Incident: Qunxing Toys released its 2012 report. In 2012, the company achieved operating income of 505 million yuan, an increase of 2.45% over the previous year; and realized net profit of 43.58 million yuan, an increase of -16.78% over the previous year. Earnings per share were $0.33. Opinion: 1. Domestic sales revenue has slowed. In 2012, domestic sales achieved revenue of 248 million yuan, an increase of 4.94% over the previous year; a slowdown from 9.8% in 2011. We think there are two main reasons. First, competition in the domestic toy market is becoming increasingly fierce. High-end toys are controlled by foreign investment. Low-end toys are mainly small family workshops, and large-scale enterprises are mainly working in the mid-range market; as a result, competition is becoming more and more incandescent. Furthermore, as with most domestic consumer goods industries, they face the same problems, that is, the channel chain is too long and the channel cost is too high; ultimately, it leads to a decline in terminal consumption capacity. 2. The scale of export sales is the same as last year, but the structure has changed. The export volume in 2012 was 257 million yuan, the same as in 2011. Regionally, the main region, Asia, declined by 5.91%; however, Europe and America grew faster, growing 25.42% and 35.19%, respectively. Faced with the worsening export environment, the company adjusted its product structure and reduced the supply of low-margin products in order to guarantee profit levels; as a result, exports to the Asian region declined. 3. Revenue growth improved quarterly. The growth rates for the third and fourth quarters of 2012 were 14.66% and 23.82% respectively, a sharp improvement over the first half of the year, and revenue in the first half of the year decreased by 7.5%. However, profitability declined in the second half of the year, and gross margins for the third and fourth quarters fell to 20.3% and 21.48%; reaching a record low since listing. Business outlook: In 2013, the company actively expanded into Russian-speaking countries in terms of exports, actively adjusted products in domestic sales, integrated upstream, vigorously explored high-tech toys, and expanded new channels. We believe that overall operations in 2013 will be better than in 2012, and gross margin will rise quarterly from current lows. We have positioned 2013 as the “year of departure” for the company, and performance will enter a new period of accelerated growth. Profit forecast We forecast the company's operating income for 2013-2015 to be 560 million yuan, 650 million yuan and 750 million yuan; net profit attributable to shareholders of the parent company is 52 million yuan, 64 million yuan and 78 million yuan respectively, corresponding EPS of 0.39 yuan, 0.48 yuan and 0.58 yuan respectively. The corresponding current valuations are 38.4 times, 31.6 times, and 25.8 times, respectively. The investment advice company has gone through two years of adjustments, and we believe that an inflection point in performance may arrive in the first half of the year and enter a healthy growth zone. The current valuation is quite reasonable, and we maintain its “highly recommended” investment rating.