Tianma Wind Power Bearings Demand Decline

We expect that the decrease in demand will lead to a decrease in the total net profit of Tianma's shares by 18%. As the wind power market and macroeconomic recession, the company's wind power bearings, general bearings and machine tool business are affected, the company's revenue in the first three quarters of this year decreased by 6.7%, net profit attributable to the parent company decreased by 22.3%. The current order status of the company is slightly better than the third quarter, but the downstream demand is still weak. We expect its net profit to decrease by 18% in 2011.

We estimate that the EPS (dilutive earnings) of Tianma's shares in 2011-2013 will be 0.45 yuan, 0.51 yuan and 0.61 yuan, respectively, and the corresponding dynamic price-earnings ratio will be 20 times, 17 times and 15 times respectively. Although the company’s short-term performance has declined, we still prefer the company’s strong overall competitiveness, and its valuation still has certain advantages in the industry. We maintain its “recommended” investment rating.

In addition, Tianma's machine tool business is facing cyclical pressure. Qizhong CNC is mainly a heavy-duty stand-up vehicle. Its profitability has increased significantly since the company’s acquisition. The profit for the first three quarters of this year was around 120 million yuan. We believe that the slowdown in FAI (Fixed Assets Investment) in the manufacturing sector and some of the downstream downstream industries will affect the demand for the heavy machine tool industry, but the company is actively developing products such as large-scale grinders, hobbing machines, and CNC vertical drilling machines, and constantly adjusts its internal management. Optimization will enhance its overall competitiveness in the long run.

However, the Deqing base steadily advanced. Deqing Base's master plan is 1,000 mu, and its product positioning is high-end, including large-scale wind power bearings, high-precision bearings, and high-end machine tool bearings. It is expected to be put into operation in 2013. The management of Tianma Group places very high expectations on this. The base is expected to recreate a Tianma. In the long run, the headquarters of the company is also facing relocation. We understand that the construction of the base is progressing steadily.

From an industry perspective, the demand for Tianma Wind Power Bearings has dropped significantly. The cumulative installed capacity of wind power in China has surged 58 times in the past six years. However, in the first half of this year, China's newly installed capacity for wind power only increased by 2.5%. The industry demand dropped sharply, causing the company’s wind turbine bearing business to slow down most rapidly. We expect its revenue to decrease by 30% during the year. The space for the decline in gross profit margin is very small. General-purpose bearing revenue declined slightly, and gross profit margin decreased. Railway bearings and special bearings were generally stable.

Tianma's performance forecast Unit: Million 2010A 2011E 2012E 2013E

Operating income 3582.9 3382.9 3713.2 4331.7

Growth rate 9.8%-5.6% 9.8% 16.7%

Net profit 658.4 540.1 608.7 725.7

Growth rate 18.9%-18.0% 12.7%19.2%

Earnings per share (yuan) 0.55 0.45 0.51 0.61

PE 16 20 17 15