Investment Highlights:

Proposing to acquire Galaxy – Valley, a scarce play, in its bid totransition into a metro WiFi services provider. Sanbian hastraditionally been engaged in the manufacturing of power transmissionproducts such as transformers. Due to excess industry competition, itsnewly launched products are yet to generate any sizeable earnings.The Company posted revenue and net profit of Rmb928mn andRmb9.66mn for 2015. Sanbian is proposing to acquire Galaxy – Valleyfor Rmb2.8bn, in its bid to transition into a metro WiFi services provider(provide free internet services and look to monetize customer traffic).Galaxy – Valley has already obtained operating rights (metro WiFiservices) across seven major Chinese cities. Leveraging on maturemobile internet business models, it has fostered a number of billionRMB businesses and boasts the potential to become a platform formobile internet services in the future.

Highly enclosed nature plus large traffic volume underscore theunique value of commercial metro WiFi services. Accounting foralmost 50% of cell phone data traffic and with a 42.4% penetrationamongst Chinese netizens, WiFi represents the key access point for themobile internet. Accessing internet within subways is hampered by anumber of issues including substantial interference, incontinuity andhigh concurrency. At present, 3G/4G services are only available onsome metro lines, which underscore the irreplaceability of WiFi over thelong-term. China’s rail transit carried a total of 14bn passengers in2015. Hence, metro services boast the largest source of mobile internetusers and relevant demand, whereby, its highly enclosed nature pluslarge passenger traffic underscore the unique value of metro WiFiservices. Service providers are expected to embrace a “proliferation” inthe commercial monetization of their services once they are able toachieve economies of scale. Hence, accelerated construction of railtransit in China will unleash further potential for the industry.

Galaxy – Valley built up its competitive edge thanks to a number ofadvantages, leader amongst the exclusive service providers:

Technological advantage: continuous WiFi coverage along theentire metro line for the application of carriage-rail (earth)interconnection was achieved for the first time, the service entailsbandwidth of 500M and supports 600 concurrent users.

Resource advantage: secured long-term operating rights formetro WiFi services across seven major Chinese cities includingShanghai, Guangzhou and Shenzhen. With coverage of ~60% ofthe user base, it could expand its presence to Beijing and Tianjin,to virtually form a monopoly.

Operational advantage: (i) establishing a metro mobile internet system encompassing WiFi,iBeacon and PIS; (ii) building up digital advertising and interactive entertainment platforms; (iii)promoting its proprietary metro WiFi customer portals (Peanut) and related app functions. Based onthe latest data, Galaxy – Valley has already kicked off its services across a number of metro lines inShanghai while operations in Shenzhen and Guangzhou are scheduled to begin in Aug 2016. Itsnumber of WiFi users already exceeds the 10mn mark with daily active users standing at 2mn. Inaddition, Galaxy – Valley posted advertising revenue of Rmb39.44mn from the Shanghai market for1Q16 (+29% QoQ).

Rapid growth expected for Galaxy – Valley on the back of three channels of monetization:

Advertising: with cell phone and subway advertising growing rapidly, Galaxy – Valley is able toprovide a comprehensive range of precision interactive digital marketing services via its WiFi,iBeacon and PIS services. This will allow Galaxy – Valley to establish a closed-loop of advertisingservices for its e-commerce/gaming/app development clients. We forecast 2016-18E revenue ofRmb238mn/444mn/640mn from its advertising business.

Contents: collaborating with partners including AcFun and Xiami to establish content aggregationplatforms via apps, in order to lift its customer loyalty. Galaxy – Valley has already made its move inthis direction by cutting in through the gaming field. We forecast its 2016-18E revenue from thissegment will be Rmb26mn/118mn/378mn.

Platform: building up the “WiFi+” pan-metro mobile internet ecosystem with a focus on expandinginto cloud-communication, big-data and O2O areas. As these business segments all boast potentialto grow into billion RMB market, both organic and inorganic growth are expected to catapult itsearnings from the platform business to a new level.

Risks: (i) uncertainties surrounding the proposed takeover; (ii) deterioration in user experience of WiFiservices leading to disappointing growth in user numbers; (iii) monetization of WiFi services falling shortof expectations, slow progress in monetizing content operations.

Earnings forecast, valuation and investment rating. Due to exacerbating competition in the powertransmission/distribution products industry (Saibian’s traditional business), we lower Sanbian’s 2016-17EEPS projection to Rmb0.04/0.04 from Rmb0.07/0.09 and forecast its 2018E EPS to be Rmb0.07. Giventhe acquisition of Galaxy – Valley will generate pro forma net profit of Rmb119mn/241mn/427mn for theCompany over 2016-18E, we forecast its pro forma EPS to be Rmb0.24/0.48/0.86 for the three years.Using the SOTP method, we value its: (i) traditional business at 1x P/B, translating into a target marketcap of Rmb484mn; (ii) WiFi business at 50x 2017E P/E (begin large-scale operation in 2017 after theconstruction period of 2016) after factoring in valuation of comparables and the scarce nature of Galaxy –Valley, implying target market cap of Rmb11,665mn. As such, we arrive at a combined target market capof Rmb12,149mn and target price of Rmb24.43/share, initiate coverage with BUY.