I. Overview of events

On the evening of February 27th, Tongda Power announced its 2013 results KuaiBao: realized operating income of 909 million yuan, up 21.08% over the same period last year; realized net profit belonging to the parent company of 10.51 million yuan, down 42.51% from the same period last year, and achieved EPS0.06 yuan, which is in the lower position of 15% of the third quarter performance forecast. We believe that the company's profit margin and ROE level have dropped to the lowest point, and will benefit from downstream expansion such as electric vehicles and elevators, wind power recovery, international strategy and stable raw material prices, and the formation of upward inflection points and greater upward flexibility. It is estimated that the EPS for 14-15 years will be 0.19 yuan and 0.35 yuan respectively. We believe that in the current market environment, the company's market capitalization is undervalued and there is a demand for improvement in the future. For the first time to cover the "highly recommended" investment rating, a reasonable valuation of 12-14 yuan.

II. Analysis and judgment

The company mainly deals in large and medium-sized motor stators and rotors and their core components.

The company's main business is motor stator and rotor, core, stamping and other core components, while the wholly-owned subsidiary and Chuanli Electric provide metallurgical and other industry automation integration products and services. Among them, motor stator and rotor core and punching sheet are the main sources of revenue of the company, accounting for 67% and 57% of the revenue in 2012 and 2013H1 respectively.

Poor downstream demand such as wind power and fluctuations in raw materials have led to a decline in performance in the past three years.

The company's performance began to decline in the second half of 2011. In 11-13, revenue increased by 11.53%,-20.81%, 13.09% and 21.08% respectively, and net profit increased by 1.72%,-69.72% and-42.51%, respectively. The main reasons for the decline are as follows:

(1) the development of wind power industry was the core reason for the rapid development in 2009 and 2010, when revenue accounted for 30%, and the rest were mainly large and medium-sized industrial motors. the overall decline in wind power and manufacturing led to a significant decline in the company's product demand. at the same time, the company's products are still dominated by parts such as punching sheets and iron cores, and little progress has been made in the development of complete sets of stators and rotors.

(2) the company's raw materials are mainly silicon steel sheet and other raw materials (according to the prospectus, silicon steel sheet accounts for 60-70% of the main business cost), the added value of the product is not high. However, the price of raw materials has dropped significantly in the past two years, which on the one hand leads to a decline in the price of finished products and the growth rate of operating income. at the same time, the pattern of supporting large and medium-sized motors also determines the decline in the sales price and profit margin of scrap (scrap ratio is about 40%).

(3) the company acquired Shanghai Hutchison Electric after listing, but it is still in a state of integration in the past few years.

13 years' revenue and deducted non-net profit began to grow again, and the inflection point was initially revealed.

In 2013, operating income reached 909 million yuan, an increase of 21.08% over the same period last year, equivalent to an increase of 0.67%, 11.37%, 26.58% and 52.4% respectively over the same period last year; the net profit attributed to the parent company was 10.51 million yuan, down 42.51% from the same period last year, but the operating profit was 8.2 million yuan, an increase of 140.6% over the same period last year. The decline in net profit was mainly due to the decrease in non-operating income, indicating that the main business began to show signs of recovery.

Wind power recovery + electric vehicles, elevator expansion + internationalization + raw material prices are stable, performance is expected to recover quickly, net interest rate and ROE are only about 1% upward elastic.

The recovery will continue in the past 14 years, and it will accelerate. The main reasons are:

(1) driven by the policy, downstream industries such as wind power began to recover.

(2) compared with the competitors such as Xinqian Motor, not entering the two subdivided industries of automobile and motor and the low proportion of finished products of stator and rotor are its main disadvantages. With the completion of the company's internal integration, it began to make a breakthrough in the elevator industry last year. At present, it has occupied 80% of an elevator company on the basis of trial production last year; with the small batch supply of BYD electric vehicles this year, a breakthrough will be made in the automobile industry with the outbreak of electric vehicles in the future. At the same time, the company has determined the internationalization strategy, and has begun to implement it, and will develop faster in internationalization in the future.

(3) with the elimination of backward production capacity and the support of ore prices, there is little room for the cost of raw materials such as silicon steel sheet to decline further, which will create a favorable environment for revenue and profit recovery.

(4) the company has increased budget management and cost control since this year, and it is expected that the higher expense rate will be effectively alleviated (the total rate of sales expenses and management expenses is about 10%).

The automation business will be gradually expanded, and the improvement of the company's overall technical level and added value will be the main focus in the future.

The company acquired Shanghai Hutchison Electric in 2011, focusing on metallurgical industry control system integration and basic automation agency business such as Siemens and ABB. The integration has been basically completed in the past two years, and there will be a breakthrough in the downstream field and product structure in the future.

The company's capital on hand is about 300 million yuan, and the asset-liability ratio at the end of 13Q3 is only 21.7%. There is a lot of room for capital operation. Recently, the company has strengthened the high-tech investment in high-end machine tools and other high-tech enterprises, and the technological upgrading of automation companies and related industries is the main focus in the future.

Third, stock price catalyst and risk hint

Catalyst: rapid recovery of performance; faster-than-expected technological upgrading.

Risk hint: the macroeconomic downturn exceeded expectations and the company's performance returned to less than expected.

Fourth, profit forecast and investment suggestions

We believe that the company's profit margin and ROE level have dropped to the lowest point, and will benefit from downstream expansion such as electric vehicles and elevators, wind power recovery, international strategy and stable raw material prices, and the formation of upward inflection points and greater upward flexibility. It is estimated that the EPS for 14-15 years will be 0.19 yuan and 0.35 yuan respectively. We believe that in the current market environment, the company's market capitalization is undervalued and there is a demand for improvement in the future. For the first time to cover the "highly recommended" investment rating, a reasonable valuation of 12-14 yuan.