Downgrade earnings per share for fiscal year 2013, but maintain buy rating

The results were in line with expectations: in fiscal year 2012, Chaowei recorded revenue of Rmb9.559.4 million, up 93.8% from the same period last year. The main reason for the increase in revenue is the increase in sales. During the period, sales increased by 102% compared with the same period last year, and the sales of lead-acid batteries reached 86.7 million. Net profit rose 9.0% year-on-year to Rmb496.3 million, which was in line with expectations as the group announced Yingxi on February 25. The sharp reduction in profit margins in the fourth quarter was the reason for the relatively slow growth of net profit, with gross profit margin falling to 14.1% in the second half of the fiscal year from 27.4% in the first half.

Despite the decline in gross profit margin, the balance sheet is healthy: inventory turnover time fell to 55 days in fiscal 2012, down from 79 days in the previous fiscal year. After issuing Rmb633 million convertible bonds in September last year, the net debt ratio fell to 29.6% from 53.g% in the first half of the fiscal year. As the net operating cash inflow increased by 13.2% year-on-year to Rmb635 million, we believe that the group does not have a cash shortage, and the purpose of issuing convertible bonds is to increase the proportion of long-term bonds. In fiscal year 2012, the ratio of short-term debt to long-term debt (including convertible bonds) fell to 65% from 87% in the previous fiscal year, and we believe that an improvement in the debt structure is more beneficial to the group's long-term development. Capital expenditure for fiscal year 2013 is expected to be Rmb600-700m. We believe that in fiscal year 2013 the group has the financial strength to meet the target of capacity growth of 30 per cent to 120m compared with the same period last year.

Outlook: Chaowei and its main rival Tianneng Power (819) are the two largest producers in the industry, and their rapid expansion has led to a glut in the industry. In order to maintain its leading position, Chaowei did not choose to lower prices but to provide sales rebates to distributors to stimulate sales, which was as high as 8% in the fourth quarter, resulting in a sharp fall in gross profit margin during the period. It is estimated that the market share of the two producers rose to 60% in 2012 from 50% in 2011. However, in view of the high proportion of sales rebates, we judge that the products produced by the two leading enterprises are not very different from those in the same industry. Apart from a slight price increase of 3% in January, the industry did not see a big improvement in the first quarter, according to management. We do not expect the two major producers to take advantage of their leading positions until the new industry standards come into effect in 2014. In fiscal year 2013, Chaowei's net profit growth will be mainly driven by 20 per cent sales growth. Due to the decline in gross profit margin, we reduced its earnings per share by 19.0% to Rmb0.4732. At the same time, based on 7x FY13 PE, the target price is reduced from HK$5.50 to HK$4.14. Given the current low valuation and a dividend yield of 5.0% (FY13 DPS: Rmb0.148), we maintain a "buy" rating.