4526 Tongtai in English

June 16, 2013 Machine Tool Group

Initiation

Tongtai Machine & Tool (4526:TT) Machinery / Taiwan

Key Ratios Summary Share Price (June 14, 2012) $24.50 Sell

JPY depreciation impedes Tongtai’s price competitiveness The depreciation weakens Tongtai’s price advantage. The price difference between Japanese machine tools and those of Tongtai shrinks to less than 8 percent and results in a decline in Tongtai’s market share. We forecast the depreciation will take effect on Tongtai’s revenue in 2Q13. Chinese auto makers to cut capex The fall in Chinese auto maker’s capex will dwindle Tongtai’s shipments. The capacity utilization of Chinese auto makers is plagued by the excess capacity due to overinvestment in past years. In the short run, we forecast Tongtai’s shipments to Chinese market to aggravate because of the anti-Japan protest and because of the sluggish demand for commercial vehicles. PCB makers switch to the Laser driller The demand for machinery drillers diminishes. We have observed the capex from PCB manufacturers switches to the laser drilling machine to produce any layer HDI as handheld devices become lighter and thinner. The yen depreciation will force Tongtai to reduce prices and thereby cause a tightening gross margin.

Price Target Our target price is $14.38, which is 14x the P/E multiple of Tongtai’s estimated EPS from 2Q13 to 1Q14.

Price Target $14.38

Downside to Price Target 41%

Capital $2.26 billion

Market Cap. $5.31 billion

Shr. held by Foreign

Investors

6.98%

Stock Prices relative to TAIEX in past year:

Tongtai has underperformed TAIEX by 30% for

the past year.

Researchers

吳睿驊

[email protected]

張泰德

[email protected]

潘彥誠

[email protected]

許家源

[email protected]

鍾尚樺

[email protected]

Consolidated 2012 2013(f) 2014(f) 2015(f)

Revenue (mn) 7226 6858 7459 8099

Gross Margin (mn) 1799 1595 1706 1851

EBITDA (mn) 652 580 669 761

Net Income (mn) 221 227 258 320

EPS ($) 0.98 0.99 1.12 1.38

Source: TEJ, Team Research

0

2,000

4,000

6,000

8,000

10,000

0

10

20

30

40

50

July, 2011

Oct, 2011

Jan, 2012

Apr, 2012

Tongtai TAIEX

Price Competitiveness Is Eroded by the Yen Depreciation The price gap between Tongtai’s drillers and those of Japan’s machinery makers has reduced to 10% from 30% as Japanese competitors enjoy the benefit of weak yen. Although Tongtai has already decreased its prices, it cannot maintain the original price gap because of relatively stronger Taiwanese currency and because of its thinner profit margin than Japanese counterparts. We forecast Tongtai to report lower-than-expected earnings in 2Q13. Machinery manufacturers in Taiwan have cut selling prices in January to prevent customers from transferring orders. We forecast a sag in revenue will be disclosed in 2Q13 considering Tongtai makes product delivery in 3 months after it receives an order. Japanese machine tool industry is driven by export. The export revenue accounted for 81% of the gross revenue in 2012. Owing to the yen depreciation, Japanese competitors has shown great improvement in profitability and financial position. We believe Japanese competitors will fix their gross profit margin owing to their constrained capacity expansion plan.

The yen depreciation will reduce revenue in May.

The decrease in Japanese machinery prices will exceed that of Taiwanese machinery prices in July.

The percentage change in prices when orders are placed. The percentage change in prices when products are shipped.



Negotiation

•Clients demand price reduction

Order Placment

•Purchase consideration is set

Shipment

Revenue Recognization

-25%

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Oct

Nov De

cJa

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bM

ar Apr

May Jun Jul

Aug

Sep

Oct

Nov De

c

2012 2013

JPY/USD NTD/USD KRW/USD

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Oct

Nov De

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May Jun Jul

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2012 2013

JPY/USD NTD/USD KRW/USD

1 month

Source: Team Research

3 months Taiwanese and Korean makers

6 months Japanese makers

Tongtai used to benefit from yen appreciation.

The yen started a remarkable depreciate in September 2012. Japanese machinery sales used to be impeded by strong yen.

Source: TEJ

Source: TEJ

Scenarios

Price %

Decrease of

Jap. Makers

Price %

Decrease of

Tongtai

Price Gap

Maintain

Price Gap

22%

22% 30%

Partly

Adjust

17% 25%

12% 20%

Do not

Adjust 0% 8%

Scenario analysis of Tongtai’s pricing strategies


Tongtai Will Lose Market Share on an 8% Price Gap Tongtai has suffered from the yen depreciation in 2013. Tongtai’s price reduction reflects only the cost cut on raw materials. The price gap between Tongtai’s machine tools and those of Japanese manufacturers has shortened to 8%. However, major Taiwanese competitors such as Awea, Goodway, Kafo, and Victor Taichung acknowledged that they have reduced 5% - 10% of their selling prices. We believe Tongtai will keep an 8% price gap while endure a slump in machine tool shipments. In 2012, machine tools yield 25% gross profit margin and 6% net profit margin. If further price cut is to be promoted, Tongtai’s machine tools can barely realize profits. Seeing that the Japanese yen will remain sluggish, we infer Tongtai will rather sacrifice its revenue to stabilize its profitability.

We forecast the growth of Japanese export orders will turn

positive in May.

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Jul, 2012

Oct, 2012

Jan, 2013

Apr, 2013

USD/JPY USD/NTD USD/KRW

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30%

Jan, 2010

Apr, 2010

Jul, 2010

Oct, 2010

Jan, 2011

Apr, 2011

Jul, 2011

Oct, 2011

Jan, 2012

Apr, 2012

USD/JPY USD/NTD USD/KRW

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100%

Jan

Mar

May Ju

l

Sep

Nov Jan

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(F)

Jul(F

)

Sep(

F)

Nov

(F)

2012 2013

日本台灣韓國Japan Taiwan Korea

Source: NTL. Dep. of Statistics, JMTBA, KOMMA, Team Research

The Yen Depreciation Will Reduce Tongtai’s Profit Margin by 2%.

The components’ price reduction cannot compensate

the product’s selling price decrease.

We forecast the year-over-year growth of Tongtai’s manufacturing cost will decrease 5% in 2013. CNC controllers, ballscrews, and linear guideways have seen 10% price decrease thanks to the yen depreciation. The oversupply of iron and steel has depressed the cost of sheet metal, foundry goods, and turret, which account for 65% of Tongtai’s manufacturing costs. However, the reduction of material cost is not enough to offset the falling prices brought about by the price competition from Japanese competitors.

Manufacturing Costs Breakdown


Changes in Tongtai’s profit margin

1Q12 2Q12 3Q12 4Q12

Machine Tool 28.0% 26.1% 27.8% 30.7%

PCB Driller 23.0% 21.4% 22.9% 25.2%

Total Mix 24.7% 23.0% 24.6% 27.1%

1Q13 2Q13 3Q13 4Q13

Machine Tool 28.5% 25.3% 25.5% 28.5%

PCB Driller 25.0% 22.3% 22.1% 24.5%

Total Mix 22.0% 23.0% 22.7% 25.0%

The percentage changes in Tongtai’s manufacturing costs

1Q12 2Q12 3Q12 4Q12

Machine Tool 72.0% 73.9% 72.2% 69.3%

PCB Driller 77.0% 78.6% 77.1% 74.8%

1Q13 2Q13 3Q13 4Q13

Machine Tool 70.8% 72.5% 70.7% 68.0%

PCB Driller 74.3% 75.4% 74.0% 71.7%


Direct Labor

5%

Sheet Metal, Foundry Goods, and Turrret

65%

CNC Controller

18%

Ballscrews and Linear Guideways

4%

Other Manufacturing Costs

8%

Driller industry revenue is expected to tumble.

Tongtai’s and Takisawa’s ASP

Takisawa’s ASP continues to fall in past 6 years.

The PCB Industry Shows Slow Growth Momentum. We expect Tongtai’s PCB driller revenue will be $37.6 million in 2013 (-10.55% YoY), $37.2 million in2014 (-1.06% YoY), and $34.0 million in 2015 (-8.60% YoY). The corresponding shipments are estimated to be 342, 348, and 329 with the average selling prices at $109 thousand, $107 thousand and $103 thousand. The price of PCB driller decreased at a CAGR of 1.9% for the past six years. We believe the decline was due to the attempt to boost market share by liquidating old and inexpensive drilling models to small PCB producers. A driller machine producer based in Taiwan, Takisawa has encountered declining shipments to 3.06 million in 2012 from 4.36 million in 2006. During the period, Takisawa garners a 2% ~ 8% market share with its gross profit margin hovering between 15% and 20%. We hold the average selling price will stay inert seeing that mechanical driller producers are protecting exposure to customers in a contracting market. With the forecast that Tongtai’s gross profit margin will be fixed at 25%, we infer Tongtai to lower 5% of its PCB driller’s price in 2013 and 2.4% in 2014 and 2015 respectively. Tongtai’s PCB drillers are comparable to that of Japanese manufacturers in quality but are 15% ~ 20% cheaper than Japanese counterparts. However, the yen depreciation, which has amounted to 25% since 2H12, has forced Tongtai to discount its selling prices. We maintain Tongtai will lower 5% of its selling prices in 2013 to restore its 15% price difference with Japanese machine tools.

$40.3

$37.6 $37.2

$34.0

$30.0

$32.5

$35.0

$37.5

$40.0

$42.5

2012 2013(f) 2014(f) 2015(f)

NTD

in M

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ns

$144

$111

$130

$123

$100

$110

$120

$130

$140

$150

2007 2008 2009 2010 2011 2012

in N

TD T

hous

and

Takisawa TongTai

4.2%3.6%

5.9%

8.3%

2.5%

6.1%

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6%

8%

10%

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2007 2008 2009 2010 2011 2012

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ASP Market Share

PCB Industry Transitions Any Layer HDI PCB. Tongtai garners 22% share of the mechanical driller market. Tongtai’s key PCB customers are rigid PCB manufacturers in Taiwan whose capital expenditures are critical to Tongtai’s PCB driller shipments. We observed PCB manufacturers’ spending on mechanical drillers were 30% of the annual capex before 2011. However, the percentage reduced to 19% during 2011 and 2012. We believe the laser driller has been replacing the traditional mechanical driller because today’s handset devices use any layer HDI, an advanced type of PCB widely adopted by smartphone brands but can be efficiently produced only by laser drillers. Therefore, PCB manufacturers will increase laser driller installation while decreasing the reliance on mechanical drillers. We forecast there will be solid demand for laser drillers because the production of any layer HDI PCB will utilize 25% more capacity than that of four-layer HDI PCB and because the production yield of any layer HDI PCB is 70% for new entrants. We believe the market for mechanical drillers is cannibalized by the rising demand for laser drillers as smartphone companies embrace any layer HDI PCB. We estimate the market share of mechanical drillers will be 19.1% in 2013, 18.2% in 2014, and 17.1% in 2015. Tongtai Cannot but Compete on Prices. We expect Japanese manufacturers will lower their prices in response to request from their PCB customers. Hence, we forecast Tongtai to decrease 5% of its selling prices to protect its market status. However, Tongtai cannot keep the original 5%~10% price difference with Japanese competitors and its market share in mechanical drilling will retreat to 23% in 2013, 22% in 201 and 20% in 2015.

7.1%

4.2%3.6%

5.9%

8.3%

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2006 2007 2008 2009 2010 2011 2012

Shipment (unit) Market Share (RHS)

6.6 2.8

10.6

4.8 4.9 5.2 5.3 5.3

30%26%

39%

17%19% 19% 18% 17%

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Capex Capex on Mechanical Drilling % of Capex

$394

$314

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$500

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2007

2008

2009

2010

2011

2012

2013(E)

2014(E)

2015(E)

ASP of Tongtai's PCB Drillers

306 548 331 210 719 325 348 342 348 329

15%

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Shipment Market Share

Japanese auto shipments turned down in 4Q12.

Source: CAAM

Auto shipments growth decelerated during 2011-2012.

Source: CAAM, Team Research

CV shipments declined during 2011-2012.

Source: CAAM, Team Research

Chinese Auto Factories Will Slash Capex in 2013. Chinese and Japanese auto brands based in China contributed 25% of Tongtai’s machine tool revenue in 2012. Tongtai claims Chinese auto makers will represent 35% of its revenue in 2013. However, we argue the target will be missed seeing that Chinese local brands cannot continue capacity build-up and that auto sales fall short of growth expectation in 2012, which leads to high stocks that are difficult to be liquidated in the coming low season. Meanwhile, Japanese car makers in China face a plunge in sales triggered by the ongoing anti-Japanese sentiment. We forecast Tongtai’s machine tool shipments to drop in the next twelve months. Auto Makers Adjust to New Growth Prospect

China’s auto sales saw double-digit growth during 2009 to 2010 due to government’s subsidy and tax cut, which brought demand forward but will depress sales in future. The weakening PV sales growth during 2011 to 2012 has depressed capacity utilization among Chinese auto brands. In commercial vehicle market, the demand for trucks is plagued by the decrease in fixed asset investment and the railroad system as a substitute for land transportation. The slowdown in auto sales will deter auto makers from investing in machine tools. Although auto parts suppliers will compete for European and North American car makers, which registered higher sales growth than Chinese and Japanese auto brands, we hold the strategy will not take effect until 2H13 given that it takes 3-4 quarters for auto parts suppliers to build partnership with car manufacturers.

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Mar, 2013

May, 2013

in te

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Shipment of Japanese Cars YoY Growth Rate

6.7%

45.4%

32.4%

2.5% 4.3%

12.4% 12.0% 12.0%

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in m

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ns Car Shipments YoY Growth Rate

2.62 3.31 4.29 4.03 3.81 3.93 4.04 4.15

5.2%

26.0%29.8%

-6.1% -5.5%

3.1% 2.8% 2.8%

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Auto shipments lead to the fluctuations in capex.

Source: CAAM, DataStream, Team Research

Car inventory has increased since the beginning of 2013.

Source: Sohu

Overinvestment Leads to Falling Capacity Utilization. We forecast the capex from Chinese auto industry has peaked and is expected to drop in next 12 months. The capex expansion during 2011 to 2012 was due to the rising demand supported by the car subsidy in 2009 and 2010. Because the demand was brought forward, the car market cannot sustain its high growth momentum in 2013 and 2014. We believe the excessive capacity will deter capacity investment, especially investment from Chinese local manufacturers whose capacity utilization falls below the industry’s average. We anticipate the car market will register double-digit volume growth in 2013. However, the rebound can hardly boost demand for machine tools in 2013. Based on historical fluctuations, capex leads sales volume 1.5 to 2 years. The overinvestment in 2011 and 2012 has caused serious drop in capacity utilization among auto makers since the auto sales in 2011 and 2012 showed an unexpected 5% growth. We forecast industry capex to fall 30% YoY in 2013 and rebound 14% YoY in 2014. Low Utilization Worsens The capacity utilization remains low among Chinese auto manufacturers. We forecast the utilization rate will exacerbate in 2H13 as auto inventory will be difficult to be liquidated in the coming slack season. Auto makers will, therefore, delay machinery installation and hurt Tongtai’s machine tool shipments in 2H13.

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Sales Volume YoY Capex YoY

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Price Evaluation P/E comparison among Taiwanese

machine tool manufacturers

Tongtai’s share price is 23.52x the forward 12-month EPS (2Q13 – 1Q14). Among the most influential factors are the depreciation of Japanese yen, the decline in capex from Chinese auto industry, and the slowdown in rigid PCB demand. We target Tongtai’s share price at $14.38, which is 14x the $1.03 forward 12-month EPS estimate. The downside potential is 41.31% of Tongtai’s current share price.

Company PE ratio

Awea 10.41

Chevalier N.A.

Goodway 10.16

Johnford 15.69

Kafo 32.67

Takisawa 10.60

Tongtai 23.52

Source: Bloomberg


Risks

The upside risks include： 1. Exchange Rates If NTD depreciates in 2H13, the price difference between Tongtai’s machine tools and those of Japan’s competitors will narrow. The pressure to reduce selling prices alleviates and Tongtai’s gross profit margin will be stable. We forecast the NTD depreciation will also contribute $0.5 EPS as exchange gains in 2H13. 2. PCB Drillers Tongtai can maintain driller shipments if Han’s Laser, a PCB driller manufacturer that ranks fourth in terms of market share, cannot lower its defect rate and stabilize the supply of its self-produced CNC controllers. If Tongtai’s laser drillers improve in production yield, we forecast its driller shipment will see large increase in the following years. 3. Chinese Auto Market If Tongtai’s customers break into European and American auto supply chain earlier than we expect, we forecast the growing capex from these auto makers will boost Tongtai’s annual revenue by 15%.

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Scenario Analysis

The fluctuations in exchange rates and the pricing strategy of Japanese machine tool manufacturers are the most possible risk factors that will erode Tongtai’s profitability for the coming 12 months. We simulate Tongtai’s gross profit margin and its annual EPS under different scenarios, finding that the exchange rate has a greater impact on Tongtai’s earnings power. The neutral scenario represents our forecast that leads to the $14.38 target price.

Scenarios

Optimistic Neutral Pessimistic

NTD depreciates 10% in 2H13

Japanese competitors fix prices

NTD holds value in terms of JPY

Jap. competitors reduce 22% prices

NTD appreciates 10% in 2H13

Jap. competitors reduce 22% prices

2013 profit margin 28.6% 23.2% 21.6%

EPS

2013 $2.73 $0.99 $0.13

2014 $3.37 $1.12 $0.34

2015 $3.90 $1.38 $0.52


Appendix 1：Peer Comparison

Company Ticker Market Cap.

(NTD mn)

2012

Revenue

(NTD bn)

EPS P/E P/B

2012

ROE

(%)

Manufacturers that supply parts and components for machine tools

AirTAC TT:1590 23,272 5.66 7.05 20.56 3.92 19.4

Hiwin TT:2049 118,631 12.37 -6.18 N.M 0.75 19.3

NSK JP:6471 50,072 77.9 3.09 29.38 1.44 13.8

THK JP:6481 28,890 20.9 8.18 26.38 1.37 10.5

Fanuc JP:6954 360,122 57.2 65.32 23.01 2.54 23.2

Manufacturers that produce metal cutting machine tools

Awea TT:1530 2,910 3.67 2.94 10.41 1.18 11.5

Johnford TT:1540 1,482 1.23 1.10 15.69 1.04 7.2

Goodway TT:1583 4,036 6.68 4.05 10.16 1.37 10.0

Kafo TT:4510 955 1.48 0.33 32.67 0.83 1.6

Chevalier TT:4513 719 2.62 0.01 N.M. 0.86 2.4

Tongtai TT:4526 5,311 7.22 0.85 27.54 1.11 4.2

Takisawa TT:6609 1,339 2.73 1,77 10.60 0.89 8.7

Tsugami JP:6101 4,078 3.80 6.07 8.97 1.18 13.4

Okuma JP:6103 12,859 14.9 4.90 15.53 1.13 10.6

Toshiba Machine JP:6104 8,500 12.7 5.51 9.24 0.91 12.8

Makino Milling JP:6135 7,382 11.7 4.92 12.50 0.70 6.0

Mori Seiki JP:6141 13,715 16.5 5.01 23.07 1.15 7.0

OKK JP:6205 1,219 2.7 1.45 10.28 0.57 5.0

Brother JP:6448 2,986 52.8 7.07 15.46 1.04 14.7

Hyundai WIA KS:011210 3,066 5.1 11.65 10.24 2.2 22.2

Doosan Infra KS:042670 1,487 0.03 10.22 11.73 1.00 11.6

SMTCL CH:000410 95,920 176.8 0.33 N.M 1.92 1.4

Fair Friend Group HK:2398 14,126 28.1 1.50 18.42 1.16 6.3

DMG Mori Seiki GIL:Xetra 13,769 273 17.58 13.01 1.44 9.8

Manufacturers that produce other types of machine tools

Anderson TT:1528 2,182 2.87 0.74 19.87 1.04 4.2

Seyi TT:4533 1,807 3.51 1.21 10.38 0.83 5.9

Fu Chun Shin TT:6603 1,629 2.71 0.33 43.77 0.94 2.1

Source: Bloomberg, TEJ

Appendix 2：Financial Statements

P&L (NTD in millions) 2011 2012 2013(E) 2014(E) 2015(E)

Net Sales 8,717 7,226 6,858 7,459 8,099

Cost of Goods Sold (6,563) (5,427) (5,263) (5,753) (6,248)

Gross Profit 2,154 1,799 1,595 1,706 1,851

Operating Expenses (1,400) (1,336) (1,235) (1,249) (1,294)

Marketing Expense (709) (586) (566) (582) (618)

G&A (570) (542) (509) (516) (524)

R&D (121) (207) (161) (152) (151)

Operating Income 753 463 360 456 557

Net Interest (24) (26) (50) (58) (59)

Exchange Gains and Losses 66 (60) 45 3 4

Others (15) 11 (14) 28 17

Pretax Income 780 389 351 371 460

Income Tax (201) (81) (83) (77) (100)

Earnings from Continuing Ops. 578 308 268 294 360

Minority (2) (87) (41) (36) (40)

Net Income 576 221 227 258 320

NOPAT 594 242 265 305 366

EBIT 738 474 392 488 577

EBITDA 895 652 580 669 761

EPS 2.60 0.98 0.99 1.12 1.38

BVPS 23.89 23.27 29.41 30.03 31.19

Shares Outstanding 222 227 229 231 231

Balance Sheet (NTD in millions) 2011 2012 2013(E) 2014(E) 2015(E)

Cash & ST. Investment 1,099 1,105 1,013 1,016 1,091

Accounts Receivable 3,169 2,534 2,776 2,957 3,197

Inventory 3,967 3,698 3,471 3,619 3,784

Others 445 578 503 526 557

Current Asset 8,680 7,914 7,762 8,118 8,630

Net PP&E 2,647 2,775 2,881 3,031 3,179

Other Non-current Assets 497 466 473 473 473

Total Asset 11,786 11,120 11,117 11,623 12,283

Accounts Payable 1,492 1,231 1,334 1,476 1,664

ST. Borrowing 1,859 1,734 1,893 2,051 2,260

Current Portion of LT. Debt 264 507 89 85 80

Other Current Liability 1,328 1,256 0 0 0

Current Liability 4,944 4,728 3,315 3,611 4,004

Loans 1,371 965 832 832 832

Bond 0 0 0 0 0

Other Long-term Liability 0 0 0 0 0

Long-term Liability 1,371 965 832 832 832

Other Non-current Liability 176 158 242 242 242

Total Liability 6,490 5,850 4,389 4,685 5,078

Total Equity 5,296 5,270 6,728 6,938 7,205

CF Statement (NTD in millions) 2011 2012 2013(E) 2014(E) 2015(E)

Net Income 578 308 268 294 360

DD&A 170 193 188 181 184

Working Capital Investment (751) 644 87 (187) (217)

Other Adjustments 596 (150) (147) 56 98

Cash Flow from Operations 593 995 396 344 425

Capex (396) (319) (272) (331) (332)

Other Adjustments (175) (66) 31 (12) (55)

Cash Flow from Investments (571) (385) (241) (343) (387)

Debt Increase (Decrease) (7) (289) (48) 158 209

Stock Issuance (Repurchase) 30 10 0 0 0

Cash Dividends (264) (287) (226) (136) (155)

Other Adjustments 44 (3) (22) (20) (16)

Cash Flow from Financing (197) (570) (297) 2 38

Exchange Influence 72 (35) 49 (0) (1)

Net Change in Cash (103) 6 (93) 3 75

FCFF (138) 477 182 (0) (11)

FCFE (163) 169 96 111 153

Ratios (%) 2011 2012 2013(E) 2014(E) 2015(E)

Growth - YoY

Net Sales 1.5% -17.1% -5.1% 8.8% 8.6%

NOPAT -3.7% -59.3% 9.6% 15.0% 20.0%

EBIT -27.7% -35.8% -17.4% 24.5% 18.4%

EBITDA -22.7% -27.1% -11.1% 15.4% 13.8%

EPS -11.9% -62.3% 1.3% 12.7% 23.7%

Profitability

Gross Margin 24.7% 24.9% 23.3% 22.9% 22.9%

Operating Margin 8.6% 6.4% 5.3% 6.1% 6.9%

Net Income Margin 6.6% 3.1% 3.3% 3.5% 3.9%

Capital Structure

Debt Ratio 29.6% 28.8% 25.3% 25.5% 25.8%

Current Ratio 175.6% 167.4% 234.1% 224.8% 215.6%

Quick Ratio 95.3% 89.2% 129.4% 124.6% 121.0%

P&L (NTD in millions) 2Q12 3Q12 4Q12 1Q13 2Q13(E) 3Q13(E) 4Q13(E) 1Q14(E)

Net Sales 1,771 1,882 1,891 1,453 1,837 1,818 1,751 1,678

Cost of Goods Sold -1,363 -1,419 -1,378 -1,133 -1,414 -1,404 -1,312 -1,303

Gross Profit 408 463 512 320 423 413 439 375

Operating Expenses -301 -320 -440 -311 -310 -309 -305 -299

Marketing Expense -127 -128 -208 -140 -144 -143 -139 -135

G&A -135 -116 -172 -125 -129 -128 -127 -126

R&D -39 -76 -59 -47 -38 -38 -38 -38

Operating Income 107 143 73 9 113 104 134 75

Net Interest -9 -8 -1 -7 -11 -13 -18 -15

Exchange Gains and Losses 25 -33 -11 47 -3 1 1 1

Others 29 -3 -16 -39 8 9 9 9

Pretax Income 152 98 45 60 95 88 107 54

Income Tax -85 -15 36 -22 -20 -18 -23 -9

Earnings from Continuing Ops. 68 83 81 38 75 70 84 45

Minority -22 -18 -28 -12 -10 -10 -10 -9

Net Income 45 66 54 27 65 60 74 36

EPS 0.20 0.29 0.24 0.12 0.29 0.26 0.32 0.15

Ratios (%) 2Q12 3Q12 4Q12 1Q13 2Q13(E) 3Q13(E) 4Q13(E) 1Q14(E)

Sales Growth - YoY -34.4% -19.1% -1.7% -13.7% 3.7% -3.4% -7.4% 15.5%

Sales Growth - QoQ 5.2% 6.3% 0.5% -23.2% 26.4% -1.0% -3.7% -4.2%

Gross Margin 23.0% 24.6% 27.1% 22.0% 23.0% 22.7% 25.1% 22.3%

Operating Margin 6.0% 7.6% 3.9% 0.6% 6.1% 5.7% 7.7% 4.5%

Net Income Margin 2.6% 3.5% 2.8% 1.8% 3.6% 3.3% 4.2% 2.1%

Tax Rate 18.4% 55.6% 15.3% -80.1% 36.3% 20.8% 20.3% 21.5%

4526 Tongtai in English

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