Main points of investment

Items:

The company disclosed that the revenue in the first half of the year was 5.458 billion yuan, an increase of 11.8% over the same period last year, and the net profit belonging to the shareholders of the parent company was 46.032 million yuan, down 84% from the same period last year. Earnings per share is 0.0289 yuan and net assets per share is 2.26 yuan.

Peace viewpoint:

The company's consolidated business is mainly for Xiali (Xiali model, Wei series model) car sales, and the loss has been expanding year by year since 2006. FAW Xiali net profit comes from investment income, which is mainly contributed by FAW Toyota, which holds a 30% stake.

The consolidated watch business reduced its loss by 62.05 million yuan compared with the same period last year, and the quarterly loss decreased: the sales volume of 1H11 Xiali was 140635 vehicles, up 12.5% from the same period last year, and its revenue was 5.45826 billion yuan, up 11.8% from the same period last year.

Gross profit margin rose 0.8 percentage points year-on-year to 6.15%.

The loss of the consolidated business was 370 million compared with the same period last year. On a quarterly basis, 2Q11 revenue fell 21% from the previous month and 10% from the same period last year, the gross profit margin rose to 7.6% from the same period last year, and the loss was further smaller by 156 million.

The capital construction of Huali's 150000 vehicle production base project has been completed, the company's research base project is expected to be completed by the end of 2011, and the company's internal combustion engine manufacturing branch's CA4GA series engine technical renovation project and 100000 transmission capacity expansion project are progressing smoothly.

Affected by the Japanese earthquake, FAW Toyota's net profit fell year on year, 42.9%:1H11 FAW Xiali shares 30% of Tianjin FAW Toyota sold 197000 cars, down 16.2% year on year; realized net profit of 1.49 billion yuan, down 42.9% year on year 1H11 Tianjin FAW Toyota contributed 416 million yuan of investment income, accounting for 904% of FAW Xiali's net profit in the first half of the year. 2Q11 Tianjin FAW Toyota Motor Corp was affected by the Japanese earthquake and its secondary disasters, resulting in a shortage of parts needed for production, which had a greater impact on its production and sales, and its net profit fell 50 per cent year-on-year. However, normal production has basically returned to normal since June, and profitability is expected to gradually return to normal in the third and fourth quarters.

Profit forecast and investment advice: we expect that the negative factors affected by the earthquake in FAW Toyota in the second quarter will be gradually eliminated in the third quarter, and FAW Xiali investment income in the third and fourth quarters is expected to gradually return to the normal level. We expect the company's earnings per share in 2011 and 2012 to be 0.21 yuan and 0.27 yuan respectively, corresponding to the closing price of 8.38 yuan on August 29, with a price-to-earnings ratio of 40 times and 31 times respectively. At present, the valuation is high and the "neutral" rating is maintained.

Risk tips: 1) the extent and pace of loss reduction in this part is uncertain; 2) the profitability of FAW Toyota recovers slowly.