I. Overview of the incident. On the evening of October 27, Ruiling Co., Ltd. released its report for the third quarter of 2013: achieved operating income of 512 million yuan, down 11.42% from the same period last year; realized net profit attributable to owners of the parent company was 74.69 million yuan, an increase of 14.02% over the same period last year, and achieved an EPS of 0.33 yuan, which is basically in line with the performance forecast (10%-20%). The company's performance exceeded our previous report expectations, so the 13-15 EPS was raised to 0.45, 0.69, and 0.90 yuan respectively, and the rating was raised to “highly recommended.” Considering valuation switching factors, the reasonable valuation was raised to 18-20 yuan according to 25-30 times PE in 2014. 2. Analysis and judgment. Affected by the fact that investment demand in the manufacturing industry is still weak, revenue for the first three quarters fell 11.42% year on year, and exports were a bright spot. The company's main business is inverter welding machines, 11 years ago, when traditional welding machines were replaced by inverter welders, the industry grew rapidly, but in recent years, as the substitution effect weakened, competition became more intense, and the growth rate of investment in the manufacturing industry declined, the industry entered a sluggish cycle. Revenue achieved in the first three quarters was 512 million yuan, down 11.42% from the same period last year. Among them, revenue for the third quarter was 177 million yuan, down 11.26% from the previous year, indicating that demand is still weak. According to the interim report (domestic sales fell 24.64% year on year, but exports increased 29.01% year on year), domestic sales were affected by the decline in manufacturing investment, and demand was clearly weak, but international demand improved. At the same time, the company's layout in developing countries entered a harvest period. It is expected that international sales will be further increased in the future to ensure steady growth in the scale of welding machine business. Cost and expense controls have been effective, and net profit has rebounded quarter by quarter, with a year-on-year increase of 14% in the first three quarters and 35.5% in a single quarter in the third quarter. Net profit attributable to owners of parent companies was 74.69 million yuan in the first three quarters, an increase of 14.01% over the same period last year, and achieved net profit of 26.68 million yuan in the third quarter, an increase of 35.52% over the previous year. The main reasons for this were: (1) the increase in the share of exports (mainly independent brands) with slightly higher gross margins (accounting for 34.2% in the medium term), while benefiting from the depreciation of the yen (imports of raw materials such as Japanese IGBT) and the decline in domestic raw material costs. The overall gross margin of the product increased to 28% from 25.7% last year, and showed a quarterly recovery trend in costs; (2) Strong control The three cost rates fell to 10.6% from 12.2% in the same period last year, and management improvements began to bear fruit during the industry's downturn. The company's balance sheet is unusually healthy, with 1.2 billion dollars in hand but a market capitalization of only 2.4 billion, so there is room for external expansion. Due to long-term steady operation, the company's current balance ratio is only 10.12%, and the capital on hand has reached 1,176 billion yuan on the basis of no interest-bearing liabilities. There is plenty of room for ROE to increase by only 4.8%. The company's technical strength and financial advantages are conducive to integration under weak market conditions. The welding industry chain is long (including welding materials, welding equipment, auxiliary equipment, automation integration, etc.), and there is plenty of room for epitaxial expansion, so it is worth looking forward to in the long term. Cash flow and profit margins gradually improved during the industry downturn, demonstrating the company's core competitiveness in technology and management. After the inverter welding machine entered a downturn cycle, the company's sales policy did not change, the accounts receivable balance remained stable, and the net interest rate increased to 14.3% from 11.1% in the same period last year. The net cash inflow from operating activities in the first three quarters was 52.82 million yuan, an increase of 264% over the previous year. This is mainly due to: (1) The founder of the company specializes in welding, and has few understanding of welding processes and equipment in the industry, and has core technical competitiveness; (2) After domestic demand enters a downturn cycle, the company will review domestic risks and actively expand the international market through licensing in the future. Further expansion of methods such as expanding international channels. The inverter welding machine industry still has room for a long time, but it needs to go through a period of industry reshuffle. The annual demand of China's welding machine industry is about 10 billion yuan, of which about 5 billion yuan for inverter welders. There is still room for alternatives to traditional welding machines such as gas shielded welding. The international market is another blue ocean. Currently, most domestic enterprises focus on OEM sales, and profit levels are relatively low. Currently, Ruiling Co., Ltd. mainly has its own brands, and will expand the OEM business appropriately in the future. However, at present, the competitive pattern in the Chinese market industry is quite scattered. The combined market share of the two listed companies is about 10%. The competition pattern is relatively scattered. Small and medium-sized enterprises within the industry are currently facing a loss situation and are experiencing a period of industry reshuffle. 3. Profit forecasting and investment suggestions. The company's current main business will maintain steady growth, and it is expected that international sales will be further strengthened next year to maintain steady growth in the welding machine business, but considering that there is more capital on hand, there is plenty of room for improving capital utilization efficiency. According to our previous periodic report, we reasonably expect the 13-15 EPS to be 0.45, 0.69, and 0.90 yuan respectively, and raised the rating to “Highly Recommended”. Considering valuation switching factors, the reasonable valuation was raised to 18-20 yuan according to 25-30 times PE in 2014. 4. Stock price catalysts and risk alerts. Risk warning: Gross profit declined due to intense market competition; the efficiency of the company's capital utilization fell short of expectations. Stock price catalyst: Increased efficiency of capital utilization; domestic demand or exports exceeding expectations.