1H13 results in line with expectations

In 1H13, revenue fell 12% YoY to Rmb350mn thanks to improving GM and expense controls; net profit rose 5% YoY to Rmb50mn or Rmb0.22/sh, in line. In 2Q13, revenue decline slowed to 6%, while net profit grew 22%, bottoming out.

Improving product mix and expansion in overseas markets drove earnings growth. In 1H13, GM expanded 1.5% YoY as the company strengthened the promotion of its new product, gas-shielded arc wielding, and cut spending on non-mainstream products. Although domestic demand was weak, the company’s overseas development strategy is maturing and the promotion of its OEM business in European and US markets and proprietary brands in emerging markets, such as SE Asia, went smoothly. Overseas revenue grew 29% YoY in 1H13, making up for the rapid drop in domestic demand.

High quality earnings and healthy balance sheet. In 1H13, net operating cash inflow totaled Rmb117mn (vs. outflow in 1H12) , AR/inventory controls were effective (vs. surging AR balance for listed peers due to lengthened AR payment terms) and net cash balance continued to rise.

Trends to watch

Overseas market to remain the revenue growth engine in 2013. Domestic demand remained weak but overseas markets were sound overall. Medium-/long-term advances from customers expanded slightly thanks to in creases in overseas markets.

Among new products, (digital) gas-shielded arch welding will lik ely continue to enjoy explosive growth; weldin g robots still lack a star product. R&D spending remained high and R&D’s share of revenue expanded 0.5% in 1H13 to 4.3%. Among new products, the company enjoys marked advantages in gas-shielded arch wielding and strong promotion in 1H13 paid off; more of its kind – digital gas-shield arch welding – will be introduced in 2H13. Although welding robots received a lot o f market attention, their share of revenue fell in 1H13; this contraction is due to: 1) further improvement in cost performance, distribution channels and sales modes are required; and, 2) they lack a star product that can see explosive growth.

Earnings forecast revisions

Maintain 2013/14e EPS at Rmb0.42/Rmb0.53.

Valuation and recommendation

The company is trading at 26x/20x 2013/14e P/E. Maintain BUY given its high quality earnings, sustained earnings growth after bottoming out in 2H13, and visible potential for new products.