What’s new

In 1H12, revenue rose 22% YoY to Rmb370mn and net profit grew 7% YoY to Rmb28mn or Rmb0.15/share, missing marketexpectation.

Comments

Revenue growth slowed and gross margin of secondary packing equipment was below expectation. The companyreported a 22% YoY expansion in revenue in 1H12, and growth in secondary packing equipment and OEM business (whichtogether account for 21% of revenue) exceeded 50%. However, revenue from major products (filling line/bottle blowingmachines) only picked up 12% YoY, slightly slower than expected, suggesting decelerated growth in downstream demand.

Gross margin on secondary packing machines dropped 9ppt YoY, dragging earnings growth to a below-expectation 7%. Thedevelopment of this new business remains to be watched in view of the strong fluctuations of GM in recent years.

Improved client mix and consolidated market position in China. Compared to the 10~15% revenue growth of major F&Bplayers in China such as Master Kong and Uni-president, Tech-long’s expanded 34% expansion in 1H12, indicating acontinuously improving position in the domestic market. However, overseas revenue fell 21% YoY in 1H, suggesting thecompany’s switch in target foreign markets has had no material effect yet.

Transforming client mix to improve earnings growth, watch long-term prospects. Tech-long’s beverage production linetechnology is approaching that of international giants such as Crones; its competitive products meet the mechanization andgo-light trends in China; and its client mix has been improving through prominent promotion of price/service competitiveness.

However, investors should be patient for these improvements to translate into earning growth given the current macroeconomic headwinds and the investment demand slowdown in downstream beverage enterprises.

Earnings forecast revision

We lower 2012/13e revenue by 7%/13% and net profit by 22%/24%, in view of the YoY slowdown in investment demand ofdomestic beverage companies and the lower-than-expected GM on secondary packing machines.

Investment recommendation

The stock is trading at 23x/17x 2012/13 P/E after our earnings forecast revision, and the company is in the process oftransforming its improved client mix into earning growth, making its long-term outlook worth watching. We maintain BUYrating and suggest investors actively add positions.

Risks

Market demand weaker than expected; market or sector valuation decreases.