1. Overview of the incident Ruiling Co., Ltd. released its report for the third quarter of 2013 on the evening of October 27: 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: Investment demand in the affected manufacturing industry is still weak. Revenue in the first three quarters fell 11.42% year on year. Exports were the highlight. The company's main business was inverter welders, 11 years ago, the industry was driven by rapid growth driven by inverter welders, but in recent years, with the weakening of substitution effects, increasing competition, and declining manufacturing investment growth, the industry has 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 cost control was effective. Net profit rebounded quarter by quarter. Net profit increased 14% year on year in the first three quarters and 35.5% in the third quarter, net profit attributable to parent company owners in the first three quarters was 74.69 million yuan, an increase of 14.01% over the same period last year, and achieved net profit of 26.68 million yuan in the third quarter, a year-on-year increase of 35.52%. The main reasons for this were: (1) the share of exports with slightly higher gross margin (mainly independent brands) increased (34.2% in the medium term), while benefiting from the yen value (imported Japanese IGBT and other raw materials) and falling domestic raw material costs. synthesis Gross margin increased from 25.7% in the same period last year to 28%, showing a quarterly upward trend; (2) Due to strong cost control, the three cost rates fell to 10.6% from 12.2% in the same period last year, and management improvements began to be effective during the industry's downturn cycle. The company's balance sheet is unusually healthy, with 1.2 billion dollars in hand, but the market capitalization is only 2.4 billion. There is room for extended expansion. Due to long-term steady management, the company's current balance ratio is only 10.12%. The current balance ratio of the company is only 10.12%. On the basis of no interest-bearing debt, the capital in hand has reached 1,176 billion yuan, and 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 downturn in the industry, 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 profit margin 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 company's founder is a welding professional. The understanding of welding technology and equipment is limited in the industry and has core technical competitiveness; (2) After the domestic demand cycle entered a downturn, The company reviews the situation and controls risks domestically and actively expands the international market. In the future, it will expand further by increasing the OEM ratio and 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 the Chinese welding machine industry is about 10 billion yuan, of which about 5 billion yuan for inverter welders, and 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 Forecast and Investment Suggestion The company's current main business will maintain steady growth. It is expected that international sales will be further strengthened next year to maintain steady growth in the welding machine business, but considering the large amount of capital on hand, there is plenty of room for improvement in 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: intense market competition has led to a decline in gross profit; the company's capital utilization efficiency has not improved as expected. Stock price catalyst: Increased efficiency of capital utilization; domestic demand or exports exceeding expectations.