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In 1~3Q12, revenue rose 7% YoY to Rmb530mn, but net profit attributable toshareholders was down 19% YoY to Rmb36mn or Rmb0.18/share, slightlymissing expectations.

Comments

Operating revenue growth hurt by order delay: As beverage demand hasgrown at a much slower pace YTD and remained particularly weak in 2Q, thecompany’s major customers reduced capital expenditure. As a result, 3Qrevenue slipped 18% to Rmb160mn.

Ineffective cost control amid new product introduction; changed targetcustomers and market conditions: The company launched light packingequipment for purified water in the past two years, which received a goodmarket response and improved its customer mix. New product developmentcosts have remained elevated lately, and its target clients and overseasmarkets changed significantly as product quality improved. The economicslowdown meant operating revenue did not rise notably, but expenses stillincreased because of ineffective cost control, with expense ratio up 1.8pptYoY in 1~3Q, a major culprit for the earnings decline.

Competitive power continuing to grow; profitability to expand whenoperating revenue rises notably: Having attended a recent beveragepacking exhibition, we believe Tech-Long is one of the most competitivecompanies operating in this segment in China, and that its products are evenmore attractive than those developed by a few international giants operatinghere. New products such as light hot-filling packing equipment couldmaterially boost earnings.

Earnings revision

We lower our 2012/13 EPS estimate by 21%/22% to Rmb0.25/0.33 toreflect demand slowdown and order delay.

Valuation and recommendation

The stock is trading at 2012/13e P/E of 27x/21x. The company is in theprocess of transforming its improved client mix into earnings growth, makingits long-term outlook worth watching. We maintain a BUY rating and suggestlong-term investors consider the stock.