Event: Qunxing Toys released its 2012 report. In 2012, the company achieved operating income of 505 million yuan, an increase of 2.45% over the previous year, and realized net profit of 43.58 million yuan, an increase of -16.78% over the previous year. Earnings per share were $0.33. Main views: 1. Domestic sales revenue has slowed down. Domestic sales increased 4.94% year over year in 2012; there was a slowdown from 9.8% in 2011. We believe that there are two main reasons: industry competition is becoming more intense and the channel chain is too long and channel costs are too high; ultimately, it has led to a decline in terminal consumption capacity. 2. The scale of export sales is the same as last year, but the structure has changed. Faced with the worsening export environment, the company adjusted its product structure to ensure profit levels and reduced the supply of low-margin products; as a result, exports to the Asian region declined. 3. Revenue growth improved quarterly. The growth rates for the third and fourth quarters of 2012 were 14.66% and 23.82%, respectively, a sharp improvement over the first half of the year, with revenue falling 7.5% in the first half of the year. However, profitability declined in the second half of the year, and the gross margin for the third and fourth quarters fell to 20.3% and 21.48%; it reached an all-time low since listing. Conclusion: In 2013, the company actively expanded to Russian-speaking countries in terms of exports, actively adjusted products in domestic sales, integrated upstream, vigorously explored high-tech toys, and expanded new channels. We believe that overall operations in 2013 will be better than in 2012, and gross margin will rise quarterly from the current low point. We have positioned 2013 as the “year of departure” for the company, and performance will enter a new period of accelerated growth. The 2013-2015 EPS is predicted to be 0.39 yuan, 0.48 yuan, and 0.58 yuan, respectively. The corresponding current valuations are 38.4 times, 31.6 times, and 25.8 times, respectively. Maintain its “Highly Recommended” investment rating.