Investment Highlights

Leading department store name in Haidian, 62.54% owned by thegovernment. Cuiwei is primarily engaged in operating departmentstores and runs eight stores (total area of 434,000 square meters)across prime districts of Beijing as of end-1H16. It posted revenue andnet profit of Rmb5.76bn (-10.2% YoY) and 170mn (0% YoY)respectively for 2015. Haidian District Municipal SASAC directly andindirectly owns a 62.54% stake in Cuiwei as of 1Q16.

Core business on the way down. Weighed down by slowingconsumption, disruption from e-commerce as well as curbs on publicspending, Cuiwei’s same-store-sales (SSS) have fallen by 5-10% p.a.since 2013. On the other hand, due to the increasing proportion ofshopping mall operations in its overall business portfolio, more efficientsupply chain and precision marketing, the Company’s gross margin hasrisen to 21.0% as of 2015 from 20.2% in 2012. Nevertheless, due toincreases in labor and rental costs, its underlying profit has been on theway down between 2014 and 1Q16. Moreover, a number of assetsinjected into the Company by its parent (Haidian District MunicipalSASAC) in 2014 also failed to deliver promised earnings, with thegovernment offering cash of Rmb11.67mn and Rmb13.46mn ascompensation for 2014 and 2015 respectively.

Setting up an international education investment JV, in a bid toreap dividends from international education over the long-term.Haidian district has the largest concentration of public educationresources in Beijing, which helps to enhance its reputation as the primeeducation base in the Chinese capital. Along with three other partners,Cuiwei forked out Rmb7.5mn to set up “Beijing Haidian InternationalEducation Investment Ltd” (total investment of 50mn), which willprimarily engage in the provision of basic and non-degree education. Asone half of Haidian SASAC’s “dual international education platform” (theother half being Jiangsu Zhongtai Bridge Steel Structure (002659)), thisinitiative will allow Cuiwei to reap dividends from the long-term growthpotential of international education in China, leveraging on theextensive public education resources in Haidian.

RNAV is ~2x its current market cap, reform and expectations oftransformation could fuel an asset reappraisal. Cuiwei owns anumber of properties located in Beijing’s prime districts, with total areaof 194,000 square meters. This translates into an RNAV ofRmb11.07bn, which is ~2.0x of its current market cap. However, its netmargin is merely 2.9%, far lower than the 4-5% for non-state owneddepartment stores. The Beijing Municipal SASAC recently published itsplan for the development of the Capital’s state-owned economy duringthe 13th FYP period, which outlined boosting quality and productivity ofcompetitive enterprises as its main objective. As such, subsequentreform and expectation of its transition towards the education industry,could help to fuel an asset reappraisal for Cuiwei going forward.

Risks: (i) worse-than-expected decline in the earnings of the department store business; (ii) disappointtransition towards international education.

Earnings forecast, valuation and investment rating. Cuiwei is currently trading at an ~50% discount(market cap of Rmb5.5bn) to its RNAV of Rmb11.07bn. Its current stock price is also lower than theRmb13.2/share it was valued at when Haidian SASAC injected assets into the Company in Nov 2014,indicating a wide margin of safety. We forecast its revenue and net profit growth for 2016-18E will comeat -11.00%/-4.85%/-0.29% and -21.03%/-3.88%/0.87% respectively, translating into EPS ofRmb0.25/0.24/0.24 for the three years. As Cuiwei is looking to expand its growth potential by forayinginto international education leveraging on the extensive public education resources of its controllingshareholder, we apply a certain degree of discount to its RNAV and arrived at a target price of Rmb15.0.Initiate coverage with BUY.