China Technology Sector：Our thoughts on SZ-HK Connect

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 17 May 2016 Asia Pacific/China Equity Research Technology China Technology Sector COMMENT Our thoughts on SZ-HK Connect Figure 1: Potential tech stocks for SZ-HK connect under our coverage Company Ticker Rating Mkt cap (US$bn) TP (lc) Current price (lc) Up/Dn-side (%) DTV (US$mn) Weight of SICOM (%) Hikvision 002415.SZ O 20.4 38.9 32.8 19% 6.1 1.21 Lens Tech 300433.SZ N 8.1 68.9 72.5 -5% 11.6 0.48 Wangsu 300017.SZ O 7.8 73.9 64.2 15% 11.2 0.47 GoerTek 002241.SZ O 6.6 36.5 28.1 30% 9.5 0.42 Dahua 002236.SZ O 6.0 19.7 13.5 46% 6.9 0.38 Luxshare 002475.SZ O 5.4 44.7 27.9 60% 10.0 0.33 O-film 002456.SZ N 4.3 25.6 27.2 -6% 9.8 0.25 Shiji 002153.SZ N 4.0 25.4 24.5 4% 5.8 0.29 TSHT 002185.SZ O 1.7 18.5 13.3 39% 3.8 0.10 YGSoft 002063.SZ N 1.1 12.9 12.5 3% 4.5 0.07 Tongda 0698.HK O 1.1 2.0 1.5 32% 2.4 n/a Kingdee 0268.HK N 0.9 2.1 2.0 3% 2.8 n/a Coolpad 2369.HK U 0.9 1.2 1.3 -10% 1.8 n/a TCLC 2618.HK N 0.8 4.8 5.0 -3% 0.9 n/a Chinasofti 0354.HK O 0.8 3.0 2.3 31% 1.8 n/a Source: Company data, Credit Suisse estimates ■ Expanding tradable tech stocks. We see the potential SZ-HK Connect to bring more interest on southbound HK small caps, such as Tongda and Chinasofti. While for northbound impact is limited and focus on size and quality, such as Hikvision, Luxshare, and GoerTek. We also prepare a list of eligible tech stocks in both markets in the report. ■ SZ-HK Connect likely to launch in 2H16. Our strategist expects SZ-HK Connect to be officially launched in 2H16— potentially after a trial in mid-2016 (report). And we expect more impact on Hong Kong listed small caps. ■ New interests on HK small cap names. In addition to those mid/large caps already included in SH-HK Connect (AAC, Sunny, Truly, FIH, and BYDE). We find out 15 eligible tech stocks for SZ-HK Connect, and we already cover six of them. We like our two OUTPERFORMs (Tongda and Chinasofti) for their respective growth stories, while also see other theme/high-beta names such as Kingdee to benefit on sentiment and fund flows. ■ Limited NT impact for northbound. We see the incremental interest on tech stocks would mainly focus on size and quality, and reiterate our A-share top picks of Luxshare, GoerTek, TSHT, Hikvision, Dahua, and Wangsu here. Research Analysts Sam Li 852 2101 6775 sam.li@credit-suisse.com Kyna Wong 852 2101 6950 kyna.wong@credit-suisse.com 17 May 2016 China Technology Sector 2 Our thoughts on SZ-HK Connect Credit Suisse strategist expects SZ-HK Connect to be officially launched in 2H16— potentially after a trial in mid-2016 (report). We believe more retail investors will be attracted to invest in HK listed stocks if those small-cap stocks with better growth prospects are further involved in southbound after the SZ-HK Connect, given the higher risk appetite of retail investors. Shenzhen-Hong Kong Connect will expand the tradable stock pool for Hong Kong and mainland investors on top of the eligible stock list for SZ-HK Connect. For southbound, the current stock pool covers 315 Hong Kong-listed companies, which are mainly dual-listed stocks and large-mid cap Hong Kong-listed stocks. We believe some quality small-cap stocks will be potentially be added in southbound after the SZ-HK connect is launched, which is usually more attractive to retail investors in mainland China given their better growth prospects than large-mid cap companies. For northbound, although our strategist expects limited impact on Shenzhen listed stocks as various trading tools have already been available for overseas investors, we believe SZ-HK Connect will provide foreign investors with more access to diversified choices of China-related stocks only listed in Shenzhen, for example, in the tech space. We have selected a list of eligible tech stocks in both Shenzhen Stock Exchange Component Index (SICOM) and Hang Seng Small Cap Index (HSSI) which we think are potential stocks to expand the tradable stock pool. (Figure 3 and 4). For southbound, we believe this potential inclusion would bring new interests from mainland investors on many small cap names, in addition to those mid/large caps which were a