What’s new

2012 operating revenue was Rmb760mn, flat YoY; net profit dropped 26% YoY to Rmb83mn or Rmb0.37/sh, largely consistentwith the earlier preannouncement; the company expects 1Q13 net profit to decline <20% YoY.

Comments

Lackluster downstream demand, increasing expenses. 2012 revenue was flat YoY and gross margin slid 2%, but the higherexpense ratio led to a 26% drop in net profit; main operating data is consistent with its peer, Jasic Tech (300193.SZ), indicatingthe negative impact of the weak macro economy, especially lackluster demand from downstream construction machinery andship building. In 4Q12, revenue dropped 11% YoY to Rmb180mn and marketing expenses to support product mix upgradingfurther increased (advertising expenses up nearly 100% YoY to Rmb12mn), pushing net profit down 45% to Rmb18mn.Revenue from the 2012 flagship product, inverter welding and cutting equipment, was largely flat YoY, with automaticequipment revenue -17% YoY due to sluggish demand from major clients in construction machinery and coal machinery.

Unpromising 2013 demand outlook; invisible earnings improvement in the short/medium term. Demand for flagshipproducts might not greatly improve in the short/medium term amid the weak macro economy. More cost-effective low-endproducts, overseas market exploration, and labor insurance products could only offer limited opportunities; relying on therelatively lower cost than labors, high-end automatic products such as digital welding machines and welding robots could tapinto the auto, MU and home appliance sectors, but have yet to make any large earnings contribution. Overall, the competitivelandscape is slowly improving despite the weak demand; though Riland is a sector leader in business scale and technology, itstill has to find a way to enhance its earnings in the short/medium term.

Low valuation; ample funds in hand likely to promote industry consolidation and automatic product development. Inspite of the weak demand, the company still managed to achieve a 10% net margin, healthy cash flows and effective productmix upgrading. The stock is trading at ~21x 2012 P/E and 1.3x 2012 P/B, below the ChiNext average, and the majorshareholders’ recent indirect share purchases show their confidence in Riland’s long-term development. Funds in hand areclose to Rmb1.1bn (no bank loans), with welding industry consolidation and high-end automatic product development, whichthe company repeatedly cites as bright spots, warranting expectations in the short/medium term.

Recommendation

Given the weak demand and increasing expenses, we lower 2013e EPS 20% to Rmb0.42,and set 2014e EPS at Rmb0.53. Thestock is trading at 19x/15x 2013/14e P/E, indicating a high safety margin. Maintain BUY.

Risks

Further deterioration of demand; lack of competitiveness in high-end products.