The decline in investment income is the main reason for the sharp decline in Xiali's semi-annual profit compared with the same period last year. In 2010, FAW Toyota contributed 1.38 billion yuan in net profit, 1Q contributed 265 million yuan in investment income in 2011, 2Q contributed only 151 million yuan in investment income affected by the Kanto earthquake, and half-year contributed income decreased by 300 million yuan compared with the same period last year, affecting EPS0.19 yuan. The decline in investment income is the main factor leading to the decline in EPS in the first half of the year.

FAW Toyota 2Q at the end of production, 3Q in the replenishment of inventory and active sales strategy, sales will increase significantly. Since June, the impact of the Kanto earthquake has gradually weakened, the main models have rebounded, and sales increased significantly in July. Like GAC Toyota, vehicle aging is currently Toyota's main problem in the Chinese market. FAW Toyota models are expected to be improved in the next one to two years, and Changchun Toyota (150000 capacity) is expected to reach full production early next year. Toyota's domestic development in the future is still promising, including domestic hybrid models that are bound to be introduced on a large scale.

Although Xiali is losing money, it has its existence value in the current domestic market. There is a dispute over the scale of the automobile company, and the annual production and sales of 250000 Xiali vehicles are helpful to support the scale of the group. At the same time, Xiali Automobile is located at the middle and low end. For FAW Group, there is a certain complementarity in the product line. In the future, FAW Group's independent brand cars will uniformly use Eagle, indicating the integrity of Xiali products and a sedan chair product planning at the group level. We believe that Xiali has some room for improvement in the future.

Maintain the "highly recommended-A" rating. Our previous report on FAW Xiali "looking at Xiali with the change of valuation model" focused on the logic of recommending FAW Xiali. In our recent continuous research, we believe that the relationship between FAW and Xiali is similar to that between Guangzhou Automobile Group and GAC Changfeng before, and judge that if the group joint-stock company is established in a short time, in order to quickly realize the overall listing, the absorption and merger of FAW Xiali is a high probability event. We are optimistic about the 30% equity value of FAW Toyota under the overall listing of the group, and maintain the "highly recommended-A" investment rating. The risk mainly lies in the uncertainty of time, and there is time cost.