GRG Banking Equipment:Wins cash sorter contract from CCB;may benefit from Guangdong SOE reform

Cash sorter contract from CCB is a positive sign for the future.

    GRG announced that it has won the bidding for CCB's cash sorter contract for 2016-17. The contract value was not disclosed, but we estimate it could exceed Rmb100mbased on past contracts. This is the third cash sorter contract GRG has won this year,after one from Mingsheng Bank and one from BoCOMM. Due to the issuance of newRMB notes in 4Q15, many banks deferred cash sorter procurement. We see the CCBcontract as a positive sign and believe GRG will win more such contracts in 2H16.

    Guangdong SOE reform will possibly bring new opportunities.

    On Aug 8, Guangdong State-owned Asset Supervision and Administration Commission(SASAC) told Economic Information Daily that Guangdong will promote SOE reform byencouraging mixed ownership, improving R&D and restructuring. We believe this ispositive for GRG, a Guangdong SOE. After introducing an employee shareholdingprogram last year, GRG is actively exploring further reforms.

    Increased stake in Digital China Holdings.

    On Aug 6, GRG announced that at Jul 29, it owned an 18.33% stake in Digital ChinaHoldings (DCH, 0861.HK), up from 17.29% at Jul 27. In other words, GRG increased itsDCH stake by 1.04% in two trading days. This indicates GRG's determination to investin DCH and create synergy between the two parties, in our view. However, it isuncertain if any synergy can be created as GRG has not yet gained control of DCH.

    Maintain Buy, PT Rmb23.75.

    The stock is trading at 20x/16x 2016E/2017E P/E, much lower than A-share technologyhardware and software peers' average. We believe the market has underestimatedGRG's long-term growth potential. Our price target of Rmb23.75 is based on a DCFmodel and implies 24.7x 2017E P/E. Maintain Buy rating.