Event:

Recently, we paid a visit to Beijing Etrol Technologies, and talked withits management about the Company’s fundamentals, establishment ofnew business and development strategies.

Comments:

Etrol is a leading manufacturer of RTU (i.e. remote terminal unit)products and a provider of relevant solutions in China. RTU is akind of automated control device applied in harsh conditions. Etrol has acomplete spectrum of RTU products, and offers integrated remotemeasurement and control solutions and relevant operation & technicalservices surrounding the RTU products.

Etrol aims to become a forerunner in the smart industry. TheCompany has been taking advantage of its RTU products as well as therich accumulation in the industrial automation field to break into theemerging informatization and intelligentization fields. It mainly targetsdata collection and remote monitoring in scattered harsh conditions,which boasts vast development potential ahead. Currently, Etrol hasbroken into fields such as smart oil & gas, smart environmentalprotection, smart grain depot etc.

Deeply tapping into the field of oil & gas data collection andcontrol. Production automation represents an inevitable trend in theChinese oil & gas field which has a low level of production automation atpresent. As of the end of 2012, China has over 3000k oil & gas wells, ofwhich only ~60k wells or 20% of the total have realized automated datauploading and production control, significantly lower than the average of65% in European and US countries. Etrol capitalizes on its RTU and oil& gas products to deeply explore the smart oil & gas field, and has madebreakthroughs in aspects such as oil pipelines and coalbed methane(CBM). Additionally, the Company came into strategic partnership withXinjiang Petroleum Survey and Design Institute and acquired BeijingGeoshine Oilfield Technology Services and Karamay Sanda NewTechnology, in a bid to further expand its presence along the smart oil &gas industry chain.

Venturing into the smart grain depot and online environmentalmonitoring fields. We expect smart construction in the grain depotsector to usher in exponential growth and reach Rmb20~30bn from2015 to 2020. Etrol entered the smart grain depot market via assetacquisition, and has received two orders in Henan province. Size of thenational environmental monitoring meters & instruments market was~Rmb30bn in 2015 and it is expected to sustain a CAGR of at least 20%going ahead. The Company has accumulated rich experience in thisfield by offering data collection & monitoring systems / solutions tosewage treatment systems and water supply wells of many oilfields, and in addition, it has also set up aRmb1bn M&A fund to invest in industrial automation and environmental monitoring equipment.

Risks: (1) Consistent decline in oil & gas prices pulls down investment in automated equipment; (2) slowdevelopment of smart grain depot and online environmental monitoring business, and (3) twists in thefollow-on offering program.

Earnings forecast, valuation and investment rating: Pursuant to its earnings preannouncement, theCompany is expected to post turnover of Rmb553mn and net profit of Rmb80.41mn in 2015. We furtherproject its 2016/17 turnover and net profit to be Rmb806mn/1,135mn and Rmb150mn/200mn,respectively. Factoring in the follow-on offering, 2015/16/17E EPS of the Company is estimated to beRmb0.30/0.51/0.68. We apply 40x 2016E PE to the Company based on valuation of comparablecompanies in the industrial automation sector, deriving a TP of Rmb20.48, and initiate coverage with a BUY rating.