Company Profile

Aerospace Communications Holdings Co., Ltd. (“the company” or “AerospaceCommunications”) is principally engaged in commodity circulation, the manufacture oftextile products and communication equipment, as well as the provision ofcommunication and property management services. It distributes its products indomestic and overseas markets.

Event

Aerospace Communications Holdings Co., Ltd. announced it made CNY 2.6 billion inrevenue in 15H1, down 24.94% YoY. The net profit attributable to shareholders stood atCNY -35.268 million (CNY -45.888 million after deducting non-recurring losses andprofits).

Comment

Restructuring Business Reduced Revenue

Aerospace Communications cut the scale of textile and trade businesses due toweakening demand and rising material price in the two industries. More efforts werespared for communication and defence related operations.

Revenue of textile and trade businesses dropped by 43.17% YoY and 41.75% YoYrespectively in 15H1. Production of communication equipment and relevantvalue-added services also earned 1.29% less in this period compared to a year earlier,but rose to the largest business which contributed CNY 1.13 billion, accounting for43.49% of total income. Sales of aerospace and defence products CNY received CNY248 million in revenue as well, a significant increase of 158.52% YoY.

With less profitable textile (5% gross margin) and trade (4% gross margin) businesses?playing less important roles in the company?s operation, we expect general gross profitrate of Aerospace Communications to rise further after reached 14.06% in 15H1, 3.54percentage points higher than that of 2014.

Investment in developing new communication products and technologies cost CNY 20million more in 15H1, taking up 8.81% of operation revenue which increased by 2.8percentage point compared to a year earlier. Sales expense almost remains the same withthat in 2014.

Communication Network for PLA: Business of Strategic ImportancePortable Missile: Go Overseas to Embrace Global OpportunitiesMarket of C4ISR, key component of national defense system in the future, values USD75.53 billion in America. But its scale in China is still very small. We believe the annualgrowth rate will be no less than 20% in the next 2-3 years.

To implement the state-level strategy of establishing special communication and commandnetwork for PLA, Aerospace Communications has conducted series of M&As in the fieldsand jointly set up a research institute with CASIC, the largest shareholder of the company,to provide integrated solutions. Having acquired production capacity of complete types ofproducts in C4ISR, it will fully benefit from modernization process of national defence.Buyers around the world spend USD 700 million on portable missiles every year. Thesemissiles are mainly from China, Russia and America. As other competitors gradually lowerthe portion of missiles exported, Aerospace Communications has great potential to gainincreased market share in the industry.

Getting Involved into Civil-Military Integration

Aerospace Communications announced it was going to issue 105 million new shares at theprice of CNY 15.66 per share. Fund raised through this transaction would be used topurchase 51% stake (CNY 1.065 billion) in Zhi Hui Hai Pai (transliterated) and 36.93%stake (CNY 173 million) in Jiangsu Jie Cheng (transliterated). CASIC and another companytogether pay CNY 413 million for new shares to finance production of intelligent terminals,expansion of Hangzhou base, upgrade of assembly lines as well as IoT pilot project.Zhi Hui Hai Pai is a leading ODM mobile phone manufacturer supplying products for ZTE,Lenovo and Coolpad. It promised its net profit would be no less than CNY 200 million in2015, CNY 250 million in 2016 and CNY 300 million in 2017 after being incorporated.Aerospace Communications start marching into cell phone and IoT terminal market withZhi Hui Hai Pai. And Zhi Hui Hai Pai is also able to improve the company?s operatingefficiency with advantages in supply chain management as well as cost control. AerospaceCommunications will hold 91.82% stake in Jiangsu Jie Cheng, facilitating further assetinjection operations.

Earnings Forecast and Investment Recommendations: We made EPS forecast for thecompany at CNY 0.06 in 2015, CNY 0.40 in 2016 and CNY 0.56 in 2017. ReiterateOUTPERFORM. Boom of both military and civil businesses will expedite AerospaceCommunications? development.

Potential Risks: Special network business generated less-than-expected earnings,slower-than-expected progress of aerospace and defence business, failure of M&A.