Net profit increased 8.9% in the first quarter, and the results were in line with expectations. In the first quarter, the company achieved operating income of 588 million yuan, up 29.5% year on year, operating profit of 19.05 million yuan, up 3.8% year on year, net profit attributable to parent company 17.62 million yuan, up 8.9% year on year, and EPS 0.064 yuan. Performance growth was in line with expectations. Net profit for the first time since the net profit for a single quarter in 2011 turned positive growth for 11 consecutive quarters, verifying our judgment on the inflection point of the company's 2014 performance.
Traditional businesses have grown steadily, and high-power mid-speed machines have increased dramatically. The inland waterway shipping market has bottomed out and rebounded slightly since last year. Fishing boat upgrades are being implemented at an accelerated pace, driven by policy, and the company's traditional engine and generator set business is expected to grow by about 20%. By the end of 2013, hand-held orders for high-power mid-speed machines were 390 million yuan, and it is expected that mainframes will be delivered about 34 million yuan in the first quarter. According to the order delivery cycle, delivery is expected to peak after the second quarter. It is estimated that in 2014, the mainframe business revenue is 430 million yuan, and it is expected that a break-even balance or small profit will be achieved.
Overall gross margin declined. During the reporting period, the overall gross profit margin was 10.97%, down 1.39 percentage points from the previous year. We believe that the decline in gross margin was mainly due to a sharp increase in fixed assets at the end of last year, which led to a sharp increase in fixed costs. In the future, as deliveries of large aircraft increase, the scale effect will cause the company's gross margin to rise slightly.
Orders for large machines continue to increase, and orders are expected to reach 800 million yuan during the year. In the first quarter, the company received new orders of 44.238 million yuan for high-power medium-speed machines, and 40.72 million yuan for the same period last year, an increase of 10% over the previous year. By the end of the first quarter, handheld orders were 407.05 million yuan. As China's construction of law enforcement official ships, offshore auxiliary ships, engineering ships, and ocean-going ships will drive rapid growth in demand for large aircraft, it is expected that the company's new orders for large aircraft will reach 800 million yuan in 2014.
Maintain the “Buy-A” rating. The company's net profit from 2014 to 2016 is expected to be 109 million yuan, 158 million yuan, and 202 million yuan, corresponding to EPS of 0.40 yuan, 0.57 yuan, and 0.73 yuan, and the company has 446 million yuan in cash, with a high margin of safety. As a subsidiary of the Shandong Provincial State-owned Assets Administration Commission, it is expected to benefit from accelerated state-owned assets reform in the future, maintain a “buy-A” rating of 12.0 yuan for 6 months, corresponding to a dynamic price-earnings ratio of 30 times that of 2014.
Risk warning. Order delivery schedule for large machines falls short of expectations; risk of rising raw material prices; risk of projects under construction being converted to fixed assets and increased depreciation costs.