The Company’s half-year performance slightly disappointed market expectations, and itsfully diluted EPS stood at RMB 0.18. Due to copper price hike in 1H11, it realized theoperating revenue of RMB 536M (+43% YoY), gross margin of 7.38%, net profit of RMB65M (+5% YoY), and the EPS of RMB 0.18, lower than our estimated RMB 0.22 (afterdilution). This was due to the relatively tight capital condition confronted by the Company,whose financial expense surged 111%.

    The steadily increasing downstream demand spurred the Company’s production and salesvolume growth in 1H11. As some new capacity has been gradually put into production, itscapacity of specialty enameled wires has been enhanced to over 130,000 tons and thisbusiness sector reported total output and sales volume of 68,000 tons and 67,000 tonsrespectively, up 16% and 14% YoY, indicating the capacity utilization rate of nearly 100%.

    This current booming situation in both the supply and demand sides reflects the robustdemand for white appliances in the downstream market and the Company’s sufficientorders.

    In 1H11, the business of specialty enameled wires reported record high gross profit, furtherreinforcing its profitability. According to the revenue, cost, and sales volume revealed in theinterim report, the gross profit of the specialty enameled wires stood at RMB 5,395 per ton,up 30% YoY, or 6% from 1H10. We analyze the Company’s earnings capability byobserving its gross profit (per ton), demonstrating its competitive strengths regardingproduction technologies, optimized product structure of the high-end specialty enameledwires, and the market recognition.

    In 1H11, the market liquidity became tight and the financial strain triggered large increasein financial expense. As the copper processing firm which posts the fastest turnover in theindustry, the Company requires relatively large amount of working capital. The risingcopper price (maintained at RMB 70,000/t in 1H11) made the Company’s financialcondition fairly tight, encouraging the financial expense to soar 111% to RMB 80.03M in1H11, which is approaching to the annual figure of RMB 86.08M in 2010.

    The fund collected through its private placement will help alleviate the capital pressures inthe short-term, while its expanding footprints in the new energy industry will furtherreinforce the growth outlook in the long-term. On July 6th, the Company has raised RMB589M through the additional offering, which effectively lowered its financial leverage. It hasdecided to use the idle fund totaling RMB 295M to enhance the working capital, aiming tomitigate the capital pressures in the short-term. In the long-term, the funds collected will bespent on the projects of high-end specialty copper wires (capacity of 30,000 tons) and thefine aluminum wires (capacity of 15,000 tons), which will further propel the Company’sgrowth. In addition, its footprints in the areas of heat pump compressors, motors applied innew energy-driven vehicles, and ultra-/extra-high voltage transformers will facilitate theprospective expansion to the promising market of specialty electrical magnetic wires.

    Considering the tight lending market which weighs on the Company’s financialconditions, we downgrade the earnings forecast and give the fully diluted EPSestimates of RMB 0.37/0.47/0.65 in 2011-2013. We think it will be common to see thecopper price fluctuate at highs and relatively tight financial conditions confronted bythe players. Compared to the fairly loose market liquidity in the past and our previousforecast, the Company used more working capital and reported obvious rise inborrowing rate. We forecast its financial expense of RMB 1.23M/1.71M/2.26M in2011-2013. In the long-term, we are bullish on the Company’s growth outlook. In theshort-term, it will likely record obvious financial expense growth; therefore, weforecast the compound net profit growth of 29% and give the fully diluted EPSestimates of RMB 0.37/0.47/0.65 in 2011-2013.

    We reiterate an “Outperform” rating and are bullish about the Company’s long-termoutlook, in light of its leading position in the industry of specialty electrical magneticwires, strong profitability and fast turnover, stable growth in capacity, revenue andprofit, and the entry to the promising market of environmentally-friendly electricalmagnetic wires.