While CKH's 1H16 headline result was soft, with EBIT down 4% （flat adjustedfor FX）， this was largely within our expectations given the macro headwinds.
　　Management also appeared confident on the business operations and outlook.
　　The highlights to us were: 1） strong execution, with EBIT in the defensivebusinesses （infrastructure and 3 Europe） up ——10% （constant currency）； and 2）the benefit of diversification, with, for example, the strong growth in retail inEurope offsetting weakness in Asia. Furthermore, the deal in Italy now appearsincreasingly likely, which on our estimates could be 8% accretive to groupEBITDA, and with valuation attractive, we retain our Buy recommendation.
　　Execution is strong
　　We highlight three observations that support this view: 1） 9% EBITDA uplift ininfrastructure despite the impact of regulatory resets; 2） 1% decline in EBITDAin retail in China in what has been a challenging environment （in comparison,Manning's China operation saw a 10% decline during the same period）； and 3）12% EBITDA growth in 3 Europe as the business continues to gain marketshare and scale benefits. We believe that the strong management will deliverlong-term outperformance for investors and that this is a factor the market willincreasingly value as the track record builds.
　　Deal in Italy appears increasingly likely and highly accretiveWith the EU having made no statement of objections so far and the Italiangovernment also announcing that it will not exercise its veto power on the deal（Bloomberg, Italy Govt won't exercise veto power on Wind-3 merger, 11 Aug），the merger in Italy appears highly likely. We estimate the deal could be 5-10%accretive to CKH's valuation, which is not yet in the share price, in our view.
　　Earnings changes
　　We have reduced our earnings in FY17 and FY18 to reflect a lower contributionfrom finance going forward and a slower growth trajectory for energy.
　　Valuation and risks
　　We value CKH using a combination of SOTP and DCF. Key downside risksinclude HKD appreciation, higher borrowing costs, and economic slowdown.