GRG Banking Equipment 1H16quick take:growth fuelled by service segment;seeking synergy with DCH

1H16 revenue grew 23% YoY, operating profit grew 22% YoY.

    GRG announced 1H16 results. Revenue and earnings grew 23% and 3% YoY,respectively. Although the earnings growth looks weak, this was mainly because of adrop in non-operating income, which mainly includes VAT (value-added tax) rebates.

    We believe the tax bureaus deferred payment of these rebates in 1H16. Operatingprofit grew by 22% YoY, in line with revenue growth.

    Services and accessories are the new growth engines.

    In 1H16, GRG's ATM equipment revenue grew only 5% YoY; meanwhile, its ATMservice and accessories revenue grew 52% and 83% YoY, respectively. Servicesaccounted for 27% of revenue in 1H16, up from 22% in 1H15. We like the company'seffort to shift its focus from equipment to services. Revenue from ATM services andaccessories is mostly recurring and stable, in our view.

    GRG seeking "industry cooperation and co-development" with DCH.

    GRG held a 19.05% stake in DCH (Digital China Holdings) as of 15 August. Thecompany indicated that it invested in DCH for "industry cooperation and codevelopment";it is optimistic about DCH's growth potential and will actively seek tobuild synergies between the two parties. However, it has provided no more details.

    Valuation: Maintain Buy rating, PT of Rmb23.75.

    Although 1H16 earnings growth of 3% seems low, the company's operating profitmaintained robust growth. We believe the VAT rebates will be paid in full in 2H16.

    Trading at 20x/16x 2016/17E PE, the stock looks cheap given its long-term growthpotential. Our price target of Rmb23.75 is based on DCF with WACC of 8.1% andimplies 25x 2017E PE. We maintain our Buy rating.