The security electronics industry will focus on video surveillance and take the system integration + customization as the future trend in a new round of development, rapidly improving industry concentration. As “safe city” construction extends to second and third-tier cities, the security electronics industry will enjoy a bump in market potential of, on average, RMB50bn per annum and a new round of development boom in the next five years. The topological structure has been complicated from point to surface, while demand also develops in depth and breadth. Communication networks, system integration and application intelligence will be the future trend. In the process towards system integration and customization, video surveillance manufacturers will play a vital role, and gradually transform from an equipment supplier to a system integrator and overall solutions provider by getting fully involved in engineering projects and comprehensively understanding customer demand. Demand for integration will drive an increase of industry concentration and market share will largely be held by advantageous and leading enterprises with full product line, technical strength and high brand position.

Shenzhen Infinova, with outstanding ability of system integration + customization, is the mid to high-end brand manufacturer in domestic video surveillance. Currently, the Company has the full product line of security electronics: camera, matrix, DVR, optical transmitter and receiver, and access control system, which targets the mid & high-end markets. Its product price is over 30-50% higher than that of other domestic equipment manufacturers, enjoying apparent brand premium. Moreover, as the Company has accumulated rich application experience from many large projects in the industry, it has the outstanding ability in terms of design, integration and customization. As a result, the Company will have its share of the fast growing security electronics industry.

Raised fund of RMB1.86bn has been invested in key areas such as research & development, production capacity and distribution channel, so we expect a leapfrog in future development. Of the funds raised, RMB510mn was mainly invested in three areas, such as the research and development of new products and technology, capacity expansion in the next three years and channel construction for domestic and overseas marketing networks. We believe that the remaining RMB1.35bn may be used at an opportune time for duplication of product lines, regional complementation, expansion of marketing channels or M&A activity. Moreover, with the help of rich product lines, high-end brand and technological ability, and sufficient capital, the Company has an apparent advantage and large potential in winning bids for large projects, such as “safe cities”.

Initiating coverage on the Company with an “Outperform” rating. We estimate that the EPS for 2011-2013 will be RMB0.72, RMB1.02 and RMB1.48 respectively, and believe that the Company’s outstanding core competitiveness of system integration + customization will be able to support the Company to continuously obtain orders and achieve higher-than-expected results.