 15% 15%Aisino 19% 19% 24% 22% 20% 19% 18% 24% 27% 31% 32% 34% 31%Shiji 24% 19% 27% 27% 25% 25% 22% 20% 25% 29% 30% 29% 27%Hundsun 22% 29% 24% 23% 16% 22% 20% 17% 19% 28% 31% 32% 34%Yonyou 18% 25% 13% 20% 13% 18% 15% 11% 11% 12% 14% 16% 17%

Ticker Company 2015E 2016E 2017E 2018E 2019E 2020E 2015E-2020E CAGR002230.SZ iFLYTek 0.45 0.68 1.01 1.37 1.76 2.09 36%

300002.SZ Ultrapower 0.43 0.37 0.45 0.53 0.60 0.68 17%

002405.SZ NavInfo 0.24 0.34 0.49 0.75 0.97 1.25 39%

002153.SZ Shiji 1.36 2.02 2.88 3.81 4.69 5.44 32%

600271.SS Aisino 1.82 2.37 3.10 3.76 4.65 5.10 23%

600588.SS Yonyou 0.36 0.45 0.53 0.64 0.78 0.93 21%

600570.SS Hundsun 0.56 0.70 1.22 1.62 2.10 2.76 38%



Exhibit 47: Pure software companies have a tax rate close to 10%

Effective tax rate in 2014

Exhibit 48: iFLYTek and NavInfo spends and capitalize more R&D than others

R&D spending as a % of revenue in 2014

Source: Company data.


Exhibit 49: More government, telcos, and large enterprises in the client mix

lead to higher receivable days Receivable days in 2014

Exhibit 50: NavInfo’s mapping product has a short shelf live while Yonyou

has a substantial landbank Amortization year in 2014



0%

5%

10%

15%

20%

25%

30%

0%

10%

20%

30%

40%

50%

60%R&D expense (%) Capitalized R&D (%)

0

50

100

150

200

250

02468101214161820



Industry Risks

China’s macro economy is slowing and any hard landing could pose downside risk to demand for software and IT services. We

believe software and IT services spending will in future be driven by the Services sector and this should make it more defensive to

any slowdown in the industrial sector. However, demand for productivity improvement may be impacted by deterioration in

profitability in both the industrial and services sectors.

There are new entrants into the software and IT services sector, such as startups and internet firms. Although internet companies

are now generally seeking collaborative arrangements with traditional software and IT services vendors, it is possible the balance of

bargaining power will move towards internet players in future. We expect those verticals with higher entry barriers to have a more

stable position in any collaboration.

Company profiles



Aisino (600271.SS): Tax control system leader to benefit from VAT reform; initiate CL-Buy

Source of opportunity

We initiate on Aisino with CL-Buy as we expect its near-monopoly position in tax control systems will allow it to

capture the revenue opportunity of VAT/BT reform, which broadens the requirement to install electronic tax

software to many millions of small business across many service sectors. Although we expect this business to

make up 21% to 2015E revenues, we expect it to contribute 46% to overall gross profit. We forecast Aisino’s other

main businesses, channel sales and network software, to grow steadily in line with the overall software/IT market

at 10-15% CAGR in 2016-2020E. We expect Aisino revenue/net income to grow at 15%/20% CAGR in these years

Catalyst

(1) The government is due to roll out VAT in property, finance and insurance industries, which it estimates will

add 10mn new VAT payers in 2015-2016E. On the back of this, We expect Aisino to gain 1.2mn/1.8mn/2.4mn

additional tax control clients in 2015E/16E/17E.

(2) We expect its nascent credit rating service to ramp up in 2016. Although the credit rating service will not

contribute significant revenue in the short term, we think a successful larger scale test of this business innovation

will help catalyze the stock. We expect segment revenue of Rmb302mn in 2016.

For full details, please see the standalone report “Aisino: Tax control system leader to benefit from VAT reform;

initiate CL-Buy”, September 25, 2015.

Valuation

Our 12-month target price is Rmb78.6, representing 55% potential upside. It is based on 21X 2020E EPS of

Rmb5.10, discounted back to 2016 at an 8% cost of equity, and implies 33x 2016E P/E. We think Aisino current

valuation looks inexpensive at 21X 2016E PE. We believe the market is undervaluing the long-term benefit from

tax reform and its monopoly market position to build up synergy from a large client base.

Key risks

Slower-than-expected VAT/BT reform execution nationally; smaller-than-expected market share due to strong-

than-expected competition; lower-than-expected gross margins due to competition.

Growth

Returns *

Multiple

Volatility Volatility

Multiple

Returns *

Growth

Investment Profile

Low High

Percentile 20th 40th 60th 80th 100th

* Returns = Return on Capital For a complete description of the investment

profile measures please refer to the

disclosure section of this document.

Aisino (600271.SS)

Asia Pacific Technology Peer Group Average

Key data Current

Price (Rmb) 50.68

12 month price target (Rmb) 78.60

Market cap (Rmb mn / US$ mn) 46,797.9 / 7,339.7

Foreign ownership (%) --

12/14 12/15E 12/16E 12/17E

EPS (Rmb) 1.24 1.82 2.37 3.10

EPS growth (%) 5.0 46.8 29.9 30.6

EPS (diluted) (Rmb) 1.24 1.82 2.37 3.10

EPS (basic pre-ex) (Rmb) 1.24 1.82 2.37 3.10

P/E (X) 18.0 27.8 21.4 16.4

P/B (X) 3.1 6.2 5.4 4.7

EV/EBITDA (X) 7.9 14.9 11.3 8.4

Dividend yield (%) 2.8 1.8 2.4 3.1

ROE (%) 17.9 23.6 27.1 30.6

CROCI (%) 75.0 72.2 77.2 83.5

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

20

30

40

50

60

70

80

90

100

110

Sep-14 Dec-14 Apr-15 Jul-15

Price performance chart

Aisino (L) Shanghai SE A Share Index (R)

Share price performance (%) 3 month 6 month 12 month

Absolute (36.8) 2.2 124.0

Rel. to Shanghai SE A Share Index (11.2) 16.1 60.9

Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 9/22/2015 close.



Aisino: Summary financialsProfit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E

Total revenue 19,959.2 24,688.5 30,972.6 36,392.5 Cash & equivalents 5,488.0 9,019.9 10,325.4 12,353.0

Cost of goods sold (16,530.3) (20,059.7) (25,205.5) (29,149.0) Accounts receivable 1,394.2 1,724.6 2,163.6 2,542.2

SG&A (1,188.4) (1,593.9) (1,846.4) (2,123.8) Inventory 970.0 1,177.1 1,479.0 1,710.4

R&D (289.4) (375.8) (466.8) (542.9) Other current assets 851.5 851.5 851.5 851.5

Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 8,703.7 12,773.1 14,819.5 17,457.1

EBITDA 2,083.2 2,833.5 3,690.5 4,875.9 Net PP&E 1,089.3 1,698.2 2,588.5 3,424.0

Depreciation & amortization (132.1) (174.5) (236.6) (299.1) Net intangibles 568.5 525.7 482.9 440.1

EBIT 1,951.1 2,659.0 3,453.9 4,576.8 Total investments 193.9 193.9 193.9 193.9

Interest income 65.0 44.2 81.1 88.2 Other long-term assets 82.7 82.7 82.7 82.7

Interest expense 0.0 0.0 0.0 0.0 Total assets 10,638.0 15,273.6 18,167.5 21,597.8

Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0

Others 45.8 177.0 208.2 222.8 Accounts payable 2,107.4 2,557.4 3,213.4 3,716.1

Pretax profits 2,061.9 2,880.3 3,743.3 4,887.7 Short-term debt 0.0 0.0 0.0 0.0

Income tax (390.1) (500.7) (651.5) (850.6) Other current liabilities 322.1 594.3 849.9 1,189.1

Minorities (524.2) (695.0) (903.0) (1,179.1) Total current liabilities 2,429.5 3,151.7 4,063.3 4,905.3

Long-term debt 42.0 2,429.8 2,429.8 2,429.8

Net income pre-preferred dividends 1,147.6 1,684.6 2,188.8 2,858.1 Other long-term liabilities 117.2 117.2 117.2 117.2

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 159.2 2,547.0 2,547.0 2,547.0

Net income (pre-exceptionals) 1,147.6 1,684.6 2,188.8 2,858.1 Total liabilities 2,588.7 5,698.6 6,610.3 7,452.2

Post-tax exceptionals 0.0 0.0 0.0 0.0

Net income 1,147.6 1,684.6 2,188.8 2,858.1 Preferred shares 0.0 0.0 0.0 0.0

Total common equity 6,712.6 7,543.3 8,622.6 10,031.9

EPS (basic, pre-except) (Rmb) 1.24 1.82 2.37 3.10 Minority interest 1,336.7 2,031.7 2,934.7 4,113.7

EPS (basic, post-except) (Rmb) 1.24 1.82 2.37 3.10

EPS (diluted, post-except) (Rmb) 1.24 1.82 2.37 3.10 Total liabilities & equity 10,638.0 15,273.6 18,167.5 21,597.8

DPS (Rmb) 0.63 0.92 1.20 1.57

Dividend payout ratio (%) 50.7 50.7 50.7 50.7 BVPS (Rmb) 7.27 8.17 9.34 10.86

Free cash flow yield (%) 6.2 3.5 4.3 6.2

Growth & margins (%) 12/14 12/15E 12/16E 12/17E Ratios 12/14 12/15E 12/16E 12/17E

Sales growth 20.4 23.7 25.5 17.5 CROCI (%) 75.0 72.2 77.2 83.5

EBITDA growth 21.0 36.0 30.2 32.1 ROE (%) 17.9 23.6 27.1 30.6

EBIT growth 20.3 36.3 29.9 32.5 ROA (%) 11.5 13.0 13.1 14.4

Net income growth 5.0 46.8 29.9 30.6 ROACE (%) 71.9 83.9 91.0 100.6

EPS growth 5.0 46.8 29.9 30.6 Inventory days 19.1 19.5 19.2 20.0

Gross margin 17.2 18.7 18.6 19.9 Receivables days 22.1 23.1 22.9 23.6

EBITDA margin 10.4 11.5 11.9 13.4 Payable days 44.1 42.4 41.8 43.4

EBIT margin 9.8 10.8 11.2 12.6 Net debt/equity (%) (67.7) (68.8) (68.3) (70.2)

Interest cover - EBIT (X) NM NM NM NM

Cash flow statement (Rmb mn) 12/14 12/15E 12/16E 12/17E Valuation 12/14 12/15E 12/16E 12/17E

Net income pre-preferred dividends 1,147.6 1,684.6 2,188.8 2,858.1

D&A add-back 132.1 174.5 236.6 299.1 P/E (analyst) (X) 18.0 27.8 21.4 16.4

Minorities interests add-back 524.2 695.0 903.0 1,179.1 P/B (X) 3.1 6.2 5.4 4.7

Net (inc)/dec working capital (356.7) (87.5) (84.9) (107.3) EV/EBITDA (X) 7.9 14.9 11.3 8.4

Other operating cash flow 310.6 0.0 0.0 0.0 EV/GCI (X) 5.1 11.2 8.9 7.4

Cash flow from operations 1,757.8 2,466.5 3,243.5 4,228.9 Dividend yield (%) 2.8 1.8 2.4 3.1

Capital expenditures (392.8) (740.7) (1,084.0) (1,091.8)

Acquisitions 0.0 0.0 0.0 0.0

Divestitures 2.9 0.0 0.0 0.0

Others (180.9) 0.0 0.0 0.0

Cash flow from investments (570.8) (740.7) (1,084.0) (1,091.8)

Dividends paid (common & pref) (554.0) (581.7) (853.9) (1,109.5)

Inc/(dec) in debt 42.0 2,387.8 0.0 0.0

Common stock issuance (repurchase) 46.5 0.0 0.0 0.0

Other financing cash flows (374.9) 0.0 0.0 0.0

Cash flow from financing (840.4) 1,806.1 (853.9) (1,109.5)

Total cash flow 346.6 3,531.9 1,305.5 2,027.6 Note: Last actual year may include reported and estimated data.

Source: Company data, Goldman Sachs Research estimates.



iFLYTek (002230.SZ): Upgrade to Buy; clear leader in China intelligent speech


We upgrade iFLYTek to Buy from Neutral, with a revised 12-month target price of Rmb38.6. In the China intelligent

speech market, we think 2013 was the inflection point, with 96% yoy growth (vs. 38% in 2012). We think this has

opened up a longer-term growth window, and we forecast 37% CAGR for 2014-2020E. Our Buy rating is based on:

1) We believe iFLYTek is in a favorable position to fully capture the growth trend; 2) iFLYTek, with dominant

domestic market share, has an established technology leadership and Chinese language specialty — which

should protect against new entrants or global players; 3) We expect the company to benefit from an increasingly

wide spectrum of language applications in industry.

Catalyst

In recent years, we have seen natural speech recognition take center stage in next-gen human-machine

interaction, with global technology giants Apple (Siri), Google (Google Now) and Microsoft (Cortana) all taking a

lead. As well as developing underlying algorithms, we have also seen more language-related applications in

different verticals. We forecast strong revenue growth at iFLYTek — 52%/62%/49% yoy for 2015-17E — mainly

driven by increasing intelligent speech application demand from telcos, government and the education sector.

For example, iFLYTek-C3 (up 269% yoy in 1H15), is an IT system for public security and public management. It

has been widely adopted by the Anhui government and we expect it to expand into other provinces. On the

expense side, we continue to expect a high ratio of expenses to revenue, mainly due to R&D and application

expansion. Overall, we expect revenue growth to drive net income growth at 50%/54%/49% for 2015E-17E.

Valuation

We update our EPS by -3%/9%/26% to Rmb0.45/0.68/1.01 for 2015E-17E on faster revenue growth in its key

businesses. Our revised 12-month target price is Rmb38.6, representing 37% potential upside. It is based on 25X

2020E EPS of Rmb2.09, discounted back to 2016 at a 7.9% cost of equity. We upgrade to Buy on its favorable

market trend and good positioning. Our previous 12-month target price was Rmb20.80, based on 2015E EV/GCI

vs. CROCI/WACC. We revise the methodology to be in line with the rest of our software/IT services coverage.

Key risks

Weaker demand from end users and lower-than-expected technology innovation would slow revenue growth;

higher-than-expected R&D input for speech recognition and smart HMI projects would curb margins.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Anhui USTC iFLYTEK (002230.SZ)


Key data Current

Price (Rmb) 28.10




12/14 12/15E 12/16E 12/17E

EPS (Rmb) 0.32 0.45 0.68 1.01

EPS growth (%) 28.6 44.1 49.5 48.7

EPS (diluted) (Rmb) 0.32 0.45 0.68 1.01


P/E (X) 58.4 61.8 41.4 27.8

P/B (X) 6.0 5.8 5.3 4.7

EV/EBITDA (X) 20.9 45.0 30.9 20.4

Dividend yield (%) 0.7 0.5 0.8 1.2

ROE (%) 10.8 11.5 13.4 18.0

CROCI (%) 24.6 22.4 24.6 27.2

1,000

1,300

1,600

1,900

2,200

2,500

2,800

3,100

3,400

3,700

15

20

25

30

35

40

45

50

55

60



Anhui USTC iFLYTEK (L) Shenzhen A Index (R)


Absolute (30.5) (9.5) 57.6

Rel. to Shenzhen A Index 8.8 (4.2) 14.6




Anhui USTC iFLYTEK: Summary financialsProfit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E


Cost of goods sold (787.6) (1,198.5) (1,950.4) (2,800.0) Accounts receivable 1,288.9 1,911.4 3,031.8 4,428.5

SG&A 151.4 (588.8) (933.5) (1,378.8) Inventory 180.6 295.5 480.9 690.4

R&D (315.2) (433.6) (715.2) (1,086.9) Other current assets 28.0 28.0 28.0 28.0


EBITDA 1,018.3 720.6 1,094.7 1,687.2 Net PP&E 766.8 1,084.2 1,487.3 1,975.9

Depreciation & amortization (194.5) (258.1) (354.2) (487.3) Net intangibles 1,292.2 1,432.0 1,711.4 2,135.4

EBIT 823.8 462.4 740.5 1,199.9 Total investments 166.7 166.7 166.7 166.7




Others (431.8) 161.2 184.9 213.7 Accounts payable 899.5 1,368.8 2,227.5 3,197.8

Pretax profits 433.7 643.8 993.9 1,471.8 Short-term debt 9.0 9.0 9.0 9.0

Income tax (45.3) (70.3) (105.8) (159.3) Other current liabilities 167.4 191.1 291.7 431.7

Minorities (9.1) (6.2) (16.3) (16.3) Total current liabilities 1,075.9 1,569.0 2,528.2 3,638.5

Long-term debt 0.0 0.0 0.0 0.0

Net income pre-preferred dividends 379.4 567.3 871.9 1,296.3 Other long-term liabilities 192.6 192.6 192.6 192.6

Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 192.6 192.6 192.6 192.6

Net income (pre-exceptionals) 379.4 567.3 871.9 1,296.3 Total liabilities 1,268.5 1,761.5 2,720.7 3,831.1


Net income 379.4 567.3 871.9 1,296.3 Preferred shares 0.0 0.0 0.0 0.0


EPS (basic, pre-except) (Rmb) 0.32 0.45 0.68 1.01 Minority interest 194.8 201.0 217.2 233.5



DPS (Rmb) 0.14 0.15 0.22 0.33


Free cash flow yield (%) (0.7) (0.4) (0.7) (0.6)



EBITDA growth 200.7 (29.2) 51.9 54.1 ROE (%) 10.8 11.5 13.4 18.0

EBIT growth 297.6 (43.9) 60.1 62.0 ROA (%) 8.0 8.5 9.8 12.1








Net income pre-preferred dividends 379.4 567.3 871.9 1,296.3


Minorities interests add-back 9.1 6.2 16.3 16.3 P/B (X) 6.0 5.8 5.3 4.7


Other operating cash flow 478.8 562.4 866.6 1,290.3 EV/GCI (X) 6.8 7.9 6.2 4.7

Cash flow from operations 420.1 563.5 795.3 1,163.9 Dividend yield (%) 0.7 0.5 0.8 1.2

Capital expenditures (580.2) (715.3) (1,036.7) (1,399.9)



Others (538.0) 0.0 0.0 0.0

Cash flow from investments (1,118.1) (715.3) (1,036.7) (1,399.9)

Dividends paid (common & pref) (70.3) (163.5) (187.2) (287.7)

Inc/(dec) in debt (18.9) 0.0 0.0 0.0

Common stock issuance (repurchase) 124.1 2,104.0 0.0 0.0


Cash flow from financing 10.3 1,940.5 (187.2) (287.7)

Total cash flow (687.7) 1,788.7 (428.6) (523.7) Note: Last actual year may include reported and estimated data.




Exhibit 51: We forecast the China intelligent speech market to grow at 37%

CAGR in 2014-2020E China intelligent speech market size

Exhibit 52: China intelligent speech as a share of the global market to

increase to 17% in 2017E from 11% Intelligent speech market size in China and globe

Source: ETIRI, Gao Hua Securities Research.

Source: ETIRI, Gao Hua Securities Research

We expect the intelligent speech market to enter a high-growth period with increasing demand for ever better human-machine

interaction. In 2013, the market inflected with 96% yoy growth, which we believe implies a strong signal for long-term growth. We

estimate the market will grow at 37% CAGR in 2014-2020E, based on robust demand from broad application in telematics, telcos,

government, and the education sector. The China intelligent speech market accounted for 11% of the global market in 2014 and the

growth in China to outpace the global market in the next 5 years and expand its share to 17%.

iFLYTek, as a leader in domestic intelligent speech market, with 54% market share (2014), has strong technology leadership and

Chinese language specialty, which we think will protect it against any new entrants and global players. It has registered strong sales

momentum in its government-related and education business in 1H15, with 269%/81% yoy growth, respectively. We expect the two

segments to grow at 38% CAGR in 2016E-20E on the back of increasing application of intelligent speech in those areas. For voice

supporting software, although we see weak 1H15 revenue growth of -11% — due to late delivery on telematics and other verticals —

we expect the segment to pick up in 2H15 and 2016 as current contracts are delivered on specific auto models entering mass

production.

The stock is trading at 41X 2016E P/E, below its historical average forward P/E of 56.4X. We think this valuation is attractive given its

strong long-term growth and upgrade it to Buy from Neutral.

‐

500

1,000

1,500

2,000

2,500

3,000

3,500

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

(USD

mn)

China intelligent speech market size

China intelligent speechmarket to grow at 37% CAGR in 2014‐2020E

"Inflection year" with 96% yoy growth

11%

17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

‐

2,000

4,000

6,000

8,000

10,000

12,000

2014 2017E

(USD

mn)

Global China China as % of global



Exhibit 53: iFLYTek is a leader in the domestic intelligent speech space, with

54% market share Market share of intelligent speech in China, 2014

Exhibit 54: We expect iFLYTek revenue to grow at 33% CAGR in 2016E-2020E

iFLYTek revenue growth estimates

Source: ETIRI.


Exhibit 55: iFLYTek is trading below its historical average P/E of 56.4X

Exhibit 56: iFLYTek is trading at its historical average P/B of 6.9X

Source: Datastream, Company data, Gao Hua Securities Research.


iFLYTek, 54%

Baidu, 13%

Apple, 12%

Nuance, 5%

Jietong Huasheng, 5%

Zhongke Xinli, 3%

Zhongke Moshi, 2%

Others, 5%

60%

42%

51%

62%

49%

39%

27%

18%

0%

10%

20%

30%

40%

50%

60%

70%

0

2000

4000

6000

8000

10000

12000

14000

16000

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Rm

b m

n

Revenue yoy growth

56.4X

70.4X

42.4X

‐

20.0

40.0

60.0

80.0

100.0

120.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15

1‐year forward rolling P/E Average +1 stdev ‐1 stdev

1‐yr fwd P/E (X)

6.9X

9.5X

4.4X

0%

2%

4%

6%

8%

10%

12%

14%

16%

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15

1‐year fwd P/B Average +1 stdev ‐1 stdev ROE (%)

1‐yr forward P/B (X) ROE (%)



Yonyou (600588.SS): A challenge to gain share in ERP market; new business unclear; Sell


We initiate coverage on Youyou with a Sell rating and a 12-month target price of Rmb14.10. Yonyou is the largest

corporate management, ERP, human resource, and CRM software/system vendor in China, with 39% market

share in ERP (2014). Its clients come from a broad spectrum of sectors. Our Sell rating is based on: (1) modest

China ERP market growth (13% CAGR for 2014-2019E); (2) limited potential to further gain market share; (3) its

innovative businesses are still at early stage and have poor earnings visibility; (4) demanding valuation.

Catalyst

In the near term, we expect the company’s revenue to grow at only 11% with net income to fall 6% in 2015E, on

the back of higher expenses related to developing new business. In the medium term, we expect Yonyou’s

market share to stagnate (having remained 40% for the past a few years), in light of the large number of

competitors that offer similar products (for example, local peers Inspur and Kingdee, and global peers SAP and

Oracle).

Associate Chanjet (1588.HK, Not Covered, Yonyou holds a 69% stake) offers cloud-based ERP solutions for SMEs

and provides third-party payment. It contributed 8%/13% to Yonyou’s 2014 revenue/net income (exclude minority

interest). We believe it remains the key swing factor for Yonyou as we expect increasing competition in ERP for

SMEs due to entry by existing software/IT services companies as well as by startups — which we think will raise

pricing pressure and make monetization a challenge.

Lastly, without clear visibility in its new businesses (credit ratings, P2P loan, and big data platform), we forecast

the company’s revenue/net income to grow at only 15%/12% CAGR over 2014-2017E, the lowest among our

software coverage. With the stock trading at 2017E P/E of 45X, the second highest after NavInfo, we believe

valuation is demanding.

Valuation

Our 12-month target price is Rmb14.1, representing 45% potential downside. It is based on 21X 2020E EPS of

Rmb0.93, discounted back to 2016 at an 8.4% cost of equity.

Key risks

Faster-than-expected revenue/net income growth at Chanjet; successful new business development such as in

credit ratings and internet finance; stronger-than-expected ERP market growth in China; lower-than-expected

SG&A.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Yonyou Network Technology (600588.SS)


Key data Current

Price (Rmb) 25.76




12/14 12/15E 12/16E 12/17E

EPS (Rmb) 0.39 0.36 0.45 0.53

EPS growth (%) (0.6) (7.9) 24.4 18.4

EPS (diluted) (Rmb) 0.39 0.36 0.45 0.53


P/E (X) 35.8 71.2 57.2 48.3

P/B (X) 5.0 6.4 6.1 5.7

EV/EBITDA (X) 33.8 63.7 55.8 48.3

Dividend yield (%) 1.8 0.7 0.9 1.0

ROE (%) 15.3 10.5 10.9 12.2

CROCI (%) 23.4 16.6 16.2 15.9

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

10

20

30

40

50

60

70

80



Yonyou Network Technology (L) Shanghai SE A Share Index (R)


Absolute (52.8) (25.4) 96.9

Rel. to Shanghai SE A Share Index (33.6) (15.2) 41.4




Yonyou Network Technology: Summary financialsProfit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E



SG&A (1,903.5) (2,200.8) (2,539.2) (2,930.1) Inventory 22.5 24.8 29.7 35.6



EBITDA 560.7 551.0 653.2 762.3 Net PP&E 1,810.0 2,396.9 3,354.1 4,006.1


EBIT 447.0 410.1 476.9 559.8 Total investments 505.1 505.1 505.1 505.1


Interest expense (84.1) (86.9) (47.3) (42.6) Total assets 8,810.6 10,472.3 11,215.1 12,073.2


Others 248.9 323.2 366.4 425.4 Accounts payable 1,291.7 1,423.1 1,708.7 2,046.8

Pretax profits 611.8 646.3 795.9 942.6 Short-term debt 1,452.4 1,152.4 1,152.4 1,152.4


Minorities (19.3) (47.2) (59.8) (70.8) Total current liabilities 3,530.0 3,269.1 3,623.9 4,022.5

Long-term debt 326.3 326.3 326.3 326.3

Net income pre-preferred dividends 550.3 518.3 656.6 777.5 Other long-term liabilities 511.8 511.8 511.8 511.8


Net income (pre-exceptionals) 550.3 518.3 656.6 777.5 Total liabilities 4,368.1 4,107.2 4,462.0 4,860.6


Net income 550.3 518.3 656.6 777.5 Preferred shares 0.0 0.0 0.0 0.0





DPS (Rmb) 0.25 0.18 0.22 0.27


Free cash flow yield (%) 2.1 (0.4) (0.9) 0.1




EBIT growth 13.1 (8.3) 16.3 17.4 ROA (%) 6.9 5.4 6.1 6.7

Net income growth 0.4 (5.8) 26.7 18.4 ROACE (%) 21.8 17.6 16.7 16.3

EPS growth (0.6) (7.9) 24.4 18.4 Inventory days 5.7 5.5 5.3 5.3




Interest cover - EBIT (X) 5.3 4.7 10.1 13.1


Net income pre-preferred dividends 550.3 518.3 656.6 777.5




Other operating cash flow 159.9 0.0 0.0 0.0 EV/GCI (X) 4.5 6.8 5.7 5.0

Cash flow from operations 804.3 648.9 844.0 994.5 Dividend yield (%) 1.8 0.7 0.9 1.0

Capital expenditures (386.6) (780.2) (1,203.4) (945.3)



Others (234.4) 0.0 0.0 0.0

Cash flow from investments (615.2) (780.2) (1,203.4) (945.3)


Inc/(dec) in debt 335.6 (300.0) 0.0 0.0

Common stock issuance (repurchase) 763.8 1,616.1 0.0 0.0


Cash flow from financing 647.9 964.7 (259.2) (328.3)

Total cash flow 837.1 833.4 (618.6) (279.0) Note: Last actual year may include reported and estimated data.




Exhibit 57: We expect the China ERP market to grow stably at 13% in next 5

years China ERP market size

Exhibit 58: We expect Yonyou’s revenue to grow in line with the industry due

to fierce competition Yonyou revenue growth estimates

Source: Gartner, Gao Hua Securities Research.


Exhibit 59: The domestic ERP market is crowded with both local and global

players ERP market share in China, 2014

Exhibit 60: Yonyou’s market share has been stable at around 40% for several

years Yonyou’s market share in China

Source: Gartner.

Source: Gartner.

‐

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

(USD

mn)

2014‐2019E CAGR: 13%

3%

0%

11%

18% 18% 18%

15%

11%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

(Rmb mn)

Yonyou39%

Inspur Genersoft

17%

SAP15%

Kingdee13%

Oracle4%

Infor 2%

Microsoft1%

Others9%

20%

25%

30%

35%

40%

45%

2012 2013 2014



Exhibit 61: Yonyou is trading at +1 stdev above its historical average P/E, at

69.2X Yonyou 12-m forward P/E band

Exhibit 62: Yonyou is trading at +1 stdev above its historical average P/B, at

7.5X Yonyou 12-m forward P/B band



41.4X

69.2X

13.6X ‐

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15


5.1X

7.5X

2.8X

0%

5%

10%

15%

20%

25%

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15





Ultrapower (300002.SZ): ITSM slowdown, and no near-term catalysts; down to Neutral

What happened

We remove Ultrapower from our Buy list as we have a cautious outlook on its business and earnings growth

potential in near-to-medium term. Overall, we see 1) its major ITSM business is facing slowing growth and

declining margins from an increasing proportion of hardware in the mix; 2) its mobile gaming ramp-up is slower

than our expectations, but will remain the main profit driver for the company in the next two years; 3) it

diversifying into a number of new businesses, such as e-commerce (raw food procurement), education (online

professional training), and smart wire (network infrastructure at mining sites). We see limited synergies among

its existing and new business lines, and remain cautious on their success until there is better visibility.

Since we added Ultrapower to the Buy (we also added it to the CL at that time) list on Aug 25, 2013, it is up 55%

vs for the Shenzhen A-share index up 75%. Since we removed it from the CL list (retaining Buy) on July 11, 2014,

the stock is up 12%, vs. Shenzhen A index up by 58%. We attribute the underperformance to a lack of earnings

catalysts.

Current view

1) The ITSM (IT system management) business continues to be the major revenue and profit contributor

(73%/57% of total revenue/gross profit in 2015E). However, within this, we expect growth of the high-gross

margin IT solution (78% gross margin in 2015E) to slow to 10% in 2015E. On the other hand, we expect growth of

the low-gross margin IT system integration (2% gross margin in 2015E) to grow faster at 40% in 2015E.

2) In its internet operations (mainly Fetion with China Mobile), we expect only 10% CAGR for 2016E-2020E due to

competing the market dominance of competitor WeChat;

3) We expect mobile gaming revenue to be the main profit driver, reaching 20% gross profit contribution in 2017E

vs. 9% in 2015E;

4) On expenses, we see limited operating leverage in the near future due to expenses increases driven by

multiple new business development.

Valuation: we update our EPS 0%/-31%/-29% to Rmb0.43/0.37/0.45 for 2015E-17E on slower revenue growth (one-

off investment gain from the Zhongqing Longtu disposal contributes Rmb0.13 to EPS in 2015E). Our 12-month

target price is Rmb10.0, representing 9% potential downside. It is based on 21X 2020E EPS of Rmb0.68,

discounted back to 2016 at a 9% cost of equity. Our previous 12-month target price was Rmb15.18, based on

2015E EV/GCI vs. CROCI/WACC. We revise the methodology to be in line with the rest of our software/IT services

coverage.

Key risks: stronger/weaker-than-expected revenue growth from overseas market and mobile gaming;

higher/lower-than-expected revenue from telco operators; potential M&A; higher/lower-than-expected gross

margin at ITSM business.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Beijing Ultrapower Software (300002.SZ)


Key data Current

Price (Rmb) 10.96




12/14 12/15E 12/16E 12/17E

EPS (Rmb) 0.32 0.43 0.37 0.45

EPS growth (%) 13.8 36.1 (15.4) 21.9

EPS (diluted) (Rmb) 0.31 0.43 0.37 0.45


P/E (X) 30.3 25.2 29.8 24.4

P/B (X) 4.0 4.0 3.6 3.3

EV/EBITDA (X) 30.6 37.4 30.0 24.1

Dividend yield (%) 0.8 1.0 0.9 1.0

ROE (%) 14.8 16.7 12.7 14.0

CROCI (%) 19.2 22.0 16.7 18.3

1,000

1,300

1,600

1,900

2,200

2,500

2,800

3,100

3,400

3,700

4,000

8

10

12

14

16

18

20

22

24

26

28



Beijing Ultrapower Software (L) Shenzhen A Index (R)


Absolute (45.2) (35.0) 17.3

Rel. to Shenzhen A Index (14.1) (31.3) (14.7)




Beijing Ultrapower Software: Summary financialsProfit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E



SG&A (492.9) (568.0) (633.6) (719.8) Inventory 215.8 273.0 336.0 397.3



EBITDA 582.7 543.3 670.9 821.3 Net PP&E 381.7 544.8 719.9 901.4






Others 96.3 394.5 104.9 123.3 Accounts payable 306.5 387.8 477.3 564.3

Pretax profits 651.4 901.9 746.6 920.3 Short-term debt 66.1 66.1 66.1 66.1


Minorities 20.3 39.2 44.0 44.0 Total current liabilities 569.4 712.0 767.4 895.2




Net income (pre-exceptionals) 624.4 864.8 730.8 890.7 Total liabilities 605.2 747.8 803.1 930.9




EPS (basic, pre-except) (Rmb) 0.32 0.43 0.37 0.45 Minority interest 88.3 49.0 5.0 (39.0)



DPS (Rmb) 0.08 0.11 0.09 0.11






EBIT growth 7.1 (10.2) 22.5 21.6 ROA (%) 12.9 14.6 11.1 12.3

Net income growth 20.6 38.5 (15.5) 21.9 ROACE (%) 19.4 20.7 15.3 16.9

EPS growth 13.8 36.1 (15.4) 21.9 Inventory days 45.3 52.2 52.8 53.8








Minorities interests add-back (20.3) (39.2) (44.0) (44.0) P/B (X) 4.0 4.0 3.6 3.3


Other operating cash flow (50.9) 0.0 0.0 0.0 EV/GCI (X) 4.7 5.0 4.4 4.0


Capital expenditures (131.0) (206.2) (237.2) (266.4)



Others (315.9) 0.0 0.0 0.0

Cash flow from investments (446.3) (206.2) (237.2) (266.4)


Inc/(dec) in debt (89.0) 0.0 0.0 0.0



Cash flow from financing (153.7) (159.3) (220.7) (186.5)

Total cash flow (250.5) 380.4 88.3 263.9 Note: Last actual year may include reported and estimated data.




Exhibit 63: We expect Ultrapower revenue growth to slow after 2015 based

on slower ITSM growth Ultrapower revenue growth forecast

Exhibit 64: Gross margin to erode due to the lack of a strong profit driver

Ultrapower margin trend



Exhibit 65: Lower-margin ITSM will remain the main revenue driver Ultrapower revenue breakdown and growth

Exhibit 66: Mobile games to drive gross profit through 2017 Ultrapower gross profit breakdown and growth



35% 34%

16%

20%18% 16%

10%7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

(Rmb mn)

Revenue growth slowing down

74%67% 65%

58%

47%42% 41% 40%

39%

28% 27% 26%21%

16% 17% 17%

39%31% 30% 27% 24%

29%21% 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010 2011 2012 2013 2014 2015E 2016E 2017E

GM OPM NPM

14%

7%

46%

5%0%

10%

20%

30%

40%

50%

‐

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

ITSM Internetoperation

Mobile game Others

(Rmb mn)2014 2017E 2020E 2014‐2020E CAGR

9%2%

63%

‐2%‐10%

0%

10%

20%

30%

40%

50%

60%

70%

‐

200

400

600

800

1,000

ITSM Internetoperation

Mobile game Others

(Rmb mn)2014 2017E 2014‐2017E CAGR



Exhibit 67: Ultrapower is trading close to +1 stdev above its historical

average P/E of 25.8X Ultrapower 12-m forward P/E band

Exhibit 68: Ultrapower is trading close to +1 stdev above its historical

average P/B of 3.7X Ultrapower 12-m forward P/B and ROE band



25.8X

37.0X

14.7X

‐

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15


1‐yr fwd P/E (X)

3.7X

5.2X

2.2X

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

‐

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15



Shiji (002153.SZ): Leader in high-end hotel & restaurant systems, stable growth: Neutral

Investment view

We initiate coverage on Shiji with a Neutral rating and 12-month target price of Rmb96.3. Shiji is the No.1

payment and merchants system (PMS) and POS (point-of-sale) vendor to hotels & restaurants in China, with 49%

market share in 2014 by our estimates. Overall, the company (1) is dominant in providing IT systems to high-end

hotels in China, with over 30% market share; (2) stands to benefit from higher IT penetration and market share

expansion among economy hotel chains; (3) is creating new growth opportunities by extending its product

offerings, such as payment system and merchants POS/inventory management; (4) leverages M&As to create

business synergies, having expanded into entertainment/travel IT, hardware distribution, and data processing.

We see solid fundamentals for Shiji but are Neutral on valuation.

Core drivers of growth

We expect its traditional hotel and restaurant IT business to remain stable, achieving 10-15% CAGR through 2020.

Its new revenue drivers are its (1) payment system and (2) merchants system segments. The company offers to its

hotel/restaurant clients to integrate their payment system with back-end IT infrastructure, either through customized

POS machine or third party online payment. We forecast 32% revenue CAGR off a low base in this segment though

2020. In 2013, The company acquired CNED (China National Electronic Devices), a 3C product distributor of 3000

resellers. Leveraging its strength in 3C product distribution channel, Shiji should be able to push its merchants IT

system product to retailers. We forecast 48% revenue CAGR (off a low base) for this segment, through 2020. We

estimate the two segments to make up 40% of the revenue mix in 2020, from 8% in 1H15. However, clarity around

the potential scale and success of these two new businesses remains unclear at this moment.

Risks to the investment case

(1) Higher/lower-than-expected hotel and restaurant market growth, and Shiji’s market share in China; 2) New

M&A deals, which may add/decrease profitability; 3) Faster/slower-than-expected ramp-up of payment/merchant

system businesses; 4) Higher/lower-than-expected SG&A expenses due to new businesses.

Valuation


Rmb5.44, discounted back to 2016 at a 9% cost of equity. Our target price implies 47.7X 2016E P/E. We initiate as

Neutral and await better visibility for its new businesses.

Industry context

We estimate the hotels & restaurants IT market size amounted US$323mn in 2014, and expect it to grow at 15%

CAGR through 2020, primarily driven by a rising number of hotels (mainly economy chain brands) and increasing

IT penetration of restaurants as the increased popularity of online to offline (O2O) services incentivize restaurants

to upgrade their IT. Shiji is the dominant player with 49% market share, while competitors have 5% or less market

share.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Beijing Shiji Information (002153.SZ)


Key data Current

Price (Rmb) 88.49




12/14 12/15E 12/16E 12/17E

EPS (Rmb) 1.24 1.36 2.02 2.88

EPS growth (%) 6.2 10.0 48.4 42.6

EPS (diluted) (Rmb) 1.24 1.36 2.02 2.88


P/E (X) 46.0 65.1 43.9 30.8

P/B (X) 9.3 12.1 9.9 7.9

EV/EBITDA (X) 39.3 56.2 37.2 25.9

Dividend yield (%) 0.2 0.2 0.5 0.7

ROE (%) 21.9 20.3 24.8 28.5

CROCI (%) 24.5 32.8 41.3 49.0

1,000

1,300

1,600

1,900

2,200

2,500

2,800

3,100

3,400

3,700

40

60

80

100

120

140

160

180

200

220



Beijing Shiji Information (L) Shenzhen A Index (R)


Absolute (45.9) (22.2) 52.6

Rel. to Shenzhen A Index (15.2) (17.6) 11.0




Beijing Shiji Information: Summary financialsProfit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E

Total revenue 2,186.1 2,096.2 2,459.1 2,882.8 Cash & equivalents 695.1 953.9 1,346.0 1,811.4

Cost of goods sold (1,387.9) (1,192.6) (1,251.5) (1,304.3) Accounts receivable 309.9 321.6 377.3 442.3

SG&A (332.2) (384.0) (442.9) (510.5) Inventory 256.7 220.6 231.5 241.3



EBITDA 431.3 471.1 702.4 989.7 Net PP&E 330.3 316.7 304.3 293.1







Pretax profits 444.3 490.5 732.2 1,030.4 Short-term debt 6.7 6.7 6.7 6.7


Minorities (13.1) (21.0) (28.0) (28.0) Total current liabilities 495.2 397.2 495.4 562.4




Net income (pre-exceptionals) 382.0 420.2 623.6 889.0 Total liabilities 559.5 461.5 559.7 626.7







DPS (Rmb) 0.12 0.14 0.40 0.58




Sales growth 99.7 (4.1) 17.3 17.2 CROCI (%) 24.5 32.8 41.3 49.0


EBIT growth 36.2 9.4 55.6 44.4 ROA (%) 15.7 16.0 20.2 23.4











Net (inc)/dec working capital 101.2 (78.5) (51.1) (60.9) EV/EBITDA (X) 39.3 56.2 37.2 25.9






Others 176.9 (100.0) (200.0) (300.0)

Cash flow from investments 163.6 (132.4) (238.0) (344.5)


Inc/(dec) in debt (1.7) 0.0 0.0 0.0




Total cash flow 292.0 258.8 392.1 465.5 Note: Last actual year may include reported and estimated data.




Exhibit 71: Payment and merchants system are the fastest growing segment

Shiji revenue breakdown by segment

Exhibit 72: Shiji’s gross margin to improve as software business growth

outpaces low-margin channel sales Shiji margin trend



16%9%

36%

55%

‐8%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

60%

‐

200 400 600 800

1,000 1,200

1,400 1,600 1,800(Rmb, mn) 2014 2020E 2014‐2020E CAGR

System forRestaurant

PMS Payment System forMechants

Sales & Others

67%

55%

37%43%

49%55%

60%63% 65%

34%

25%

17% 19%26%

32%36%

40% 42%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Gross margin Operating margin

Acquisition of CNED

Exhibit 69: China hotels will grow stably at 10% CAGR in 2014-2020E The number of hotels in China by type

Exhibit 70: We expect Shiji’s revenue to grow at 15% CAGR through 2020 Shiji revenue and growth rate

Source: CEIC, Inntie, Gao Hua Securities Research.


0

10,000

20,000

30,000

40,000

50,000

60,000

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

(unit) High‐end hotel 1‐3 star hotel & economy hotel

High-end hotel: 6% 14-20E CAGR

1-3 star hotel & economy hotel:

10% 14-20E CAGR

39%

100%

‐4%

17% 17% 17% 13% 10%

‐20%

0%

20%

40%

60%

80%

100%

120%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

(Rmb mn)

Acquisition of CNED



Exhibit 73: Shiji is establishing a comprehensive product line for its clients

Shiji’s business model

Exhibit 74: Chairman Li Zhongchu controls the company

Shiji shareholder structure by 2014



Exhibit 75: Shiji has been conducting M&A to grow its businesses and achieve synergies

Shiji M&A deal timeline


ClientsHotels

RestaurantsMerchantsTheme parks

...

POSPMS

Big data analysis

Distributi‐on

channel

Payment gateway

Third party

payment

Shareholding structureMr. Li Zhongchu, Chairman 63%Chairman's family 4%Beijing Yeqin Investment 4%Institutional investors 6%Individual investors 1%Total 78%

2006 200 2009 2010 2011 2012 2013 2014 2015

2006Acquired 60% of Hangzhou Xiruan

Nov 2007Acquired 70% of Infrasys (HK)

Apr 2009Acquired 22% of Hangzhou Xiruan

Jul 2010Acquired Nanjing

SilverStone

Mar 2011Acquired 18% of Hangzhou Xiruan

Nov 2010Acquired 15%

of IPS

Jun 2012Acquired 8% of IPS

May 2013Acquired 30% of Infrasys (HK)

Jul 2014Acquired 45% of

CNED

Dec 2013Acquired 75%

of SiSS

Oct 2013Acquired 55%

of CNED

Mar 2015Acquired 26% of

SnapShot

Mar 2014Acquired 13% of

SnapShot

May 2015Acquired 30% of

Tech‐Trans

Apr 2015Acquired 20% of

Galasys

Jul 2015Acquired 100% of

Armitage



Exhibit 76: Shiji has acquired both domestic and overseas companies, providing horizontal integration and new business expansion Shiji acquired company list

Note: POS=Point of sale; PMS=Property management system; PGS=Payment gateway system;


Date Target companyStake traded

Post‐deal stake

Deal value (Rmb mn)

12m trailing P/S (X)

12m trailing P/E (X)

Business

7/15/2015 Guangzhou Armitage Technologies Ltd. 100% 100% 75 3.1 n.a. PMS

4/14/2015 Galasys PLC 20% 20% 43 3.2 13.1System for theme parks

and scenic spots

3/11/2015 SnapShot GmbH 26% 39% 49 176.3 n.a.Big data analysis in

hospitality

5/14/2015 Tech‐Trans Co., Ltd. 30% 30% 82 4.0 13.7 POS

7/15/2014 China National Electronic Devices Corp. 45% 100% 315 0.6 20.6Distribution of electronic

devices

3/21/2014 SnapShot GmbH 13% 13% 6 42.4 n.a.Big data analysis in

hospitality

12/11/2013 Shenzhen International SoluSoft Software Co., Ltd. 75% 75% 205 6.5 15.4 POS

10/16/2013 China National Electronic Devices Corp. 55% 55% 238 0.3 9.8Distribution of electronic

devices

5/29/2013 Infrasys International Limited 30% 100% 43 n.a. n.a. POS

6/9/2012 IPS Technology Co., Ltd. 8% 23% 37 4.9 20.7 Third party payment

8/20/2011 Shanghai Bestech Software Co., Ltd. 70% 70% 31 n.a. n.a. POS

3/31/2011 Hangzhou Xiruan Technology Co., Ltd. 18% 100% 302.3

5.4 PMS

11/24/2010 IPS Technology Co., Ltd. 15% 15% 16 n.a. n.a. Third party payment

7/30/2010 Nanjing SilverStone Computer System Co., Ltd. 100% 100% 60 2.6 104.9 PGS

4/24/2009 Hangzhou Xiruan Technology Co., Ltd. 22% 82% 28 3.6 10.4 PMS

11/14/2007 Infrasys (HK) Ltd. 70% 70% 28 0.9 15.3 POS

2006 Hangzhou Xiruan Technology Co., Ltd. 60% 60% 60 n.a. n.a. PMS



Exhibit 77: Shiji has been trading at +1 stdev of its historical average P/E of

38.0X Shiji 12-m forward P/E band

Exhibit 78: Shiji has been trading above +1 stdev of its historical average P/B

of 8.0X. Shiji 12-m forward P/B and ROE band

Source: Company Data, Datastream,Gao Hua Securities Research


38.0X

57.3X

18.8X

‐

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15


8.0X

11.8X

4.3X

0%

5%

10%

15%

20%

25%

30%

‐

5.0

10.0

15.0

20.0

25.0

30.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15





Hundsun (600570.SS): financial software leader forays into cloud-based solution; Neutral

Investment view

We initiate coverage of Hundsun at Neutral, with a 12-month target price of Rmb47.9. Hundsun is currently the

market leading vendor of IT infrastructure in China’s financial sector in terms of value, and we estimate it has

51% share at securities companies in 2014. In our view, Hundsun: (1) has solid market positioning at its

traditional 1.0 business (install-based financial software), with a diversified client portfolio, across securities

brokerage houses, banks, funds/asset management, insurance companies, and exchanges; (2) has restructured

its shareholding in 2014, aiming for better decision-making and execution; (3) has been accelerating its

innovative business development, through the company-employee JV scheme and equity investment.

However, we see considerable regulation headwinds ahead in financial innovation in China, and therefore rate

the stock Neutral.

Core drivers of growth

In April 2014, Jack Ma of Alibaba invested in Hundsun and took a controlling 21% stake. Since then, Hundsun has

moved more rapidly into cloud-based solutions (called 2.0 businesses) for hedge funds, brokers, asset

management, and small banks. HOMS (a cloud-based IT solution for hedge funds) had been its most successful

product until 1H15 — when the company closed the product to new accounts or funds after the service was

investigated by CSRC for being employed as an illegal margin financing tool. While HOMS’ future remains

uncertain, Hundsun has other 2.0 businesses, such as iTN (brokerage tool), Yunrong (banking tool and P2P IT),

and Gildata. These cloud-based products allow for rapid adoption by clients. Overall, we expect revenue in this

segment (25% of 2015E revenue; disclosed as internet business by the company) to grow at 57% CAGR for 2016E-

2020E.

Risks to the investment case

1) Uncertainty around HOMS; 2) higher/lower-than-expected financial industry growth; 3) faster/slower-than-

expected financial innovation in China; 4) higher/lower-than-expected R&D expenses linked to new businesses.

Valuation


Rmb2.76, discounted back to 2016 at a 9.6% cost of equity. Our target price implies 69X 2016E P/E. We initiate as

Neutral due to uncertainty around HOMS and other innovative business development.

Industry context

Gartner estimates that software/IT services spending in securities/banking sectors in China was US$4342/356mn

respectively in 2014, and will grow at 13%/20% CAGR through 2020. While bank sector spending is much larger, it

remains inaccessible to third-party IT vendors, as large-scale banks mostly have self-developed in-house IT. At

securities companies, the market is highly concentrated, with Hundsun taking 51% market share in 2014, followed

by Kingdom with 34%.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





Hundsun Technologies Inc. (600570.SS)


Key data Current

Price (Rmb) 45.74




12/14 12/15E 12/16E 12/17E

EPS (Rmb) 0.58 0.56 0.70 1.22

EPS growth (%) 11.8 (4.5) 25.0 74.4

EPS (diluted) (Rmb) 0.58 0.56 0.70 1.22


P/E (X) 54.9 82.1 65.6 37.6

P/B (X) 10.3 13.2 11.6 9.6

EV/EBITDA (X) 108.0 91.7 65.0 41.6

Dividend yield (%) 0.6 0.4 0.5 0.9

ROE (%) 20.2 17.0 18.8 27.9

CROCI (%) 17.1 24.3 26.4 38.4

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

20

40

60

80

100

120

140

160

180



Hundsun Technologies Inc. (L) Shanghai SE A Share Index (R)


Absolute (69.3) (54.7) 31.5

Rel. to Shanghai SE A Share Index (56.9) (48.5) (5.5)




Hundsun Technologies Inc.: Summary financialsProfit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E

Total revenue 1,421.8 2,326.6 2,560.7 3,318.4 Cash & equivalents 522.3 539.3 579.1 916.3

Cost of goods sold (89.8) (165.7) (193.0) (274.3) Accounts receivable 209.7 343.1 377.7 489.4

SG&A (588.1) (955.8) (1,013.5) (1,239.0) Inventory 57.4 105.8 123.2 175.1

R&D (590.5) (947.0) (990.1) (1,231.8) Other current assets 1,071.6 1,071.6 1,071.6 1,071.6


EBITDA 179.8 304.4 430.1 667.0 Net PP&E 245.2 414.4 661.3 1,003.1









Minorities 5.5 (44.2) (67.3) (117.4) Total current liabilities 920.4 1,002.7 974.6 1,185.9

Long-term debt 30.2 30.2 30.2 30.2



Net income (pre-exceptionals) 360.5 344.4 430.7 750.8 Total liabilities 995.0 1,077.3 1,049.2 1,260.5







DPS (Rmb) 0.18 0.18 0.23 0.40





EBITDA growth (9.7) 69.3 41.3 55.1 ROE (%) 20.2 17.0 18.8 27.9

EBIT growth (11.6) 68.3 41.1 57.5 ROA (%) 13.4 10.7 12.1 18.2

Net income growth 11.5 (4.5) 25.0 74.4 ROACE (%) 23.3 22.8 25.0 38.0

EPS growth 11.8 (4.5) 25.0 74.4 Inventory days 254.2 179.7 216.6 198.5


EBITDA margin 12.6 13.1 16.8 20.1 Payable days 2,322.0 1,735.4 1,512.2 1,096.6






Minorities interests add-back (5.5) 44.2 67.3 117.4 P/B (X) 10.3 13.2 11.6 9.6

Net (inc)/dec working capital 334.8 (102.0) (108.5) (58.0) EV/EBITDA (X) 108.0 91.7 65.0 41.6






Others (266.1) 0.0 0.0 0.0

Cash flow from investments (362.7) (204.6) (302.0) (424.6)


Inc/(dec) in debt 13.9 0.0 0.0 0.0




Total cash flow 179.8 17.0 39.7 337.2 Note: Last actual year may include reported and estimated data.




Exhibit 79: Hundsun continues to gain shares in banking & securities IT

China banking and securities IT market size and Hundsun market share

Exhibit 80: China mutual fund and hedge fund AUM have seen rapid growth

China mutual and hedge fund AUM.

Source: Gartner, Company data, Gao Hua Securities Research.

Source: AMAC, simuwang.com.

Exhibit 81: We expect Internet (2.0 business) to be the second largest

revenue stream Hundsun revenue breakdown

Exhibit 82: We expect its OPM to rebound in 2016 thanks to operating

leverage Hundsun margin trend



20%24%

26%

31%33%

35% 36%

0%

5%

10%

15%

20%

25%

30%

35%

40%

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012 2013 2014 2015E 2016E 2017E 2018E

US$, mn

Banking & securities Hundsun mkt share

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012 2013 2014 2015H1

Rmb, bn

Mutual fund AUM Hedge fund AUM

36% CAGR

81% CAGR

‐ 200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000

2013 2014 2015E 2016E 2017E

Rmb, mn

Capital market Banking Ineternet Non‐financials and others

79% 82%

94% 93% 92% 92%

6%14% 11% 11% 14% 17%

20%27% 25%

15% 17%23%

0%10%20%30%40%50%60%70%80%90%

100%

2012 2013 2014 2015E 2016E 2017E

GPM OPM NPM



Exhibit 83: Hundsun has been developing its 2.0 businesses (internet-based) through fully/partially owned subsidiaries (as of 1H2015) Hundsun major 2.0 business list


Exhibit 84: HOMS (its cloud-based hedge fund management tool) was used

as a margin financing tool. A 1:4 margin financing example through HOMS

Exhibit 85: In our base case, we expect HOMS business to recover in 2017

Our sensitivity analysis on HOMS

Bear case: no meaningful business ramp-up through 2017; Base case: meaningful

ramp-up in 2017; Bull case: meaningful ramp-up in 2016;



Product Description Subsidiary Listed company stakeHOMS Hedge fund management tool Hundsun Networks 60%iTN Cloud‐based brokerage, PWM, asset management IT solution Hundsun Networks 60%Gildata Financial data services Hundsun Juyuan 100%Yunrong Internet P2P IT solution, Banking IT Hundsun Yunrong 60%Wangjin society Investment product retailer Santan Finance 22%Shumi Online fund product retailer Shumi Fund Sales 24%

Broker

Parent account: Financing company

(Rmb25mn)

Sub-account 1: individual investor

(Rmb1mn)


(Rmb1mn)


(Rmb1mn)


(Rmb1mn)


(Rmb1mn)

HOMSA 1:4 margin

financing model

Place trading order

Bear case Base case Bull caseHOMS 2016ERevenue (Rmb, mn) 117.1 133.6 381.7As a % of total revenue 5% 5% 14%EPS contribution (Rmb) 0.03 0.03 0.09 Total EPS (Rmb) 0.69 0.70 0.76 %EPS contribution 4% 5% 12%

HOMS 2017ERevenue (Rmb, mn) 144.3 268.7 466.6 As a % of total revenue 5% 8% 13%EPS contribution (Rmb) 0.04 0.07 0.12 Total EPS (Rmb) 1.18 1.22 1.27 %EPS contribution 3% 6% 10%



Exhibit 86: Hundsun has been leveraging company-employee JVs and equity investment to accelerate its innovative businesses Hundsun major event list


Time Events6/11/2009 Hundsun acquired 100% of Liming (software company specialised in notes servicing)1/29/2010 Hundsun acquired 100% of Shanghai Glidata Inc.(Financial data services company)11/21/2011 Hundsun reduced its shareholding from 80% to 39% as Fund123 "Shumi" and other shareholders increased their shareholding10/30/2013 Hundsun increased its shareholding in Fund123 "Shumi" from 25% to 64%

1/28/2014Hundsun terminated its stock option incentive plan and announced a new plan that allows the company and its core employees to setup and co‐invest subsidiaries undertaking innovative businesses

4/1/2014 Jack Ma indirectly acquired 21% of Hundsun through Zhejiang Rongxin Network Technology Co. Ltd.11/10/2014 Initiated the founding of Zhejiang Santan Financial Information Service which Hundsun would hold 21.75%11/21/2014 CBN and Ant Financial injected in Glidata as Hundsun controled 41% of the company12/30/2014 Hundsun Smart System increased its shareholding to 18% of Fund123 "Shumi" as Hundsun reduced its shareholding to 61%2/12/2015 Hundsun increased its shareholding in Shenzhen Tradeblazer (Futures Trading Platform) to 29% in a related transaction2/12/2015 Hundsun increased its shareholding in Hundsun Networks (Asset Management Services) to 60%2/12/2015 Hundson increased its shareholding in Hundsun Hong Kong (Shang‐HK connect business) to 76% in a related transaction

3/4/2015 Hundsun increased its shareholding in E‐Capital Transfer (interconnection platform set up by brokers in Shanghai Free Trade Zone) to 1.25%

4/10/2015Hundson increased its shareholding in Rongdu Science and Technology (P2P online lending system and internet finance services) to 30% in a related transaction

4/25/2015 Ant Financial increased its shareholding in Fund123 to 61% as Hundsun Technologies Ltd. reduced its shareholding to 24% from 61%

5/20/2015Yuntai Network Technology (Healthcare IT services) received investment from Yunfeng Capital as Hundsun Technologies Inc. reduced its shareholding from 40% to 34%.

6/18/2015 Hundsund established Zhejiang Internet Financial Asset Trading Centre ('Santan') and hold 22% of the company6/8/2015 Ant Financial acquired 100% of Rongxin



Exhibit 87: Hundsun has been trading at +1 stdev of its historical average P/E

of 55.8X. Hundsun 12-m forward P/E band

Exhibit 88: Hundsun has been trading at +1 stdev of its historical average P/B

of 9.6X. Hundsun 12-m forward P/B and ROE band

Source: Company data, Datastream, Gao Hua Securities Research

Source: Company data, Datastream, Gao Hua Securities Research

55.8X

104.6X

7.0X ‐

50.0

100.0

150.0

200.0

250.0

300.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15


9.6X

17.6X

1.6X

0%

5%

10%

15%

20%

25%

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15





NavInfo (002405.SZ): Telematics to fuel growth; Neutral on fair valuation

What's changed

We maintain our Neutral rating on NavInfo and update our 12-month target price to Rmb21.7. Overall, we believe

the company is well positioned in the fast growing telematics industry (driving-related services, such as mapping

& navigation, fleet management, and location-based services). We estimate that the most mature of these,

mapping & navigation, was worth US$565mn in 2014 and we expect it to post 22% CAGR through 2020, with

NavInfo taking 41% market share in 2014. With its excellent positioning, we believe the company is developing an

ecosystem that aims to provide telematics solutions (hardware + software) to its clients, with revenue in

telematics up 69% yoy in 1H15. It will enable the company to capture more services revenue opportunities as

telematics evolves. However, we see its valuation as full, having priced in high growth in the near-to-medium

term.

Implications

We expect its revenue to grow at 28% CAGR for 2016E-2020E, benefit from increasing penetration of IT content in

cars, and the car servicing market. In the near-to-medium term, we expect its R&D spending to remain high (13-

14% of total revenue), thanks to continuing map upgrades and development of new functions and applications.

We also expect its gross margin to decline, from 81% in 2014 (76% in 1H15) to 72% in 2017E, as the company

increases the mix of hardware in providing solutions. Overall, we expect the company’s operating margin to

rebound from 0%/4% in 2013/14 (6% in 1H15) to 8% in 2017E, driving 41% net income CAGR in 2015-17E,

benefiting from revenue growth and operating leverage from other expenses (ie, non-R&D).

Valuation

We lower our EPS -19%/-23%/-23% for 2015E-17E to Rmb0.24/0.34/0.49 on lower margins. Our 12-month target

price is Rmb21.7 (up from Rmb18.7), representing 15% potential downside. It is based on 25X 2020E EPS of

Rmb1.25, discounted back to 2016 at a 9.6% cost of equity. Our previous 12-month target price was Rmb18.70,

based on 2015E EV/GCI vs. CROCI/WACC. We revise the methodology to be in line with the rest of our software/IT

services coverage.

Key risks

Higher/lower-than-expected telematics growth in China; higher/lower-than-expected R&D spending;

higher/lower-than-expected gross margin due to change in hardware sale mix.

Growth

Returns *

Multiple


Multiple

Returns *

Growth

Investment Profile

Low High





NavInfo Co. (002405.SZ)


1,000

1,500

2,000

2,500

3,000

3,500

4,000

10

20

30

40

50

60

70



NavInfo Co. (L) Shenzhen A Index (R)


Absolute (63.4) (26.5) 19.7

Rel. to Shenzhen A Index (42.7) (22.2) (12.9)


Key data Current

Price (Rmb) 25.62




12/14 12/15E 12/16E 12/17E

EPS (Rmb) 0.17 0.24 0.34 0.49

EPS growth (%) 11.6 43.8 39.5 42.7

EPS (diluted) (Rmb) 0.17 0.24 0.34 0.49


P/E (X) 107.5 104.9 75.1 52.6

P/B (X) 5.1 6.9 6.5 5.9

EV/EBITDA (X) 42.6 39.8 26.0 17.7

Dividend yield (%) 0.3 0.3 0.4 0.6

ROE (%) 4.8 6.7 8.9 11.8

CROCI (%) 29.4 34.8 33.1 32.3



NavInfo Co.: Summary financialsProfit model (Rmb mn) 12/14 12/15E 12/16E 12/17E Balance sheet (Rmb mn) 12/14 12/15E 12/16E 12/17E


Cost of goods sold (197.0) (354.2) (552.0) (778.5) Accounts receivable 281.4 392.6 544.8 735.0

SG&A (461.6) (623.1) (856.9) (1,162.2) Inventory 51.4 92.4 143.9 203.0



EBITDA 262.2 413.7 644.9 962.7 Net PP&E 205.5 628.6 1,136.1 1,729.1









Minorities (11.9) (4.0) (13.7) (19.5) Total current liabilities 473.6 651.1 875.0 1,138.6




Net income (pre-exceptionals) 117.5 169.0 235.8 336.6 Total liabilities 481.2 658.7 882.5 1,146.2







DPS (Rmb) 0.05 0.07 0.10 0.15


Free cash flow yield (%) (0.6) (1.1) (1.1) (0.9)




EBIT growth NM 54.0 94.2 78.2 ROA (%) 3.9 5.2 6.5 8.3











Net (inc)/dec working capital (2.6) 9.9 0.0 (15.8) EV/EBITDA (X) 42.6 39.8 26.0 17.7


Cash flow from operations 324.8 536.4 777.5 1,094.8 Dividend yield (%) 0.3 0.3 0.4 0.6

Capital expenditures (399.2) (735.2) (973.7) (1,250.5)



Others 319.0 0.0 0.0 0.0

Cash flow from investments (79.9) (735.2) (973.7) (1,250.5)


Inc/(dec) in debt 58.7 0.0 0.0 0.0



Cash flow from financing 30.7 (35.3) (50.7) (70.7)

Total cash flow 275.6 (234.1) (246.9) (226.5) Note: Last actual year may include reported and estimated data.




Exhibit 89: China mapping & navigation market to grow at 22% CAGR in

2014-202E China mapping & navigation market size

Exhibit 90: Telematics will be the largest driver for the market growth

China mapping & navigation market breakdown

Source: iResearch, Gao Hua Securities Research.

Source: iResearch, Gao Hua Securities Research.

Exhibit 91: We expect NavInfo revenue to grow at 28% CAGR in 2016-2020E.NavInfo revenue growth forecast

Exhibit 92: NavInfo spends c.80% of revenue into SG&A, of which R&D and

amortization is 51% NavInfo expense structure



‐ 200 400 600 800

1,000 1,200 1,400 1,600 1,800

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

(USD mn)

China mapping & navigation market to grow at 22% CAGR in 2014‐2020E

24%

1%

9%5%

43%

0%5%10%15%20%25%30%35%40%45%50%

‐

100

200

300

400

500

600

700

800

900

In‐dashnavigation

PC onlinenavigation

Mobile onlinenavigation

Traffic Telematics

(USD mn)2014 2020E 2014‐2020E CAGR

14%

20%

39% 39%35%

32%

23% 23%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

(Rmb mn)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2010 2011 2012 2013 2014 2015E 2016E 2017E

R&D expense % Intangible asset amortization %

Other administration expense % Selling expense %



Exhibit 93: NavInfo has been trading above its historical average P/E of

83.9X. NavInfo 12-m forward P/E band

Exhibit 94: NavInfo has been trading above its historical average P/B of 5.3X.

NavInfo 12-m forward P/B and ROE band

Source: Company data, Datastream, Gao Hua Securities Research.

Source: Company data, Datastream, Gao Hua Securities Research.

83.9X

115.6X

52.2X

‐

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15


1‐yr fwd P/E (X)

5.3X

8.1X

2.6X

0%

2%

4%

6%

8%

10%

12%

14%

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Jan‐11

May‐11

Sep‐11

Jan‐12

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15

1‐year fwd P/B Average +1 stdev ‐1 stdev ROE (%)1‐yr forward P/B (X) ROE (%)



Disclosure Appendix

Reg AC

I, Carol Jin, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part

of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth,

returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage

universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,

ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month

volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make

comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well

positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on

quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Carol Jin: China Technology.

China Technology: Aisino, Anhui USTC iFLYTEK, Beijing Shiji Information, Beijing Ultrapower Software, Hangzhou Hikvision, Hermes Microvision Inc., Hua Hong Semiconductor Ltd., Hundsun

Technologies Inc., Mediatek, NavInfo Co., Ningbo Joyson Electronic, Parade Technologies Ltd., TSMC, TSMC (ADR), United Microelectronics Corp., United Microelectronics Corp. (ADR), Yonyou

Network Technology, Zhejiang Dahua Technology Co., ZTE Corp. (A), ZTE Corp. (H).

Company-specific regulatory disclosures

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant

published research

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships

Buy Hold Sell Buy Hold Sell

Global 32% 53% 15% 46% 38% 33%

As of July 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,248 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment

Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage

groups and views and related definitions' below.

Price target and rating history chart(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant

published research



Regulatory disclosures

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or

other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or

specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their

households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes

investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer,

director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and

therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if

with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States

The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: Goldman Sachs Australia

Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking

business, in Australia. This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In

producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the issuers the subject of its research

reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the

specific circumstances relating to the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html.

Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of

this report, unless indicated otherwise at the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company specific

disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research report in Canada if and to the extent that

Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on

request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private

Limited. Goldman Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act, 1956) of the subject company or

companies referred to in this research report. Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs

(Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act

1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman

Sachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their

main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research

may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should

carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United

Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to

herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report,

are available from Goldman Sachs International on request.

European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at

http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers

Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus

consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities

Finance Company.

Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a

stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review

Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular

coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the

potential return or the likelihood of the realization of the return.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all

covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one

of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The

investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12



months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage

group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic

transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because

there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and

price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The

information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices

around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia

by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or

Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by

Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company

Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United

Kingdom and European Union.

European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has

approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated

by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures

This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is

accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports

published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment.

Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a

substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary

to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the

recommendations or views expressed in this research.

The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that

reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analyst's published

price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's return

potential relative to its coverage group as described herein.

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or

derivatives, if any, referred to in this research.

The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment

Research and are not an official view of Goldman Sachs.

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with

the views expressed by analysts named in this report.

This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal

recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this

research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income

from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have

adverse effects on the value or price of, or income derived from, certain investments.

Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options

disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option

strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request.

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or

available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research, models or other data available on a particular

security, please contact your sales representative or go to http://360.gs.com.

Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.

© 2015 Goldman Sachs.



No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

Documents

China Tech