Key takeaways

Recently, we visited Dalian Refrigeration’s new factory and attended its analysts meeting.

Profitability to keep improving. Improving profitability should be the company’s key growth driver in the future.

Dalian has been consolidating its resources and business model innovations since 2014, and it relocated and upgradedits factory. The new factory is more intelligent and the overall operating efficiency should improve by more than 15%.

Its productivity and G&A expenses could also improve. We estimate the company’s earnings （incl. consolidatedsubsidiaries） will deliver 20~40% annual growth over the next 2~3 years.

Associated companies’ businesses merit attention. The vending-machine production capacity at Fuji Bingshancould reach 100,000 units this year. As a leader in the niche market, it may help Dalian expand its presence in the bigdata business in the future. Panasonic Appliances Compressor （Dalian） is a leader in terms of scroll compressortechnology, and holds around a 60% market share in AFV sector and should benefit from AFV sector growth over thelong term. Panasonic Appliances Cold Chain （Dalian） benefits from Panasonic’s acquisition of Hussmann. It leadership inrefrigerated display cabinets for supermarkets and convenience stores should further strengthen. Changzhou Jingxue ispreparing for an IPO, and it may bring decent equity investment returns to Dalian Refrigeration in the future.

Business park to be built where the old factory was. Dalian Refrigeration worked with a Zhejiang-basedconstruction & design firm to build a business park to start new businesses on the site where its old factory was. DalianRefrigeration plans to start a big-data business in the park, which should boost its long-term growth.

Parentco positioned as a strategic investment platform. The Dalian Bingshan Group no longer directly invests inspecific projects, as it will invest in other companies via Dalian Refrigeration and explore new businesses to createlong-term growth drivers. The Dalian Bingshan Group may inject more assets into Dalian Refrigeration in the future.

Earlier this year, the Group began its first batch of asset injections, as Dalian Bingshan Engineering & Trading and DalianBingshan Metal Technology were injected into Dalian Refrigeration. More asset injections are likely in the future.

Recommendation

Excluding potential asset injections, the stock is trading at 23.7x 2017e P/E and 19.0x 2018e P/E （21.2x 2017e P/E and17.1x 2018e P/E after factoring in its stake in Guotai Junan）， a relatively low level. Moreover, the share price of itsprivate placement （Rmb9.89 per share） remains 5% higher than its current share price, offering support to its shareprice. Maintain BUY and TP of Rmb13.5, implying 28x 2018e P/E.

Risks

Growth of cold chain sector and external expansion disappoint.