2012 earnings in line

2012 revenue was Rmb17.48bn, flat YoY; net profit was Rmb1.52 bn, - 18.9% YoY, implying EPS of Rmb1.76, in line with expectation. In 4Q, net profit fell 13.1% YoY to Rmb340mn, but rose 1.4% QoQ.

Positives:

Gross margin improved with increasing ASP of Transit. 2012gross margin rose 0.3ppt YoY to 25.0%, and was improving quarterb y quarter. We believe this is mainly attributable to the recovery o fTransit sales and the vehicle’s increasing ASP.

Operatin g cash flow better than profits, earnings qualit yimproved. 2012 net operating cash flow is Rmb2.06bn, up 86.8% YoY; net profit excluding non-recurring profits/loss was Rmb1.34bn, down 24% YoY. The difference mainly came from the increase of payable items.

Negatives:

R&D expense rose quickly, dragging down earnings. In 2012, administrative expense ratio rose 1.8ppt YoY to 7.1%, reaching11.5% in 4Q. R&D expense increased by Rmb247mn, up 40%, mainly for service and technician fees on the Ford V348, J08 and J09 projects. These expenses will continue in the next couple of years. Competition intensified, promotions reinforced. To maintain market share, the company reinforced promotional efforts in 2012, and sales-expense ratio rose 0.6ppt YoY to 6.4%. However, the market share of Transit light passenger vehicles fell 1.3ppt to 16.9%.

Trends to watch

The company raised 2013 revenue target to Rmb20bn, up 15%. Thisis achievable with the roll-out of the new Yusheng and sales recovery. With the Xiaolan base project being put into operation, depreciation will increase by Rmb130mn. As the only commercialvehicle base of Ford in China, it will obtain more technology and product support in future. Its development path is clear. Earning forecast adjustment and recommendation We revise down 2013e EPS to 2.1% to Rmb2.00 and 2014e EPS of Rmb2.40. The current stock price implies 8x dynamic P/E, at the low end of the sector. Maintain ACCUMULATE.