Coslight (1043.HK)           BUY (TP: HK$16.38)

Upside on potential online associate spinoff

We believe that there is potential upside to Coslight’s share price on: (a) potential spinoff of 46.16%-owned game associate, and (b) planned investments in a sealed lead acid plant in India. Further inroads into bus companies and/or investment in a bus company licence would be beneficial. We think that if these come to fruition, there could be a potential re-rating on Coslight. We reiterate our BUY rating, with a TP of HK$16.38

Potential gains from possible spinoff. As mentioned in our new coverage report dated August 5, 2009, management plans to list its online game associate, Beijing Guangyu Huaxia, when valuations are favourable. Currently, China-based online game companies are valued at about 12.0x 12-month forward ex-Share Based Compensation (SBC) PER (see Exhibit 1). While we recognize that Beijing Guangyu Huaxia is of a smaller size than other major players, and the generally accepted low earnings visibility of online game businesses (as highlighted in August 5, 2009 report), we see a potential value accretion on such a possible spinoff. We estimate the online game business valued at HK$3.85 per share, based on 10.0x 12-month forward ex-SBC PER on our 12-month forward share of associate earnings.

Core battery segment seems undervalued. Based on our 12-month forward earnings estimate of RMB418.74m and applying our previously used valuation parameter of 10.1x 12-month forward PER, segmental value is estimated at HK$4,802.4m or HK$12.83 per share. Conservatively, we have not included the potential earnings from the Indian investment, which is Coslight’s inroad into the Indian market with an incremental 25% increase (1m kVAH) in capacity when ready in 2012 (estimate).

Emphasis on bus companies. Though no orders have been received yet, Coslight’s technical agreement with Shenzhen Wuzhoulong (SW) (www.wzlmotors.com) could provide a platform to win some orders from an estimated RMB1.5bn value of batteries needed by SW. Further, Coslight’s collaboration with the Yuchai Group (www.yuchai.com) on battery and systems for hybrid engines could prove beneficial. We also believe that Coslight is likely to secure a bus manufacturing company licence, to aid downstream diversification.