Leading infrastructure engineering company actively undertakingtransformation. China Zhonghua Geotechnical Engineering (CGE), isprimarily engaged in foundation work and infrastructure engineeringservices and represents one of the handful integrated undergroundengineering services provider in China. With downstream clientsspanning across industrials, public transportation, airport and civilianconstruction fields, CGE has proactively expanded into general aviation,media, finance and other new business segments since 2014.

Traditional core business: consolidating leadership on the back ofM&As, business synergies opening up greater developmentpotential. We estimate the industry’s size at Rmb700bn as of 2015.

However, industry leaders only account for less than 1% of the marketshare. Going forward, diversified competition and industry consolidationwill become the major trends in the future. Meanwhile, thanks to acombination of factors (including the delayed rollout of the IPOregistration system, an increase in the number of potential takeovertargets, CGE’s mature M&A approaches and attractive valuation, aswell as further potential in diluting the stake of the de facto controller),CGE boasts a solid foundation to expand inorganically leveraging on itsabundant capital. Through a series of horizontal acquisitions, CGE hasalready transformed its core business from “underground works” to“integrated underground engineering services provider”. Meanwhile, itspotential market also expanded significantly from the original industrialsfield to other areas including rail transit, civilian construction,port/maritime and municipal services.

Foraying into emerging fields with a PE (private equity) mindset,“Jiuzhou” offers the most encouraging prospects. CGE hasventured into emerging fields via equity investments, of which, it owns30%/15%/11.08% (preference shares)/0.1364% stakes in media/insurance/integrated chips/internet finance companies. Thanks to thesteady approach of its business expansions, we are most upbeat on itsmedia business going forward. CGE owns a 30% stake in “JiuzhouDream Works International Media Co.”, which focuses on producingclassic fantasy contents centering around the “Jiuzhou” (meaning thenine states of China during earlier dynasties) theme. After its first twoproductions were warmly received by the market, CGE intends to investRmb2.0bn to produce 12 movies and 13 TV drama series over the nextthree years. Thanks to the uniqueness and vast potential for itsproductions, CGE’s media business boasts encouraging prospect.

Differences to the market view:

Venturing into multiple emerging fields with small stakes is aimedat fostering new core businesses in the future with a PE mindset.

Due to significant hurdles attached to cross-industry transformation, this approach is regarded as asteady and feasible option;

As the number of airports will be limited in the future, seizing the first mover advantage is the key forventuring into the general aviation airport industry for the time being;Uniqueness, abundant experience in collaboration plus the warm reception to its first twoproductions are the key factors behind our upbeat outlook on its “Jiuzhou” series;Its current demanding valuation is well supported from a historical perspective (the stock has nottraded at less than 35x P/E since its listing). Moreover, this is also a direct result of its unique nature.

Risks: (i) management risks stemming from expansion and transformation into diversified operations; (ii)significant decline in the value of investments; (iii) bad debts.

Reiterate BUY rating. Taking into account dilution from its capital raising, we forecast its 2016-18E EPSto be Rmb0.20/0.27/0.35. The Company represents one of the rare A-share plays which own a stake in amedia company as well as venturing into the general aviation market. Given that the Company also beatexpectations in its business transformation and boasts a solid track record of rapid growth, we are upbeaton its investment value over the medium to long-term. Using the SOTP method (professional engineeringof general aviation business is valued at Rmb17.7bn while the media segment is valued at Rmb940mn),we arrive at a target price of Rmb10.46 and reiterate our BUY rating.