In the first half of 2010, the company achieved sales income of 356 million yuan, an increase of 38.7% over the same period last year; total profit of 589.9 billion yuan, an increase of 3.9% over the same period last year; net profit of 48.88 million yuan belonging to shareholders of listed companies, an increase of 2.73% over the same period last year; and earnings per share of 0.27 yuan, in line with expectations.

The rebound in gross profit margin has been verified and is expected to remain at around 34% for the whole year. We judged in the early stage that with the gradual mass production of the modular high-precision reducer and the gradual maturity of the sales strategy, the company's future gross profit margin will gradually pick up. According to the company's report, the single-quarter consolidated gross margin of the company's products has rebounded from 21% in the fourth quarter of 2009 to 34% in the second quarter of 2010. The company's orders for the second half of the year have been basically confirmed, and the gross profit margin is expected to remain relatively stable in the second half of the year.

The fastest growth rate of the modular high-precision reducer shows that the company's multi-field expansion is progressing smoothly. Metallurgy is the company's traditional market, accounting for up to 85% of the company's revenue. At present, the company adjusts its sales strategy to impact new markets such as crane, port equipment, power equipment, building materials machinery and so on through modular high-precision reducer products. From the growth rate of individual products in the first half of the year, the growth rate of modular high-precision reducer is 140%, which is much higher than that of other products, indicating that the company's multi-field expansion is smooth.

Investment rating and valuation. As the leading enterprise in the subdivided industry, the company has a clear strategy, perfect product reserve and definite growth in the next three years. We estimate that the EPS of the company in 2010, 2011 and 2012 will be 0.56,0.87 and 1.14 yuan respectively, and the corresponding PE will be 27 times, 17 times and 13 times respectively. We believe that after adjustment, the company has entered a stage of rapid growth, with a compound profit growth rate of 45% in the next three years. The current PE level does not reflect the company's rapid growth expectations and is still underestimated. Maintain the target price of 20 yuan, corresponding to 23 times the dynamic PE in 2011.