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GRG Banking Equipment:DCH says cooperation with GRG is developing positively and it has confidence in the future

发布时间:2016-08-31    研究机构:瑞银证券

DCH management made public its position on GRG's investment in the firm

At its interim results briefing on 31 August, DCH (Digital China Holdings, 0861.HK)chairman Guo Wei said that the company is actively communicating with GRG, withthe management from the two companies meeting frequently. He added that thecooperation between both companies has been developing positively and he hasconfidence in the future. This is the first time DCH's management has made public itsposition on GRG's investment in the company, which is consistent with GRG's positiondisclosed in previous announcements: GRG is not carrying out a hostile takeover;rather, it has stated that it wants to collaborate with DCH to create synergies.

Parties disagree on approaches to employee incentives/new businesses

Mr. Guo said that GRG's investment in the company has to some extent disrupted itsplans, as it has been exploring bringing in strategic investors, introducing employeeincentives, and adjusting its corporate culture. Currently, the main differences betweenthe two parties lie in their approaches to employee equity incentives and nurturing newbusinesses (including smart cities and financial services). DCH wants to improveemployee efficiency by reducing basic salaries and increasing equity incentives, and it isactively exploring concrete solutions with GRG.

Cooperation between GRG and DCH has promising outlook

DCH's long-term plan is to make its software and information services business bigger,stronger and more hi-tech in order to take advantage of the opportunities arising fromthe shift towards made-in-China software, which is consistent with GRG's long-termstrategy. In our view, if the two parties achieve substantive cooperation, GRG will beable to capitalise on DCH's strong R&D capabilities to build its own software andinformation services business. GRG's experience and relationships with clients in thebanking sector could also help DCH develop in the field of financial software.

Valuation: Maintain Buy rating, PT of Rmb23.75

We believe DCH's message is a positive one. The cooperation, if successful, should helpGRG's long-term development. GRG is trading on 20x/16x 2016E/17E PE, far below theA-share IT industry's average, which we think may be because investors have yet toconsider the synergies that could be produced between GRG and DCH. Our price targetof Rmb23.75 is based on a 3-stage DCF model (8.1% WACC) and implies 25x 2017EPE. We maintain our Buy rating.

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