A good start to 2013. Our recent chat with management suggests that2H12sales were stronger than expected, though this was offset byerosion in gross margins. We also learned that the company raised itsASPs by around 5% through the reduction of its sales rebates in earlyJan 2013, which are positive moves amid its peak season. We reiterateour view that Tianneng will continue to enlarge its market share in 2013,the final year before the effective execution of “Entry Requirements”. Bythe end of 2013, all lead-acid battery producers will need to fulfillseveral environmental standards, according to the “Entry Requirements”released by the government in 2012.

Market share gains to continue. The positive sales surprise comesfrom better-than-expected volume growth in 2H12, thanks to selectivesales rebate programme and the sourcing of more OEM production. Asa result, Tianneng is likely to have gained significant market share in2012and we expect this trend to continue into 2013. We now projectsales volume in 2012to reach 80m units (+89% YoY) from 42m units in2011and grow a further 21% in 2013to 96m units.

Gross margin squeezed due to rise in OEM. In addition to rampingup its production capacities, Tianneng took on OEM business in 2H12as a way to enlarge its market share. OEM sales volume is projected toaccount for ~20% of overall volume in 2H12and we expect Tianneng tomaintain an OEM sales proportion of around 15% in 2013. While OEMbusiness will easily boost sales volume up, it will likely lead to a declinein blended GPM due to its less profitable nature (OEM GPM: ~15%).We project a contraction in GPM to 23.5% in FY12F and 23% in FY13Ffrom 28.2% in FY11.

Maintain BUY. We trim our FY12F/13F estimates by 2.4%/0.4% tofactor in the stronger sales but lower margins. The stock is trading atundemanding valuation of 5.6x FY13F PER, and offers a yield of 5.4%.Given the low valuations, we reiterate our BUY call and keep our TP atHKD6.7, based on 7x FY13F PER.

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