1~3Q in line

1~3Q13 revenue declined 11% YoY but net profit rose 14% thanks to gross margin expansion and effective cost control.

Earnings increase driven by new products, overseas markets and fine management, despite drop in sales volume: Sales volume of new gas-shielded welder increased rapidly and the company reduced output of products for some niche markets, and these are the factors behind both the decline in sales volume and the increase in earnings.

Good earnings quality and ample cash flow: 1~3Q13 net operating cash flow was Rmb150mn, twice as large as net profit. AR/inventory control was better than peers’. Balance of net cash flow increased further to about 50% of its market cap.

Trends to watch

Great growth potential in overseas markets: The No.1 Chinese welder brand is gaining wide recognition in overseas markets and the company expects healthy organic growth.

Launches of new products to help maintain decent profitability: Riland is set to launch digital welders, and automatic products such as welding robots. Its high R&D spending has broadened its new product pipeline, helping maintain decent profitability.

Share price likely to rebound strongly driven by domestic demand improvement or acquisitive growth: Distributors have not seen a demand recovery after two years of weakness. The company has ambitions to consolidate the industry and extend its value chain presence. Given its ample cash flow, we believe acquisitive growth is likely, and could drive its share price much higher.

Earnings revisions

We keep 2013/14e EPS at Rmb0.42/Rmb0.53.

Valuation and recommendation

The stock is trading at 24x/19x 2013/14e P/E. Maintain BUY on sustained growth of earnings, good earnings quality and the potential of new products. We suggest buying for the medium-long term.