From January to June 2010, the company achieved operating income of 1.163 billion yuan, an increase of 15.16% over the same period last year; operating profit of 60.9775 million yuan, an increase of 10.98% over the same period last year; net profit belonging to the parent company was 41.7741 million yuan, an increase of 4.67% over the same period last year; and basic earnings per share reached 0.339 yuan.

New production capacity and export recovery drive the company's operating income growth. In the first half of the year, the company's electrode revenue increased by 7.71%, welding wire revenue increased by 31.35%, and welding wire revenue increased significantly. During the reporting period, the company's new production capacity includes: flux-cored wire, ambush wire each 10,000 tons, ordinary electrode 30,000 tons. The increase in production capacity leads to the increase in production and sales volume, which is the main reason for the increase in operating income. In addition, the company's overseas sales reached 86 million yuan in the first half of the year, an increase of 55.10% over the same period last year. The gradual recovery of exports is also one of the drivers of the company's revenue growth.

The gross profit margin rose in the first half of the year, and the increase in impairment loss was a drag on the company's performance. The company's comprehensive gross profit margin in the first half of the year was 15.37%, an increase of 0.31 percentage points over the same period last year.

The increase in gross profit margin is mainly due to the increase in the proportion of special electrodes, flux-cored wires and ambush wires with higher added value in the composition of the company's products. In the same period in 2009, there was a significant reversal in the provision for inventory decline, which led to an increase in impairment losses of more than 15 million. As a result of the increase in impairment losses, the company's profit growth is lower than that of revenue.

Gross profit margin is expected to remain stable in the second half of the year. 1. The new production capacity in the first half of the year is mainly higher value-added products, and in the second half of the year, with the further release of these production capacity, the company's gross profit margin will be further improved. 2. The company well managed the risk of large fluctuations in raw materials in the first half of the year, avoided a sharp rise in inventory costs to a certain extent, and largely avoided a sharp decline in gross profit margin in the second half of the year. The company's inventory fell 1.60% in the first quarter from the beginning of the year, and rose 5.62% in the second quarter compared with the first quarter. In the first quarter when steel prices rose sharply, the company controlled the size of its inventory; in the second quarter, when steel prices fell sharply, the company's inventory scale expanded. 3. As the price of the company's products is basically consistent with the trend of steel prices, and the cost of raw materials lags behind the trend of steel prices, the stabilization and rebound of steel prices is conducive to the rebound of the company's gross profit margin in the second half of the year.

Earnings forecast and investment rating: 2010-2012 earnings per share are expected to be 0.69 yuan, 0.90 yuan and 1.10 yuan respectively, corresponding to the latest closing price of 19.38 yuan, with a price-to-earnings ratio of 28 times, 22 times and 18 times respectively. In view of the company's concept of nuclear welding materials and reasonable valuation, we maintain the "overweight" investment rating.

Risk hint: macroeconomic downturn risk, steel prices higher-than-expected decline risk.