CHINA / SOFTWARE & SERVICES IFLYTEK 002230 CH · 2016-09-30 · iflytek 002230 ch bnp paribas jimmy huang this report is solely for recipients who are non-chinese investors located

Ifl ytek 002230 CH BNP PARIBAS Jimmy H uang

THIS REPORT IS SOLELY FOR RECIPIENTS WHO ARE NON-CHINESE INVESTORS LOCATED OUTSIDE THE PEOPLE'S REPUBLIC OF CHINA ("PRC"). WITHOUT THE PRIOR WRITTEN CONSENT OF BNP PARIBAS, THE RECIPIENTS OF THIS REPORT SHALL NOT FURTHER DISTRIBUTE SUCH REPORT OR DISCLOSE ANY INFORMATION THEREIN TO ANY OTHER PERSON INCLUDING BUT NOT LIMITED TO ANY OTHER NON-CHINESE INVESTORS OR ANY PERSON IN PRC. 30 SEPTEMBER 2016 CHINA / SOFTWARE & SERVICES

IFLYTEK 002230 CH

The voice of China KEY STOCK DATA

Sources: FactSet estimates; BNP Paribas estimates

Initiating coverage at HOLD with a TP of RMB31We believe iFlytek is poised to benefit from China’s autonomousdriving and artificial intelligence (AI) trends, despite increasingcompetition in these areas. Its leading position in the voicerecognition market, particularly in China autos and education,should drive steady earnings growth. However, as its risk-reward profile is not attractive at this time, we initiate at HOLD.

Increasing voice recognition in auto spaceWe expect the voice recognition trend in auto HMI (humanmachine interface) to grow as voice is an intuitive method tocontrol vehicles and helps to reduce driver distraction. Eventually,biometrics-based access should also increase convenience andpersonalization, representing potential opportunities for iFlytek.

AI is a new opportunityThe Chinese government highlighted the importance of AI at therecent G20 summit in Hangzhou. We think iFlytek will benefitfrom wider adoption of AI, especially in education, given itsmachine perception capacity (e.g. voice/writing recognition).

Rich valuation from high entry barriers and strong growthOur TP of RMB31 is based on 57x FY17E P/E line with thehistorical trading avg. since 2011 as we expect an FY16-18earnings CAGR of 34%, vs 33% over FY10-15. Our DCFcrosscheck supports our TP. Trading at 52x FY17E P/E (vs.hist.58x), we initiate at HOLD and suggest investors wait for abetter entry point.

12m forward P/E versus net income

Sources: iFlytek; BNP Paribas estimates

Jimmy Huang [email protected] +852 2825 1124

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PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 36

HOLD TARGET PRICE RMB31.00

UP/DOWNSIDE +9.0%

CLOSE RMB28.43

HOW WE DIFFER FROM CONSENSUS MARKET RECS

TARGET PRICE (%) (16.2) POSITIVE 4

EPS 2016 (%) 0.7 NEUTRAL 0

EPS 2017 (%) 5.1 NEGATIVE 0

2015A 2016E 2017E 2018E

Revenue 2,501 3,524 4,944 6,906

Rec. net profit 425 544 727 1,016

Recurring EPS (RMB) 0.33 0.41 0.55 0.77

EPS growth (%) 4.8 24.8 33.7 39.7

Recurring P/E (x) 85.9 68.8 51.5 36.9

Dividend yield (%) 0.4 0.4 0.6 0.8

EV/EBITDA (x) 93.5 71.4 48.0 33.1

Price/book (x) 5.8 5.6 5.2 4.7

Net debt/Equity (%) (36.6) (26.9) (22.0) (19.7)

ROE (%) 8.5 8.4 10.4 13.3

Share price performance 1 Month 3 Month 12 Month

Absolute (%) (6.0) (12.2) 5.0

Relative to country (%) (4.0) (12.8) (9.5)

Next Results

Mkt cap (USD m) 5,617

3m avg daily turnover (USD m) 69.0

Free float (%) 63

Major shareholder China Mobile Communication (14%)

12m high/low (RMB) 40.90/24.19

3m historic vol. (%) 26.4

ADR ticker -

ADR closing price (USD) -

Issued shares (m) 1,318

YE Dec (RMB m)

October 2016

(15)

(4)

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38

42Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Iflytek Rel to Shenzhen SE Composite(RMB) (%)

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2011 2012 2013 2014 2015 2016 2017 2018

(RMB m)(x) 12m forward P/E (LHS) Net income (RHS)

2011 2012 2013 2014 2015 2016E 2017E 2018E

Historical 12m forward P/E avg.

Iflytek 002230 CH Jimmy Huang

2 BNP PARIBAS 30 SEPTEMBER 2016

Investment thesis

We initiate coverage of iFlytek at HOLD with a RMB31 target price, suggesting 9.0% upside based on 57x FY17E P/E.

Increasing adoption of voice control in auto space. We think iFlytek will stand to benefit from the increasing voice recognition trend in auto HMI area as we think voice is an intuitive method to control the vehicle and help to reduce driver distraction.

AI is an upcoming driver for iFlytek. China Gov. highlighted the importance of artificial intelligence (AI) at 2016 G20 and we think a wider adoption of AI, especially in education area, will offer new opportunity for iFlytek on the back of its machines perception, like voice/writing recognition ability.

Initiate at HOLD with RMB31 TP. Our TP of RMB31 is based on 57x FY17 P/E, which is in line with historical avg. since FY11 as our FY16-18E earnings CAGR of 34% is consistent with FY10-15E earnings CAGR of 33%. We crosscheck our TP with a DCF valuation (7.4% WACC). It is currently trading at 52x FY17 P/E, vs peers’ 54x average, and we see a less convincing risk-reward profile at >50x P/E, especially because we expect increasing competition from global peers, like Baidu, Apple, and Nuance.

Catalyst

1 Increasing adoption of voice control system as HMI for China smart car.

2 Better-than-expected growth in China voice recognition market.

3 More projects from China intelligent education teaching systems.

Risk to our call

Downside risks to our call are 1) worse-than-expected China voice recognition demand, 2) international/domestic players penetrating the China voice recognition market, and 3) worse-than-expected growth of China smart car market.

Upside risks to our call are 1) better-than-expected China voice recognition demand, 2) government policy support to China local voice recognition players, and 3) better-than-expected growth of China smart car market.

Company background Key assumptions

Founded in 1999, iFlytek is a Chinese software enterprise focusing on speech intelligence and artificial intelligence technology. The company also provides chip products, voice messaging software, and integration service for e-government systems.

2015 2016E 2017E (RMB m) (RMB m) (RMB m) Voice-based software 303 414 652 Education 761 1,066 1,582 Internet & Telecom 313 486 716 Public & Government 248 395 572 System Integration 757 978 1,200 Big data service 113 175 215 Total sales 2,501 3,524 4,944 Change (y-y %) 40.9 40.9 40.3 GM (%) 48.9 48.7 49.5

Key executives Age Joined Title

Liu Qingfeng 42 1999 Chairman Chen Tao 42 2007 Vice President Wu Xiaoru 43 2007 Vice President

http://www.iflytek.com/en/index.html Sources: Iflytek; BNP Paribas estimates

Principal activities (revenue, 2015) Earnings sensitivity

------------- FY16E ------------ ------------- FY17E ------------

(%) Bear Base Best Bear Base Best

Revenue growth 30.9 40.9 50.9 30.3 40.3 50.3

Gross margin 45.7 48.7 51.7 46.5 49.5 52.5

Net margin 9.8 15.4 21.4 9.0 14.7 20.8

Upside/downside (36.3) 0.0 38.8 (38.7) 0.0 41.3

Source: Company data Sources: Iflytek; BNP Paribas estimates

Event calendar

Date Event

Oct 2016 iFlytek FY3Q16 results

Nov 2016 Nuance FY4Q16 results

Feb 2016 Nuance FY1Q16 results

Mar 2016 iFlytek FY2016 results

Key earnings drivers include revenue growth and margins.

In our best case scenario, we forecast 2016 revenue growth/GM to be 50.9%/51.7%, which would increase our earnings estimates by 38.8%, all else being equal.

In our bear case scenario, we forecast 2016 revenue growth/GM to be 30.9%/45.7%, which would decrease our earnings estimates by 36.3%, all else being equal.

Voice-based software - 12.1%

Education - 30.4%

Internet & Telecom - 12.5%

Public & Government - 9.9%

System Integration - 30.3%

Big data service - 4.5%

Others - 0.3%



CONTENTS Executive summary ___________________________________________________________________________ 4

Potential share price catalysts _________________________________________________________________ 5

Where we differ from the Street _______________________________________________________________ 5

Market leader in China voice recognition market _________________________________________________ 6

Voice recognition in auto space ________________________________________________________________ 8

Long term opportunity from Artificial Intelligence (AI) ___________________________________________ 12

What is iFlytek’s core technology?_____________________________________________________________ 14

Business overview ___________________________________________________________________________ 16

Competitive landscape _______________________________________________________________________ 20

Initiate at HOLD with a target price of RMB31 ___________________________________________________ 22

DCF analysis ________________________________________________________________________________ 24

Financial Analysis ___________________________________________________________________________ 25

Sensitivity analysis __________________________________________________________________________ 28

DuPont analysis _____________________________________________________________________________ 29

Risks to our call _____________________________________________________________________________ 30

Company profile ____________________________________________________________________________ 31

Corporate governance _______________________________________________________________________ 33

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Executive summary

We initiate coverage on iFlytek with a HOLD rating and a target price of RMB31, implying 9.0% upside from current levels. Founded by the doctors from University Science and Technology of China, iFlytek is a leading voice recognition expert in China with applications mainly including automotive and education markets. We think it should benefit from the development of both autonomous diving as well as artificial intelligence (AI) in China. We appreciate its leading position in China voice recognition market which will drive steady earnings growth of 34% earnings CAGR in 2016-18. However, we find its risk-reward profile less convincing at 50+ P/E. We suggest investors await a better entry point.

Key beneficiary from autonomous driving development

We see iFlytek as one of the major beneficiaries of the continued autonomous vehicle development as voice input and speech recognition appears to be an intuitive method to control the vehicle, which can also help to reduce driver distraction. Currently, iFlytek targets to penetrate into more than 100 auto models in FY16, vs 30 models in FY15, supported by its superior quality and accuracy. Its end customers in auto space include both global and China local OEMs, like Porsche, BMW, Volkswagen, Honda, SAIC, FAW, Changan, Geely, and Chery, and Didi Dache, a leading mobile platform taxi-calling application in China. Meanwhile, we believe biometrics-based voice access can also increase the convenience and personalization, which could be ideal solution in the long term.

Artificial intelligence (AI) provides longer term opportunity

China’s President Mr. Xi highlighted the importance of artificial intelligence (AI) during the week of 2016 G20 in Hangzhou, which suggests a directional trend in China. As both voice and image recognitions are the major applications today, we believe iFlytek can ride on the ongoing AI development, on the back of its deep language recognition, writings recognition, logical reasoning, and self-learning AI systems. Notably, iFlytek has invested in AI-related technology in education and Gov. court business with meaningful impact to start in FY17 at earliest, in our view. We expect both education and voice-based software to become key driver in FY16-18, which will represent 12-14% and 30-35% of total sales, respectively.

Waiting for a better entry point on rich valuation

Our TP of RMB31 is based on 57x FY17E P/E, which is in line with historical avg. since FY11 as our FY16-18 earnings CAGR of 34% is consistent with FY10-15 earnings CAGR of 33%. On the other hand, our TP of RMB31 implies 1.7x FY17 PEG, which is also in line with global peer Nuance’s current FY17 PEG level. We also use DCF method to crosscheck our TP; this gives a valuation of RMB31/share, based on a WACC of 7.4%. It is currently trading at 52x FY17 P/E, vs peers’ 54x average, and we see a less convincing risk-reward profile at >50x P/E, especially we expect an increasing competition from global peers, like Baidu, Apple, and Nuance. We suggest waiting for a better entry point.

Exhibit 1: Historical 12m forward P/E Exhibit 2: FY17 P/E versus earnings CAGR FY16-18E

Sources: Bloomberg; BNP Paribas estimates Sources: Bloomberg; BNP Paribas estimates

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Sep-13 Sep-14 Sep-15 Sep-16

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iFlytek*

Kingsoft

YonyouDigiwin

Navinfo Thunder Software

Wisesoft

Hikvision*

Joyson*

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FY17 P/E (x)

Earnings CAGR FY16-18E (%)



Potential share price catalysts

Better than expected earnings performance in 2016-17

We expect the FY16-17 bottom line to up by 28%/34% y-y, supported by steady revenue growth of 41%/40% y-y in FY16-17, with gross margin to expand slightly. Potential upside will come from the better than expected gross margin, especially after its AI related business (higher gross margin) starts generating revenue.

International award announcement

iFlytek has proved its leading voice and speech recognition by winning 4th CHiME (Computational Hearing in Multisource Environments) competition, which is held by The French Research Institute for Computer Science and Automatic Control, University of Sheffield, and Mitsubishi Electric Research Laboratories. The participants in the competition include Google, Cambridge University, Carnegie Mellon University and other globally renowned research institutions. We think any further similar announcement would reinforce market confidence on its market position and could provide a near-term stock price catalyst.

Better progress in auto models

Management expects to step into 100 auto models in 2016, from 30 models in 2015, and we think any better than expected voice recognition penetration rate in auto could be positive for overall sentiment.

Where we differ from the Street

We are the only broker on the street to have relatively cautious view on iFlytek, on the combination of its earnings growth as well as current valuation.

We identify voice control HMI as an important growth driver to iFlytek’s voice-based related product, which is able to penetrate tier 1 Auto OEMs in the future.

We expect a slightly higher gross margin than Bloomberg consensus, driven by a favourable product mix as voice-based softwares deliver a higher margin profile.

Exhibit 3: BNPP vs street consensus

------------------------- 2016E ------------------------- ------------------------- 2017E ------------------------- ------------------------- 2018E -------------------------

BNPP Street Diff. BNPP Street Diff. BNPP Street Diff.

(RMB m) (RMB m) (%) (RMB m) (RMB m) (%) (RMB m) (RMB m) (%)

Sales 3,524 3,501 1 4,944 4,919 1 6,906 6,863 1

Gross profit 1,717 1,731 (1) 2,449 2,432 1 3,445 3,423 1

Operating profit 412 432 (5) 651 613 6 980 853 15

Pre-tax profit 609 591 3 811 789 3 1,140 1,054 8

Net profit 544 532 2 727 710 2 1,016 948 7

Margins (%)

Gross margin 48.7 49.4 49.5 49.4 49.9 49.9 Operating margin 11.7 12.3 13.2 12.5 14.2 12.4

Pre-tax margin 17.3 16.9 16.4 16.0 16.5 15.4

Net margin 15.4 15.2 14.7 14.4 14.7 13.8

Sources: Bloomberg consensus; BNP Paribas estimates



Market leader in China voice recognition market

iFlytek has been a market leader in China voice technology area in various sectors, including education, automotive, and robotic areas. In 2015, it is ranked the No.1 player with market share of 44% in China speech recognition market, followed by Baidu 28%, Apple 7%, and Nuance 3%, according to Speech Industry Alliance of China (SIAC). SAIC expects China intelligent speech market to grow fast with 55% CAGR over 2015-17E as speech technology penetration remains low in China.

While the global market is dominated by US companies, such as Nuance, Google, Apple, Microsoft, and IBM, we believe China local players have a clear advantage in China market, in terms of Chinese database and Chinese speech recognition. Therefore, we are not surprised by the fact that Chinese local players together grab more than 70% of voice recognition market share in China as, generally, the nature of Chinese language creates an entry barrier to overseas companies.

A broader applications today but the entry barrier is very high

We have seen voice recognition moving away from traditional application like smartphone to various new territories including automotive, education, or robot. In terms of function, we think the voice recognition can provide not only the pure data input but also different infotainment services to support functions such as voice biometrics, virtual assistant, advanced machine learning, and so on.

Voice recognition market has an extremely high entry barrier in every country, especially for a foreign player. We think the voice recognition generally has a relatively low level of accuracy as the quality is highly influenced by factors such as

Exhibit 4: China intelligent speech market size

Source: SIAC

Exhibit 5: China speech recognition market share (2015) Exhibit 6: Global speech recognition market share (2015)

Source: SIAC Source: SIAC

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(y-y %)(USD m) Market size (LHS) Growth (RHS)

iFlytek44%

Baidu28%

Apple7%

Nuance3%

Xiaoi3%

Jietong Huasheng

2%

Haitian Ruisheng

2%Zongke Xinli

1%

Others10%

Nuance32%

Google28%

Apple 15%

Microsoft8%

iFlytek5%

IBM4%

Others8%



background noise, mood and physical conditions. In other words, the algorithm must be able to recognize the voice accurately under different environments; especially some places are noisy, like inside a fast moving vehicle. As such, market players have to spend a large amount of R&D expenditure to develop recognition technology, based on a sizeable database, language decoder, or core spoken language model. Due to a high requirement on R&D, voice recognition players were usually initiated from research institution. For example, Nuance, largest speech recognition player in global market, was originated from the Speech Technology and Research Laboratory of SRI, a world-leading research organization in speech technology area. On the other hand, iFlytek was also founded by the students of the University Science and Technology of China (中国科学技术大学).

Who are the key clients?

iFlytek has a diversified customer portfolio from various industries with top 5 customers together accounting for 25-30% of total sales in 2012-15. In education area, its major clients are educational institutions in Guangdong, Jiansu, and other provinces. In auto area, iFlytek cooperates with not only auto components suppliers (Continental and Delphi) but also auto OMEs such as BMW, Volkswagen, Changan, Great Wall and many others. Its products are also widely used in financial institutions, such as Bank of Communication, ICBC, and Ping An Insurance. In telecom space, three of China’s telecom operators are using iFlytek’s service for its voice-related functions. We believe the well-diversified client portfolio is beneficial for iFlytek to deliver a stable growth.

Exhibit 7: iFlytek - major client and partners Area iFlytek major clients and partners

Education Educational institutions in Guangdong, Jiangsu, Guangxi, Chongqing, and etc

Auto OEMs Porsche, BMW, Volkswagen, Honda, Mazda, Lexus, SAIC, FAW, Changan, Great Wall, Geely, Chery, JAC, GAC, and etc

Auto components Continental, Delphi, and etc

Telecom China Mobile, China Unicom, and China Telecom

Tech Intel, Huawei, Xiaomi, Tencent

Smart hardware Yunji Technology, IU House, JD.com

Financial Institution Bank of Communication, Ping An Insurance, Merchants Bank, ICBC

Broadcasting Tianjin Television & Broadcasting Group, Guangdong Television & Broadcasting Group, and etc

Government China Government agencies in different cities

TV vendors Konka, Changhong, Skyworth, Hisense

Sources: iFlytek; BNP Paribas



Voice recognition in auto space

We believe the autonomous driving demand is one of the key drivers to iFlytek in the long term because voice recognition plays a more important role in auto market.

One of the preferred control solutions in HMI

We expect iFlytek to benefit from the increasing demand of advanced human machine interface (HMI), especially voice control appears to be one of the key input methods. HMI, by definition, is a device that allows users to interact with machines’ control system. In recent years, HMI has been adopted in automotive as a way for drivers to receive information and command orders from/to the vehicles. We expect the automotive HMI market to expand, driven by the growing popularity of intelligent car (smart car) and infotainment demand.

We see interfaces have become more complex as a result of an ongoing integration of advanced computer systems into vehicles. There are three major categories for interface inputs: 1) through touchscreens; 2) through physical controls, a combination of knobs/joysticks and a separate display; and 3) through voice recognition. Based on Frost & Sullivan data, we think voice control is pick up fast, together with touch panel screen, in automotive HMI applications, on the back of (1) safe without distraction, and (2) improving voice recognition technology today. According to Frost & Sullivan, touch screen and voice recognition will become mainstream input for auto HMI, with penetration rate reaching 70%+, respectively.

Exhibit 8: Key development in voice recognition

Source: BNP Paribas

Voice Biometrics

Deep Speech

Embedded Natural Language Processing

Real-time Translation

Noise Cancellation

Voice Analytics to improve Voice

AI-enabled Virtual Assistants



Exhibit 9: Pros and cons for automotive HMI inputs by categories

Method Advantage Disadvantage

Physical Controls 1) Defined physical shape 2) Tactile feedback

Not suitable for complex tasks

Touchscreens 1) Flexible display of abundant content 2) Easy to master for all types of users

1) Poor for tasks involving long lists, such as searching for a phone contact 2) Driver distraction risks due to the lack of tactile feedback and the need for eye glance check

Voice Recognition 1) Potentially to be safest without distraction 2) Well-suited for complex tasks such as message entry, music playback, or radio tuning

Current speech recognition systems are not optimal enough

Handwriting Recognition

Good at deciphering input, especially attractive to market with non-Roman character sets, such as China

1) Not suitable for basic tasks, such as volume control 2) Requires large space in the center console

Non-Touch Gestures

Very long learning curve for users

Eye Tracking Requires large amount of glance times, which caused driver distraction

Sources: Strategy Analytics; BNP Paribas

We believe iFlytek could continue to improve its accuracy, supported by experienced speech synthesis and recognition technology, especially for Chinese voice recognition area. In China, 38% of auto consumers prefer speech recognition as HMI input, only behind USA’s 39% and Italy’s 40% in global market. As such, we think China could be a fast growing market for automotive voice control system, which offer good opportunity to local voice experts. Currently, iFlytek is cooperating with both global and domestic Auto OEMs, such as Porsche, BMW, Volkswagen, Honda, Mazda, Lexus, SAIC, FAW, Changan, Great Wall, Geely, Chery, JAC, GAC, and others, to work on in-vehicle voice control system.

Exhibit 10: HMI penetration rate by categories Exhibit 11: Consumer preference in HMI input

Source: Frost & Sullivan Sources: Strategy Analytics, ACI

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Air gesture

Digital instrumentcluster

Multifunctional controller

Handwriting recognition

Voice Recognition

Head-up display

Touch screen

(%)

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43 48 45 5337

53

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239

39 29 28 2740 38

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Speech recognitionRotary dial and/or hard buttonsTouchscreen



What is beyond voice input function?

Eventually, biometrics-based access can also increase the convenience and personalization, which could be ideal solution in the longer term, compared to other biological recognition technologies, such as fingerprint, palm print, and iris identification, voiceprint recognition delivers high security performance. Moreover, the technology requires any special except for a telephone and a microphone. As such, voiceprint recognition is the only contactless biological recognition technology which can be used for remote control over a telephone channel.

Exhibit 12: Automotive Voice Recognition value chain

Sources: Frost & Sullivan; BNP Paribas

Exhibit 13: Global Voice Recognition trends in automotive area

Trends Technology Provider Current Field of Application Expected Entry in Automotive industry

Voice biometrics Nuance, Sensory, and VoiceBox Banks 2018

Smartphone voice assistant Apple Siri, Cortana, S Voice, Google Now, iFlytek, and Maluuba

Smartphones Currently available

Voice recognition with wearables Microsoft Automotive and health/fitness Volvo with Microsoft

Virtual assistant iFlytek, Nuance and iNago Smartphones Expected by 2020

Noise cancellation Harman Automotive Commercially available

Machine learning iFlytek, Baidu, Google, VoiceBox, Nuance, Sensory, and iNago

Automotive and smart homes Expected by 2020

Sources: Frost & Sullivan; BNP Paribas

Voice Recognition technology

iFlytek, Nuance, Sensory

Tier 1 suppliers

Harman, Panasonic, and others

Auto OEMs

Audi, BMW, and others

Content provider

Map supplier

Baidu, Autonavi, and others

Voice through smart device

Siri, Cortana, and S voice

In-vehicle platform

Apple Carplay and Android Auto

Navigation software

NNG, Navinfo

Virtual Assistant Software

iNago

Cloud based in-vehicle assistant

New Value Chain Disruptor

VR Value Chain flow



Exhibit 14: North America automotive voice recognition market (2015)

OEM Embedded

voice Natural voice

Voice engine Voice through Smartphone Integrator Biometrics R&D Vehicle model

Audi Nuance Carplay, Android auto Harman Voice and facial Standard on 2016 models

BMW Nuance Carplay, Android auto Harman Voice biometrics Expected by 2016/2017

Chrysler Voicebox Carplay, Android auto Panasonic Facial and eye tracking Expected by 2016/2017

Chevrolet Nuance Carplay, Android auto Panasonic Not available Standard on 2016 models

Cadillac Nuance Carplay, Android auto Bosch Voice recognition Standard on 2016 models

Ford Nuance Carplay, Android auto Panasonic Eye tracking, facial recognition Standard on 2017 models

Honda Nuance Carplay, Android auto Denso Not available 2016 Accord and Civic

Hyundai Nuance Carplay, Android auto N/A Voice biometrics Sonata and Elantra

Mercedes-Benz Nuance Carplay, Android auto Harman Facial and voice CLA, CLS, E-class, and GLA

Toyota Voicebox No plans Denso Not available No timeline

Mazda Voicebox Not available Elektrobit Not available No timeline

Source: Frost & Sullivan



Long term opportunity from Artificial Intelligence (AI)

Generally, the concept of Artificial Intelligence (including machine learning and deep learning) can be dated back to 1980s. AI attempts to simulate the function of the human brain by using electronics and software algorithms. In Artificial Intelligence (AI) research scope, there are four major areas: 1) symbolic intelligence, 2) computing intelligence, 3) machine learning, and 4) machine perception. iFlytek’s advantage is at the machine perception side, which includes image identification, natural language processing, voice recognition and machine vision. On the back of its know-how in speech recognition space, iFlytek could develop a more advanced research in machine perception area. We think AI will provide a longer term opportunity to iFlytek. According to Global Times (click here), China’s President Mr. Xi highlighted the importance of both artificial intelligence (AI) and virtual reality (AR) during the G20 in Hangzhou in 2016, which should drive the continued market focus on this field, in our view.

In 2014, iFlytek launched China’s first artificial intelligence (AI) project, “Super Brain” (讯飞超脑). The “Super Brain” project emphasizes on deep language recognition, logical reasoning, and self-learning AI systems, based on company’s previous research on Chinese voice recognition. The systems will be applied in various areas, such as education, customer service, HMI, and medical. To facilitate the development of its AI projects, iFlytek will invest RMB352m to build research center and procure additional equipment for “Super Brain” project. Currently, management indicates the material impact remains quite limited in FY16-17 but expects the potential sales contribution to be significant in the longer run.

AI on automotive

We have observed that AI technology is used in auto area, especially ADAS functions and infotainment HMI. For example, one of the HMI functions, speech recognition, relies on algorithms based on neural networks running in the cloud. We expect a wider adoption of Artificial Intelligence in high-end auto market as tier 1 OEMs are attempting to improve its driver experience. According to IHS, deep learning based infotainment system will see a 32% CAGR over 2016-2025E in terms of shipment, which is mainly driven by speech recognition growth.

Exhibit 15: Research area of Artificial Intelligence

Source: BNP Paribas

Artificial Intelligence

Symbolic Intelligence

Graph searchingSymbolic learning

Uncertain reasoningAutomated reasoning

Knowledge engineering

Machine perception

Image identificationNatural language processing

Voice recognitionMachine vision

Machine Learning

Deep learningStatistical learningMatrix recognitionInductive learning

Computing Intelligence

Ant colony algorithmsArtificial immune systemEvolution Computation

Neural computingiFlytek’s area

http://www.globaltimes.cn/content/1004489.shtml



Exhibit 16: Deep learning-based infotainment systems Exhibit 17: Automotive application of AI

Applications Functions

Camera-based machine vision systems Object-marking recognition, context evaluation, action prediction

Radar-based detection units (LIDAR) Object recognition

Driver drowsiness Evaluation of driver´s condition

Sensor fusion ECU Context evaluation and action prediction

Human machine interface Speech recognition, gesture recognition, eye tracking & driver monitoring, virtual assistance and natural language interface

Source: IHS Source: BNP Paribas estimates

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2015 2017E 2019E 2021E 2023E 2025E

(m units) Speech Recognition Gesture RecognitionVirtual Assistance



What is iFlytek’s core technology?

We think iFlytek’s core technology is based on four key engines and it applies those technologies to different industry and applications.

Speech Synthesis Engine 语音合成引擎 Speech synthesis technology, which is also known as the Text to Speech (TTS) technology, is the combination of multi technologies in different areas including acoustics, linguistics, digital signal processing, and computer sciences. The main function of speech synthesis technology is to convert text into intelligible voices, in other words, let machines talk more like human beings. With over 20-year experience in speech synthesis market, iFlytek holds a leading position in China market and occupies over 70% of market share.

Speech Recognition Engine 语音识别引擎 iFlytek’s Auto Speech Recognition (ASR) technology targets to equip a computer with voice input so that the machine is able to recognize the speech of human beings and then extract text information from the speech. As such, the ASR technology enables human-machine communication and interaction through a more natural and convenient ways. The technology plays an important role in intelligent computer systems. iFlytek has launched its speech recognition engine “InterReco” for China speech recognition market. Currently, iFlytek has gained over 80% market share of Chinese speech recognition market, especially in telecommunications, financial, energy, transportation, and government institute.

Voiceprint Recognition Engine 声纹识别引擎 Voiceprint recognition is a technology which automatically determines the identity of the speaker based on voice parameters in the voice waveform reflecting physiological and behavioural characteristics of the speaker. iFlytek has launched its speaker verifier product “InterVeri”, a professional voiceprint recognition engine to fulfil market demand in the security field. To elaborate its function: 1) the engine compares the voice of speakers with the voiceprints registered in the database, 2) checks and verifies the speaker’s identity, and 3) determines whether the voice matches the voiceprint of the speaker or not.

Voice Cloud 讯飞开放平台 To leverage speech technology in more mobile Internet applications, it launched iFlytek Voice Cloud in 2010. Using cloud computing technologies to process massive data, iFlytek voice cloud is a key intelligent speech technology platform designed for mobile Internet applications. Based on this voice platform, iFlytek has launched a series of applications for demonstration purpose, including iFlyDictation, iFLYTEK Voice Touch, and Lingxi Voice Assistant. In 2012, iFlytek has launched a new generation of open platform for the voice cloud, attracting over 10,000 partners including Huawei, Lenovo, Changhong, SAIC Motor, Sina, and Xiaomi.

Exhibit 18: iFlytek’s mobile application

Source: iFlytek

iFlytek Input Lingxi Voice Assistant iFlyDictation

Icon

Chinese name 讯飞输入法灵犀讯飞语音输入

Feature

iFlytek Input is an intelligent inputmethod to improve input experience onmobile devices through incorporating thespeech, handwriting, and Pinyin inputmethods.

As an intelligent voice assistant jointlylaunched by China Mobile and iFlytek,Lingxi serves as a voice secretary, whichenables users to make a voice call, sendmessages, check weather conditions,and even buy lotteries.

iFlyDictation is a speech input assistantsoftware that can hear and speak wordsbased on cloud computing. The softwaresupports speech input, speech-to-textconversion, and text sending by usingEmail, MicroBlog, WeChat and QQ.



Private placement approved by China authority

On 18 May 2016, iFlytek announced a private placement proposal to issue a total of 23.9m new shares, of which 12.9m shares are for acquisition Lezhixing (乐知行), an education software company in Beijing, and 11m shares for iFlytek’s operating capital demand. The potential dilution of current outstanding shares is around 2%. On 28 July 2016, the proposal has been approved by China Securities Regulatory Commission. We have factored in additional shares into our model as we believe the company will execute the private placement in the near term. On 10 Sep 2016, iFlytek officially announced that the acquisition of Lezhixing will be executed through cash (RMB143m) and new issue stocks (12.9m shares). However, the deal is still pending for final approval from China Securities Regulatory Commission and we haven’t factored in Lezhixing financials due to uncertain consolidation date.



Business overview

iFlytek has six major business lines, which are voice-based software, education, internet & telecom, public & government, system integration, and big data service. Among the six business lines, education and system integration both accounted for 30% of total revenues in FY15, respectively, followed by internet & telecom 13%, voice-based software 12%, public & government 10%, and big data service 5%.

1 Voice-based software (12% of total sales in FY15)

Voice-based software is the key engine for voice application system and product, such as telecom-level voice platform and embedded voice software. Its clients are voice application developers in various industries, such as telcos, robot manufacturing, car makers and financial institutions. iFlytek provides voice-based software to its clients mainly through licensing. Notably, the company does not

Exhibit 19: iFlytek revenues by business Exhibit 20: Revenues mix by business

Sources: iFlytek; BNP Paribas estimates Sources: iFlytek; BNP Paribas estimates

Exhibit 21: Business overview by business

Segment 2015 2016E 2017E 2018E

Revenues (RMB m)

Voice-based software 303 414 652 991

Education 761 1,066 1,582 2,419

Internet & Telecom 313 486 716 1,006

Public & Government 248 395 572 802

System Integration 757 978 1,200 1,423

Big data service 113 175 215 258

Revenues mix (%) Voice-based software 12 12 13 14

Education 30 30 32 35

Internet & Telecom 13 14 14 15

Public & Government 10 11 12 12

System Integration 30 28 24 21

Big data service 5 5 4 4

Growth (y-y %) Voice-based software 23.2 36.7 57.4 51.9

Education 15.0 40.2 48.4 52.9

Internet & Telecom 52.2 55.4 47.2 40.6

Public & Government 63.0 59.3 44.8 40.4

System Integration 61.0 29.3 22.7 18.5

Big data service na 55.6 22.4 20.0


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transfer the ownership of voice technology to its client. iFlytek recognizes its auto HMI related products in this business line. Currently, the company provides service modules to tier 2 auto components supplier. In the future, iFlytek targets to penetrate into Auto OEMs directly. In addition, the company supplies software to up to 5,000 small robot players in China.

2 Education (30% of total sales in FY15)

iFlytek provides education products including 1) intelligent speech teaching aid system. The system comprises an integrated unit, a recognition pen, a Memory card, supporting books with identification labels, and system software. The product aims to improve the English and Chinese language teaching quality in both primary and middle schools; 2) intelligent speech evaluation system. Based on speech recognition, natural language understanding, and multiple disciplines including linguistics, testing, and statistics, the system can analyse the speech characteristics of a user and score the pronunciation of the user. In addition, the system can point out the errors and flaws in the user's speech and give suggestions.

Currently, iFlytek has provided B2B education solution to 7,000 schools, compared to 3,000 schools in 2015. iFlytek also provides B2C services through supplying equipment for educational institution and charging add-on service fee. Notably, we think the potential margin upside might come from education business as its smart class and smart education platform might start monetarizing in the near future.

3 Internet & Telecom (13% of total sales in FY15)

iFlytek provides Internet & Telecom products and value-added services to China telecom operators such as China Mobile and China Unicom. Telcos would supply

Exhibit 22: Voice-based software revenues and y-y growth Exhibit 23: Voice-based software revenue contribution, GM


Exhibit 24: Education software revenues and y-y growth Exhibit 25: Education revenues contribution and GM


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intelligent voice applications and solutions to its end users, supported by iFlytek’s technology. Revenues of internet & telecom mainly come from profit-sharing with telecom operators’ service revenues.

4 Public & Government (10% of total sales in FY15)

iFlytek’s applications in public & government areas are public security and smart city information management. In public security area, iFlytek has signed strategic collaboration agreement with several municipal public safety bureaus to provide recognition technology for public safety solutions. Also, iFlytek supplies smart city information management platforms in several provinces, including Anhui, Jinlin, and Jiangxi province.

5 System Integration (30% of total sales in FY15)

iFlytek’s system integration business line mainly includes hardware products such as information engineering and audio & video monitoring. iFlytek acts as system integrator and receives order by project base from central or local government in differenct areas, such as hospital, subway station, airport, and so on. It is notably that system integration business has the lowest gross margin performance of less than 20% among the company’s overall portfolio. As the company will focus more on voice-based business, we believe system integration contribution will decline in the following years, which improves iFlytek’s margin performance.

Exhibit 26: Internet & Telecom revenues and y-y growth Exhibit 27: Internet & Telecom revenues contribution and GM


Exhibit 28: Public & Government revenues and y-y growth

Exhibit 29: Public & Government revenues contribution and GM


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6 Big data service (5% of total sales in FY15)

iFlytek introduced its new business big data service, which includes communication data analysis and big data advertising platform since 2015. For communication data analysis service, it is a contract-based service, which includes the content and length of the service. For big data advertising platform, iFlytek charges its clients based on the frequency of advertisement showed or advertisement clicked by end-users. We forecast the big data service to remain stable in the following years.

Exhibit 30: System Integration revenues and y-y growth Exhibit 31: System Integration revenues contribution and GM


Exhibit 32: Big data service revenues and y-y growth Exhibit 33: Big data service revenues contribution and GM


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Competitive landscape

We see major competition from both Nuance as well as Baidu in China as the rest of local players have small base and cannot be a big threat to iFlytek, in our view.

Competition with Nuance

Founded in 1995, Nuance also provides voice recognition solutions and natural language understanding technologies. It offers multiple solutions, including automated speech recognition, dialog and information management, biometric speaker authentication, text-to-speech, and optical character recognition (OCR). According to SIAC, Nuance is the global leading voice recognition solution supplier with largest market share of 32% in 2015.

Strategy and business model slightly different We think the key difference between iFlytek and Nuance is the business model. Nuance has a broader exposure to different regions with different language while iFlytek only focus on Chinese language in China. Meanwhile, iFlytek applied its speech recognition know-how into few industries but Nuance has more exposure to auto market.

Nuance is less profitable Despite a higher gross margin performance compared to iFlytek, Nuance’s opex ratio came in at 45%+ over 2011-2015, compared to iFlytek’s 36-40% level. From the financial numbers, we think the higher opex ratio of Nuance is mainly due to higher SG&A expense at 30%+. Furthermore, Nuance is suffering from high interest expense, which leads to loss-making bottom-line during the past three years.

We sees a strong revenues growth with 46% CAGR over 2012-2015, compared to Nuance’s 11% in the same period, thanks to fast development of voice recognition in China market. In China market, Nuance only has 3% market share in 2015, while iFlytek is the biggest player with more than 40% market share. We believe iFlytek will continue to benefit from market expansion and remain as the leading player in China.

Chinese means higher entry barrier for overseas player We think iFlytek still has advantage on China local language on (1) big Chinese data base (2) better understanding of different local accents, and better relationship with local customers. In China, the speech recognition market is dominated by iFlytek and Baidu with 72% market share, followed by Apple 7%, Nuance 3%, Xiaoi 小 i 机器人 3%, Jietong Huasheng 捷通华声 2%, Haitian Ruisheng 海天瑞声 2%, Zongke Xinli 中科信利 1%, and others 10%.

Exhibit 34: Revenues and y-y growth comparison Exhibit 35: Nuance has a higher SG&A expense ratio

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Baidu is a potential threat

In China, Baidu is a strong competitor as it has demonstrated its commitment in its Baidu World 2016 (百度世界大会 2016) on artificial intelligence (AI) through continued development of its Baidu Brain. Baidu Brain is a super large scale neural network with massive computing power and vast access to Chinese language data, and is now mature enough to begin commercialization. We noted voice recognition is one of its focusing areas, together with image recognition, natural language processing, and user profiling. Recently, Baidu plans to launch its voice mobile keyboard app on Android in Nov this year and has collaborated with Harman on smart sound speakers.

In terms of voice recognition quality, especially under noisy environment, we think iFlytek has better performance in auto market with total auto model reaching 30 models already by the end of 2015. iFlytek targets to penetrate into 100 auto model in 2016, on the back of its superior quality and accuracy. On the other hand, we have not seen clear breakthrough from Baidu in auto OEMs yet. Our view is that Baidu can have better performance on picture recognition or facial recognition but is still behind iFlytek in voice area.

Exhibit 36: Margins comparison Exhibit 37: Nuance revenues mix in the past 5 years

Source: Companies Source: Nuance

Exhibit 38: Voice recognition for automotive

Company Voice Biometrics Available Virtual Assistant Available Business Areas OEMs Working Tier-I Suppliers

Nuance Prototype available Available for web applications Automotive, healthcare, wearables, and connected living

All major OEMs All major Tier-I suppliers

iFlytek Under development Under development Automotive and Smartphones China OEMs Not available

Sensory Yes Under development Wearables, automotive vehicles, consumer electronics, and banking

In talks with mass-market OEMs

Sony, Samsung, TomTom, LG, and Motorola

VoiceBox Under development and expected by 2018

Under development Automotive, smartphones, connected homes, and wearables

Fiat, Mazda, Renault, Toyota, and Chrysler

TomTom, Pioneer, AT&T, Elektrobit, and Fujitsu Ten

iNago No Yes, for aftermarket navigation Automotive, smartphones, wearables, and consumer electronics

Toyota Clarion, Samsung, Fujitsu Ten, NNG, Toyota, and Kenwood

Sources: Frost & Sullivan; BNP Paribas estimates

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Initiate at HOLD with a target price of RMB31

We initiate coverage of iFlytek with a HOLD rating and TP of RMB31, implying 9.0% potential upside from current levels. We expect the autonomous driving technology to drive increasing demand for voice recognition for the foreseeable future. We believe iFlytek, as the largest voice recognition provider in China, should maintain its leading position to benefit from broader application in different market. However, it is trading at 52x FY17 PE, broadly in line with peers’ 54x average, and we see its risk-reward profile is less convincing at this moment. Our TP of RMB31 is based on 57x FY17 P/E, in line with historical average since 2011 as we expect its FY16-18 earnings CAGR of 34%, which is in line with historical earnings CAGR in 2010-15. We suggest investors to wait for a better entry point.

Exhibit 39: 12m forward P/E band Exhibit 40: 12m forward P/BV band


Exhibit 41: Historical 12m forward P/E band Exhibit 42: iFlytek stock performance versus index


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Exhibit 43: Valuation comparison Name BBG code CCY Price Mkt cap Earning growth ------- EPS ------ ------- P/E ------- ------ P/BV ------ ------ ROE ------ ---- PEG ---- - EV/EBITDA -

2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

(LC) (USD m) (%) (%) (LC) (LC) (x) (x) (x) (x) (%) (%) (x) (x) (%) (%)

iFlytek* 002230 CH RMB 28.4 5,517 28 34 0.41 0.55 68.8 51.5 5.6 5.2 8.4 10.4 2.5 1.5 54 41

Nuance NUAN US USD 14.4 4,022 n.m. 5 1.51 1.64 9.5 8.8 2.2 2.2 20.9 23.8 n.a. 1.9 53 57

Kingsoft 3888 HK HKD 19.0 3,128 62 86 0.44 0.85 37.0 19.3 2.7 2.4 4.2 13.3 0.6 0.2 31 18

Yonyou 600588 CH RMB 22.5 4,962 30 31 0.28 0.40 81.3 56.3 5.6 5.4 7.1 8.9 2.8 1.8 18 14

Digiwin 300378 CH RMB 27.2 1,079 478 44 0.38 0.57 71.9 47.8 6.0 5.5 6.8 8.0 0.2 1.1 n.a. n.a.

Navinfo 002405 CH RMB 22.3 3,555 76 31 0.20 0.29 109.7 76.5 2.0 5.0 5.4 6.5 1.4 2.4 17 15

Thunder Software 300496 CH RMB 48.3 2,928 17 99 0.35 0.69 138.7 70.2 10.3 14.5 13.0 20.9 7.9 0.7 252 96

Wisesoft 002253 CH RMB 31.0 1,052 53 51 0.21 0.30 145.7 103.5 5.0 4.7 3.7 5.2 2.8 2.0 n.a. n.a.

Average industry peers 106 48 82.8 54.2 4.9 5.6 8.7 12.1 0.8 1.1 71 40

Hikvision* 002415 CH RMB 24.2 22,363 20 22 1.15 1.40 21.0 17.3 5.9 4.8 31.6 30.5 1.1 0.8 17 14

Luxshare* 002475 CH RMB 20.2 5,695 13 22 0.65 0.79 31.2 25.5 5.7 4.7 20.0 20.2 2.4 1.1 22 18

Jinlong* 300032 CH RMB 17.3 2,110 (5) 5 0.38 0.40 45.3 43.2 5.9 5.3 13.7 12.9 n.m. 8.7 32 31

Joyson* 600699 CH RMB 33.7 3,476 73 63 0.71 1.15 47.7 29.2 2.6 2.4 8.3 8.4 0.7 0.5 22 18

GoerTek* 002241 CH RMB 30.1 6,933 18 21 0.97 1.17 31.1 25.8 3.8 3.0 13.7 12.9 1.7 1.2 19 16

Desay* 000049 CH RMB 42.0 1,288 23 10 1.38 1.52 30.4 27.7 7.2 5.8 26.6 23.1 1.3 2.9 18 16

Inspur* 000977 CH RMB 26.0 3,922 38 9 0.62 0.67 41.8 38.5 7.6 6.5 19.9 18.1 1.1 4.5 25 23

Sunwoda 300207 CH RMB 15.9 3,022 60 50 0.42 0.61 38.2 25.9 8.5 6.6 22.5 26.4 0.6 0.5 22 16

Sunway 300136 CH RMB 26.0 3,718 132 46 0.56 0.83 46.9 31.3 12.7 9.2 27.7 30.3 0.4 0.7 34 23

Sunlord 002138 CH RMB 18.6 2,060 43 31 0.51 0.66 36.6 28.0 5.2 4.5 14.2 16.3 0.9 0.9 23 21

Everwin 300115 CH RMB 27.8 3,780 52 38 0.84 1.16 33.0 24.0 6.3 5.0 17.8 20.5 0.6 0.6 17 12

O-Film 002456 CH RMB 36.1 5,733 89 45 0.87 1.24 41.4 29.2 5.5 4.7 13.6 17.2 0.5 0.7 21 16

Average China peers 46 30 37.1 28.8 6.4 5.2 19.1 19.8 0.8 1.0 23 19

Priced as at 29 Sep 2016 Sources: Bloomberg consensus; *BNP Paribas estimates



DCF analysis

We crosscheck our target price with a DCF valuation, which gives a value of RMB31/share, based on a WACC of 7.4%.

Exhibit 44: Free cash flow analysis

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Terminal val.

Revenue 3,524 4,944 6,906 9,669 13,536 18,274 23,756 30,883 37,060 40,025 EBITDA 502 751 1,090 1,450 1,895 2,558 3,088 4,015 4,447 4,703 Less: Changes in working capital 422 378 526 197 1,006 1,232 1,425 1,853 1,606 771 Less: Capex 600 500 400 503 650 786 903 926 926 800 Less: Tax 62 81 114 80 104 144 173 227 251 264 FCF (583) (207) 50 670 136 397 587 1,009 1,664 2,868 3,018

Discount factor (%) 0.96 0.90 0.84 0.78 0.72 0.67 0.63 0.58 0.54 0.51 0.49

PV of FCF (375) (45) 167 638 207 369 462 676 985 1,526 34,512

Source: BNP Paribas estimates

Exhibit 45: WACC assumption of 7.4% is in line with Bloomberg’s WACC calculation Target capital structure (%) Debt to total capitalization 2

Equity to total capitalization 98

Debt to Equity ratio 2

Cost of equity (%) Risk-free rate 2.9

Market risk premium 6.1

Levered Beta (x) 0.76

Cost of equity (%) 7.6

Cost of Debt (%) Cost of debt 1.9

Taxes 6.0

After tax cost of debt (%) 1.8

WACC (%) 7.4


Exhibit 46: DCF implied value: RMB31/share

(RMB m)

Enterprise value Present value of free cash flow 3,085

Terminal value 70,765

Discount factor 0.49

Present value of terminal value 34,512

% of Enterprise value (%) 92%

Enterprise value 37,597

Less: Total debt 37

Plus: Cash and cash equi. 2,645

Net debt (2,607)

Implied equity value 40,204

Outstanding shares 1,285

Implied share price 31




Financial Analysis

1H16 review and FY16 outlook

The company reported 1H16 earnings of RMB256m (EPS of RMB0.19), 79% y-y growth. 1H16 revenue went up by 41% y-y to reach RMB1,462m. It is notably that selling expense went up by 65.3% y-y in 1H16, versus 40.7% y-y sales growth in the same period, which was mainly due to higher employee salary and other admin expense. We currently model FY16 revenue to reach RMB3,524m, up 41% y-y with gross margin from 48.9% in 2015 to 48.7% in 2016. We believe 2016 remains a growing year with 2H16 revenue to increase by 41% h-h to reach RMB2,062m, driven by continued expansion in China voice recognition market.

Profitability and margin

We model a slightly gross margin increase into 2016-18 due to more revenues contribution from its voice-based software and education-related product, which bring in a better margin performance. We expect iFlytek to maintain its operating margin at above 10% level on favourable product mix and stable opex ratio. We think iFlytek would have a fast growth and we model its net income to grow by 28%, 34%, and 40%, respectively in 2016-18.

Exhibit 47: Revenues mix by business Exhibit 48: Revenues and y-y growth


Exhibit 49: Margins Exhibit 50: Net income growth

Sources: iFlytek, BNP Paribas estimates Sources: iFlytek, BNP Paribas estimates

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Exhibit 51: Quarterly P&L

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2015 2016E 2017E 2018E

(RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m) (RMB m)

Sales 406 633 635 827 633 829 920 1,141 922 1,150 1,297 1,575 2,501 3,524 4,944 6,906

Gross profit 230 283 299 411 301 397 449 569 447 569 642 791 1,223 1,717 2,449 3,445

Op. profit 32 59 55 136 41 92 110 170 92 149 171 239 282 412 651 980

Pre-tax profit 77 86 102 199 78 207 133 191 132 189 211 279 465 609 811 1,140

Net income 67 77 81 202 71 185 112 176 108 169 186 264 425 544 727 1,016

EPS 0.05 0.06 0.06 0.16 0.05 0.14 0.08 0.13 0.08 0.13 0.14 0.20 0.33 0.41 0.55 0.77

Margins (%) Gross margin 56.6 44.7 47.0 49.7 47.6 47.9 48.8 49.9 48.5 49.4 49.5 50.2 48.9 48.7 49.5 49.9

Op. margin 8.0 9.3 8.6 16.4 6.5 11.0 11.9 14.9 10.0 12.9 13.2 15.2 11.3 11.7 13.2 14.2

Pre-tax margin 19.0 13.6 16.1 24.1 12.4 24.9 14.4 16.7 14.4 16.4 16.3 17.7 18.6 17.3 16.4 16.5

Net margin 16.4 12.1 12.7 24.4 11.2 22.4 12.1 15.5 11.7 14.7 14.3 16.8 17.0 15.4 14.7 14.7

Change (q-q %) Sales (39) 56 0 30 (23) 31 11 24 (19) 25 13 21 Gross profit (44) 23 6 38 (27) 32 13 27 (21) 27 13 23 Op. profit (81) 82 (7) 148 (70) 123 20 55 (46) 61 15 40 Pre-tax profit (61) 11 18 95 (61) 164 (36) 44 (31) 43 12 32

Net income (63) 15 5 150 (65) 162 (40) 58 (39) 57 10 42 Change (y-y %) Sales 55 64 39 23 56 31 45 38 46 39 41 38 41 41 40 40

Gross profit 46 44 35 (1) 31 40 50 38 48 43 43 39 24 40 43 41

Op. profit 12 49 4 (21) 27 56 100 25 125 63 56 41 (3) 46 58 51

Pre-tax profit 25 19 0 1 1 140 30 (4) 69 (9) 59 46 7 31 33 41

Net income 31 16 (1) 11 6 142 39 (13) 53 (9) 67 50 12 28 34 40


Healthy balance sheet and cash flow

We expect iFlytek to maintain a healthy cash flow and balance sheet, driven by stable growth of voice recognition business. It has maintained net cash position in the past four years; we think it will continue to maintain at a healthy balance sheet position on better earnings momentum. Meanwhile, we estimate a stable capex in 2016-18 as iFlytek would prepare its AI development in the following year.

Exhibit 52: Earnings comparison

------------------------- 2015E ------------------------- ------------------------- 2016E ------------------------- ------------------------- 2017E -------------------------

BNP Cons Diff. BNP Cons Diff. BNP Cons Diff.

(RMB m) (RMB m) (%) (RMB m) (RMB m) (%) (RMB m) (RMB m) (%)

Sales 3,524 3,501 1 4,944 4,919 1 6,906 6,863 1

Gross profit 1,717 1,731 (1) 2,449 2,432 1 3,445 3,423 1

Operating profit 412 432 (5) 651 613 6 980 853 15

Pre-tax profit 609 591 3 811 789 3 1,140 1,054 8

Net profit 544 532 2 727 710 2 1,016 948 7

Margins (%)

Gross margin 48.7 49.4 49.5 49.4 49.9 49.9 Operating margin 11.7 12.3 13.2 12.5 14.2 12.4 Pre-tax margin 17.3 16.9 16.4 16.0 16.5 15.4

Net margin 15.4 15.2 14.7 14.4 14.7 13.8

Sources: Bloomberg consensus; BNP Paribas estimates



Exhibit 53: Net debt and net-debt-to-equity ratio


Exhibit 54: Capex Exhibit 55: FCF performance


(60)

(50)

(40)

(30)

(20)

(10)

0

(3,000)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0

2012 2013 2014 2015 2016E 2017E 2018E

(%)(RMB m) Net debt (LHS) Net debt to equity (RHS)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0

100

200

300

400

500

600

700

800

900

1,000

2012 2013 2014 2015 2016E 2017E 2018E

(%)(RMB m) Capex (LHS) Capex to sales (RHS)

(0.4)(0.3)(0.3)(0.2)(0.2)(0.1)(0.1)0.00.10.10.20.2

(500)

(400)

(300)

(200)

(100)

0

100

200

300

2012 2013 2014 2015 2016E 2017E 2018E

(RMB)(RMB m) Free cash flow (LHS)Free cash flow per share (RHS)



Sensitivity analysis

Sales and gross margin - We also see potential earnings downside from a lower gross margin as a result of unfavourable product mix. In 2016, an additional 1ppt on gross margin could lead to 5.6-6.0% earnings downside. Meanwhile, every 1ppt increase in annual growth would positively impact earnings by 2%

Exhibit 56: Earnings sensitivity analysis on revenue growth and gross margin (FY16E)

Earnings ---------------- Annual revenue growth ---------------- Change (%) ---------------- Annual revenue growth ----------------

(RMB m) 31% 36% 41% 46% 51% (%) 31% 36% 41% 46% 51%

GM

45.7% 347 398 449 501 552

GM

45.7% (36) (27) (17) (8) 1

46.7% 376 428 481 533 586 46.7% (31) (21) (12) (2) 8

47.7% 405 459 513 566 620 47.7% (25) (16) (6) 4 14

48.7% 435 489 544 599 654 48.7% (20) (10) 0 10 20

49.7% 464 520 576 632 687 49.7% (15) (4) 6 16 26

50.7% 494 550 607 664 721 50.7% (9) 1 12 22 33

51.7% 523 581 639 697 755 51.7% (4) 7 17 28 39


Exhibit 57: Earnings sensitivity analysis on revenue growth and gross margin (FY17E)

Earnings ---------------- Annual revenue growth ---------------- Change (%) ---------------- Annual revenue growth ----------------

(RMB m) 30% 35% 40% 45% 50% (%) 30% 35% 40% 45% 50%

GM

46.5% 446 520 594 668 741

GM

46.5% (39) (29) (18) (8) 2

47.5% 487 563 638 714 789 47.5% (33) (23) (12) (2) 8

48.5% 529 606 683 760 837 48.5% (27) (17) (6) 4 15

49.5% 570 649 727 806 884 49.5% (22) (11) 0 11 22

50.5% 612 692 772 852 932 50.5% (16) (5) 6 17 28

51.5% 653 735 816 898 980 51.5% (10) 1 12 23 35

52.5% 694 777 861 944 1,027 52.5% (5) 7 18 30 41




DuPont analysis

Among the peers, Nuance is the direct competitors to iFlytek in the voice recognition market. Despite a loss-making performance in the past three years, the streets (based on Bloomberg) holds an optimistic view on Nuance with ROE at 20%+ level into 2016-18E. However, we note that the financial leverage ratio is higher for Nuance at over 2.5x, compared to iFlytek’s 1.3x level. We believe iFlytek has a healthier financial structure versus its peer. Moreover, iFlytek delivers a outstanding ROE performance than other China peers, mainly thanks to its better net margin.

Exhibit 58: DuPont analysis on peers

Company BBG code ----------- Net margin ----------- --------- Asset turnover --------- --------- Leverage ratio --------- ---------------- ROE ----------------

2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

(%) (%) (%) (x) (x) (x) (x) (x) (x) (%) (%) (%)

iFlytek* 002230 CH 15.4 14.7 14.7 0.4 0.5 0.7 1.3 1.3 1.3 8.4 10.4 13.3

Nuance NUAN US 24.8 23.3 24.1 0.3 0.3 0.4 2.5 3.1 2.9 20.9 24.6 24.4

Navinfo 002405 CH 10.6 10.8 11.3 0.4 0.4 0.5 1.4 1.4 1.4 5.4 6.5 7.6

Joyson* 600699 CH 3.6 4.2 4.4 1.5 1.1 1.2 1.5 1.8 1.8 8.3 8.4 9.5

Neusoft 600718 CH 9.9 6.9 7.5 0.7 0.6 0.5 1.5 2.2 2.1 9.9 8.6 8.5

Protruly 600074 CH 27.2 27.7 27.5 0.1 0.2 0.2 1.1 1.2 1.2 11.6 15.9 19.9

Jingu 002488 CH 2.2 2.6 3.0 0.6 0.8 0.8 3.2 4.0 5.2 4.5 8.4 12.9

Kingsoft 3888 HK 4.3 10.4 11.1 0.4 0.6 0.8 3.1 2.0 1.9 4.7 13.1 16.4

Yonyou 600588 CH 8.6 10.0 11.4 0.5 0.5 0.5 1.7 1.8 2.0 7.1 8.9 11.1

Sources: Company data; Bloomberg consensus estimates, *BNP Paribas estimates

Exhibit 59: ROE comparison

Sources: Bloomberg; *BNP Paribas estimates

0

5

10

15

20

25

30

iFlytek* Nuance Navinfo Joyson* Neusoft Protruly Jingu Kingsoft Yonyou

(%) 2016E 2017E 2018E



Risks to our call

Downside risks

Worse-than-expected China voice recognition demand: Worse-than-expected China voice recognition demand will have negative impact on sales and earnings from voice-based application business to our current estimates.

International player to penetrate into China voice recognition market: Given a slowing global voice recognition market, Nuance might emphasize more resources to gain share in growing China voice recognition market.

Worse-than-expected growth of China smart car market: iFlytek supplies voice recognition technology for smart car’s voice control system. As such, a worse-than-expected development of smart car in China would lead to potential downside to our current estimates.

Upside risks

Better-than-expected China voice recognition demand: Better-than-expected China voice recognition demand will have positive impact on sales and earnings from voice-based application business to our current estimates.

Government policy support: If China government launches policy for local voice recognition players, it will form a natural entry barrier to international players.

Faster adoption of voice control for auto HMI. Voice control serves as a desirable method for auto HMI. A faster-than-expected adoption of voice control by auto OEMs will trigger more demand for iFlytek’s voice recognition service.



Company profile

Founded in 1999, iFlytek is a Chinese software enterprise focusing on speech intelligence and artificial intelligence technology. The company also provides chip products, voice messaging software, and integration service for e-government systems. The company mainly provides its service for telecommunication, financial institution, government, and other industries. iFlytek went listed on Shenzhen Stock Exchange in 2008.

Exhibit 60: Key milestone – iFlytek

Date Key event

1999 iFlytek was founded by a group of college students

2001 Number of developers reached over 100 on iFlytek intelligent speech platform

2005 Set up iFlytek research institution

2006 Won first prize at Blizzard Challenge from 2006 to 2011

2007 iFlytek Co. was officially established, and its intelligent speech chips sales reached 200k units

2008 iFlytek went listed on Shenzhen Stock Exchange

2009 Listed as National Innovative Enterprise in China

2010 Launched intelligent speech interaction platform - iFlytek cloud

2012 iFlytek cloud users reached 150m in total

2013 Strategic alliance with telco operators including China Mobile, China Telecom, and China Unicom

Source: iFlytek

Exhibit 61: Top 10 shareholders

Name Holding (%)

China mobile 13.9

Qingfeng Liu 8.1

USTC Holdings 4.3

Renhua Wang 1.9

China Investment Corporation 1.4

China Asset Management 1.1

Anhui Railway Construction 1.1

Hongwei Hu 1.0

Tao Chen 1.0

E fund management 0.9

Others 64.6

Source: iFlytek

Exhibit 62: Management profile

Current position Name Major experience Educational Background

Chairman Mr. Liu Qingfeng 刘庆峰 Chairman and founder of iFlytek. Representative of the 12th National People's congress in China.

PHD in engineering

Director Mr. Liu Xin 刘昕 Director of iFlytek and chairman of MIGU. Past experience as solution manager in IBM and department manager in China Mobile.

Master degree

Director Mr. Su Jun 苏俊 Director of iFlytek and CEO of Teamtech information system. Past experience as lecturer in University of Science and Technology of China.

Bachelor in science

Director Mr. Chen Tao 陈涛 Director of iFlytek. Executive director in iFlyteks' subsidiaries. Master in computer science

Director Mr. Wu Xiaoru 吴晓如 Director of iFlytek. Executive director in iFlyteks' subsidiaries. PHD in engineering

Director Mr. Hu Yu 胡郁 Director of iFlytek. Executive director in iFlyteks' subsidiaries. PHD

Director Mr. Hu Hongwei 胡宏伟 Director of iFlytek. Executive director in iFlyteks' subsidiaries. Bachelor in engineering

Financial officer Mr. Zhang Shaobing 张少兵 Financial officer of iFlytek. Past experience as auditor in accounting firm. Bachelor

Board secretary Mr. Jiang Tao 江涛 Board secretary of iFlytek. Executive director in iFlyteks' subsidiaries. Master in computer science

Source: iFlytek



Exhibit 63: Employee mix by function (2015) Exhibit 64: Employee mix by education (2015)

Source: iFlytek Source: iFlytek

Technology67%

Sales & Marketing

23%

Management6%

Others4%

Master and above26%

Bachelor62%

College degree11%

Others1%



Corporate governance

Board structure

Number of Independent Directors (ID) 4

Percentage of IDs in the board 36.4%

ID participation/attendance at board meetings 100%

ID participation in audit/remuneration committees 100%

ID terms (years of service, re-election/replacement procedures) 3 years

Sources: Company; BNP Paribas

Audit practices

Auditor HPTJCPA

Length of service 14 years

Reporting incidents N/A

Fee track record RMB1.5m for 2015

Policy on change of Audit firm N/A


Compensation and remuneration

Directors' remuneration vs. earnings/ROE/share performance 1.9% of 2015 earnings

Changes/stability in senior management Stable

Incidents of termination of senior management N/A

Track record on Insider sales N/A


Shareholders' rights

Communication - shareholder participation in AGMs/EGMs 34.2%

Related party transactions N/A

Voting issues - policies, incidents of rejected proposals None




Financial statements Iflytek

Sources: Iflytek; BNP Paribas estimates

Profit and Loss (RMB m) Year Ending Dec 2014A 2015A 2016E 2017E 2018E

Revenue 1,775 2,501 3,524 4,944 6,906

Cost of sales ex depreciation (728) (1,192) (1,717) (2,395) (3,351)

Gross profit ex depreciation 1,048 1,309 1,807 2,549 3,555Other operating income 0 0 0 0 0

Operating costs (696) (941) (1,305) (1,798) (2,465)

Operating EBITDA 352 368 502 751 1,090Depreciation (60) (86) (90) (100) (110)

Goodwill amortisation 0 0 0 0 0

Operating EBIT 292 282 412 651 980Net financing costs 42 38 40 40 40

Associates 13 39 134 40 40

Recurring non operating income 100 145 156 120 120

Non recurring items 0 0 0 0 0

Profit before tax 434 465 609 811 1,140Tax (45) (28) (62) (81) (114)

Profit after tax 388 437 546 730 1,026Minority interests (9) (11) (2) (3) (10)

Preferred dividends 0 0 0 0 0

Other items 0 0 0 0 0

Reported net profit 379 425 544 727 1,016Non recurring items & goodwill (net) 0 0 0 0 0

Recurring net profit 379 425 544 727 1,016

Per share (RMB)

Recurring EPS * 0.32 0.33 0.41 0.55 0.77

Reported EPS 0.32 0.33 0.41 0.55 0.77

DPS 0.11 0.10 0.12 0.17 0.23

Growth

Revenue (%) 41.6 40.9 40.9 40.3 39.7

Operating EBITDA (%) 32.2 4.5 36.4 49.6 45.1

Operating EBIT (%) 29.3 (3.5) 46.1 58.0 50.5

Recurring EPS (%) 35.1 4.8 24.8 33.7 39.7

Reported EPS (%) 35.1 4.8 24.8 33.7 39.7

Operating performance

Gross margin inc depreciation (%) 55.6 48.9 48.7 49.5 49.9

Operating EBITDA margin (%) 19.8 14.7 14.2 15.2 15.8

Operating EBIT margin (%) 16.5 11.3 11.7 13.2 14.2

Net margin (%) 21.4 17.0 15.4 14.7 14.7

Effective tax rate (%) 0.0 0.0 0.0 0.0 0.0

Dividend payout on recurring profit (%) 35.0 31.0 30.0 30.0 30.0

Interest cover (x) n/a n/a n/a n/a n/a

Inventory days 75.8 75.5 72.7 67.4 66.7

Debtor days 199.0 193.6 170.0 147.7 127.3

Creditor days 248.1 210.3 165.9 128.1 105.2

Operating ROIC (%) 30.0 18.8 18.2 20.9 25.0

ROIC (%) 16.0 11.5 11.8 13.6 17.0

ROE (%) 10.8 8.5 8.4 10.4 13.3

ROA (%) 7.3 5.9 5.9 7.6 10.0*Pre exceptional pre-goodwill and fully diluted

Revenue By Division (RMB m) 2014A 2015A 2016E 2017E 2018E

Voice-based software 246 303 414 652 991

Education 662 761 1,066 1,582 2,419

Internet & Telecom 206 313 486 716 1,006

Public & Government 152 248 395 572 802

System Integration 470 757 978 1,200 1,423

Big data service 0 113 175 215 258

Others 40 7 9 7 7



Financial statements Iflytek

Sources: Iflytek; BNP Paribas estimates

Cash Flow (RMB m) Year Ending Dec 2014A 2015A 2016E 2017E 2018E

Recurring net profit 379 425 544 727 1,016

Depreciation 60 86 90 100 110

Associates & minorities 0 0 0 0 0

Other non-cash items 296 213 0 0 0

Recurring cash flow 735 725 634 827 1,126Change in working capital (315) (209) (422) (378) (526)

Capex - maintenance 0 0 0 0 0

Capex - new investment (580) (890) (600) (500) (400)

Free cash flow to equity (160) (374) (388) (50) 200Net acquisitions & disposals 0 0 0 0 0

Dividends paid (95) (133) (132) (163) (218)

Non recurring cash flows (538) (467) 0 0 0

Net cash flow (793) (974) (520) (214) (18)Equity finance 124 2,307 0 0 0

Debt finance (19) 245 (50) (50) (50)

Movement in cash (688) 1,578 (570) (264) (68)

Per share (RMB)

Recurring cash flow per share 0.61 0.56 0.48 0.63 0.85

FCF to equity per share (0.13) (0.29) (0.29) (0.04) 0.15

Balance Sheet (RMB m) Year Ending Dec 2014A 2015A 2016E 2017E 2018E

Working capital assets 1,498 2,122 2,568 3,042 3,722

Working capital liabilities (1,067) (1,379) (1,402) (1,499) (1,653)

Net working capital 431 743 1,165 1,543 2,069Tangible fixed assets 767 1,056 1,566 1,966 2,256

Operating invested capital 1,197 1,799 2,732 3,509 4,325Goodwill 608 650 650 650 650

Other intangible assets 0 0 0 0 0

Investments 167 - 513 513 513

Other assets 1,064 1,404 1,404 1,404 1,404

Invested capital 3,036 4,367 5,299 6,077 6,893Cash & equivalents (1,067) (2,645) (2,075) (1,811) (1,743)

Short term debt 9 222 172 122 72

Long term debt * 0 37 37 37 37

Net debt (1,058) (2,385) (1,865) (1,652) (1,634)Deferred tax 0 0 0 0 0

Other liabilities 193 229 229 229 229

Total equity 3,707 6,268 6,680 7,244 8,042

Minority interests 195 255 255 255 255

Invested capital 3,036 4,367 5,299 6,077 6,893

Per share (RMB)

Book value per share 3.08 4.88 5.07 5.50 6.10

Tangible book value per share 2.58 4.37 4.58 5.00 5.61

Financial strength

Net debt/equity (%) (27.1) (36.6) (26.9) (22.0) (19.7)

Net debt/total assets (%) (20.5) (28.4) (21.3) (17.6) (15.9)

Current ratio (x) 2.4 3.0 2.9 3.0 3.2

CF interest cover (x) n/a n/a n/a n/a n/a

* includes convertables and preferred stock which is being treated as debt

Valuation 2014A 2015A 2016E 2017E 2018E

Recurring P/E (x) * 90.1 85.9 68.8 51.5 36.9

Recurring P/E @ target price (x) * 98.2 93.7 75.1 56.2 40.2

Reported P/E (x) 90.1 85.9 68.8 51.5 36.9

Dividend yield (%) 0.4 0.4 0.4 0.6 0.8

P/CF (x) 46.5 50.4 59.1 45.3 33.3

P/FCF (x) (213.5) (97.6) (96.5) (741.9) 187.0

Price/book (x) 9.2 5.8 5.6 5.2 4.7

Price/tangible book (x) 11.0 6.5 6.2 5.7 5.1

EV/EBITDA (x) 94.6 93.5 71.4 48.0 33.1

EV/EBITDA @ target price (x) 103.4 102.5 78.2 52.5 36.2

EV/invested capital (x) 11.0 7.9 6.8 5.9 5.2* Pre exceptional & pre-goodwill and fully diluted



Disclaimers and Disclosures

APPENDIX

DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD

ANALYST(S) CERTIFICATION

Jimmy Huang, BNP Paribas Securities (Asia) Ltd, +852 2825 1124, [email protected] The BNP Paribas Securities (Asia) Ltd Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations

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transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act,

BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired.

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following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.

Company Ticker Price Rating Valuation & Risks

Iflytek 002230 CH RMB 28.43 Hold Downside risks to our P/E-based TP are 1) worse-than-expected China voice recognition demand, 2) international/domestic players penetrating the China voice recognition market, and 3) worse-than-expected growth of China smart car market Upside risks are 1) better-than-expected China voice recognition demand, 2) government policy support to China local voice recognition players, and 3) better-than-expected growth of China smart car market

Sources: Factset, BNP Paribas

Company Ticker Disclosure (as applicable)

N/A N/A N/A

Company Ticker Price (as of 29-Sep-2016 closing price) InterestN/A N/A N/A N/A



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Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. 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In relation to the distribution to such categories of investors, BNPPSSL and its representatives are exempted under Regulation 35 of the FAR from the requirements in Section 36 of the Financial Advisers Act of Singapore, regarding the disclosure of certain interests in, or certain interests in the acquisition or disposal of, securities referred to in this report. For Institutional and Accredited Investors in Singapore, please contact BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: 199801966C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore 049315; tel: (65) 6210 1288; fax: (65) 6210 1980) for all matters and queries relating to this report. South Africa: In South Africa, BNP Paribas Securities South Africa (Pty) Ltd is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Providers and subject to regulation by the Financial Services Board. BNP Paribas Securities South Africa (Pty) Ltd does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are appropriate to the particular investment objectives, financial situation or particular needs of the recipient. This document does not constitute advice as contemplated in the Financial Advisory and Intermediary Services Act, 2002. South Korea: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND



CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This document does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, regulated insurance companies as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Federal Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CH-270-3000542-1. BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2 place de Hollande, CH-1204 Geneva. Taiwan: This report is being distributed to Taiwan based clients by BNP Paribas Securities (Taiwan) Co., Ltd or by a subsidiary or affiliate of BNP Paribas. Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decision. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. BNP Paribas Securities (Taiwan) Co., Ltd. may not execute transactions for clients in these securities. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of BNP Paribas.

Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS (“BNPP”) and Finansia Syrus Securities Public Company Limited (“FSS”). FSS International Investment Advisory Securities Co Ltd (“FSSIA”) prepares and distributes research under the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name “FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr) and outside Turkey jointly by TEB Investment and BNP Paribas. Information, comments and suggestions on investment given in this material are not within the scope of investment consulting. The investment consulting services are rendered tailor made for individuals by competent authorities considering the individuals’ risk and return preferences. However the comments and recommendations herein are based on general principles. These opinions may not be consistent with your financial status as well as your risk and return preferences. Therefore, making an investment decision only based on the information provided herein may not bear consequences in parallel with your expectations. This material issued by TEB Yatırım Menkul Değerler A.Ş. for information purposes only and may be changed without any prior notification. All rights reserved. No part of this material may be copied or reproduced in any manner without the written consent of TEB Yatırım Menkul Değerler A.Ş. Although TEB Yatırım Menkul Değerler A.Ş. gathers the presented material that is current as possible, it does not undertake that all the information is accurate or complete, nor should it be relied upon as such. TEB Yatırım Menkul Değerler A.Ş. assumes no responsibility whatsoever in respect of or arising out or in connection with the content of this material to third parties. If any third party chooses to use the content of this material as reference, he/she accepts and approves to do so entirely at his/her own risk.

United States: This report may be distributed in the United States only to U.S. Persons who are “major U.S. institutional investors” (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a “major U.S. institutional investor”. U.S persons who wish to effect transactions in securities discussed herein must do so through BNP Paribas Securities Corp., a US-registered broker dealer and member of FINRA, SIPC, NFA, NYSE and other principal exchanges. Certain countries within the European Economic Area: This document may only be distributed in the United Kingdom to eligible counterparties and professional clients and is not intended for, and should not be circulated to, retail clients (as such terms are defined in the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”)). This document will have been approved for publication and distribution in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas SA whose head office is in Paris, France. BNP Paribas SA is incorporated in France with limited liability with its registered office at 16 boulevard des Italiens, 75009 Paris. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000; fax: [44 20] 7595 2555) is lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR). BNP Paribas London Branch is authorised by the ACPR and the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority and PRA. Details about the extent of our authorisation and regulation by the PRA, and regulation by the Financial Conduct Authority are available from us on request. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the ACPR whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Other Jurisdictions: The distribution of this report in other jurisdictions or to residents of other jurisdictions may also be restricted by law, and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report you agree to be bound by the foregoing instructions. This report is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. All research reports are disseminated and available to all clients simultaneously through our internal client websites. For all research available on a particular stock, please contact the relevant BNP Paribas research team or the author(s) of this report.

Additional Disclosures Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative. BNP Paribas Personal Finance and Geely Automobile Holdings Limited have entered into an agreement in December 2013 to establish a joint venture company to engage in auto financing in the People’s Republic of China. All share prices are as at market close on 29 September 2016 unless otherwise stated.



RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving (): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 30 September 2016)

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report. © 2016 BNP Paribas Group

Total BNP Paribas coverage universe 456 Investment Banking Relationship (%)

Buy 266 (58.3%) Buy 31.20

Hold 132 (28.9%) Hold 36.36

Reduce 58 (12.7%) Reduce 25.86

Documents

CHINA / SOFTWARE & SERVICES IFLYTEK 002230 CH · 2016-09-30 · iflytek 002230 ch bnp paribas jimmy huang this report is solely for recipients who are non-chinese investors located