Net profit continued to decline in the third quarter of 2014. Dalian Port's revenue in the third quarter of 2014 increased 17.5% year on year, but net profit fell 25.0% year on year. Net profit for the third quarter continued to decline in the first half of the year. Revenue for the first half of 2014 fell 1.3% year on year to 3,297.9 million yuan, and shareholders' net profit for the first half of 2014 fell 26.6% year on year to 284.4 million yuan.

Adjust earnings forecasts for 2014-2016. We lowered our 2014 net profit forecast based on the weak performance of grain terminals. We expect that the China-Korea Free Trade Agreement will be gradually implemented in 2015, which will boost the container terminal throughput of Dalian Port. Overall, we expect a moderate increase in net profit in 2015 and 2016. We expect net profit for 2014-2016 to be 575 million yuan, 684 million yuan, and 787 million yuan respectively.

The investment rating was downgraded to a “neutral” rating but the target price was raised to HK$2.50. Influenced by news that the China-Korea Free Trade Zone negotiations have reached an agreement, the company's stock price has risen sharply recently. We believe that the company's current valuation is reasonable, and the investment rating was downgraded to “neutral.”

However, we raised the target price to HK$2.50 to reflect the long-term positive expectations brought about by the China-Korea FTA. The target price is equivalent to 15.0 times, 12.6 times and 11.0 times the 2014-2016 price-earnings ratio and 0.6 times 2014 P/B.