2013 EPS increased by 47.6% YoY to Rmb0.93, in line with expectations. The Company posted a) turnover of Rmb2.94bn (+30.0% YoY), b) operating profit of Rmb1.33bn (+45.4% YoY), c) net profit attributable to shareholders of the parent company of Rmb1.04bn (+47.6% YoY) and d) EPS of Rmb0.93 for 2013. In 4Q13, its turnover slid 12.3% YoY due to the base number effect, net profit attributable to shareholders of the parent company increased by 2.8% YoY, and EPS came in at Rmb0.22, in line with expectations in the annual earnings guidance. In 2013, Haining China Leather Market registered EPS of Rmb0.70 (+40% YoY, in line with expectation) from rental business, Rmb0.20 from shop sales and Rmb0.03 from settlement of Dongfang Yishu project. A 61.1% YoY increase in the rental income is the main reason for high annual earnings growth, and increase in business tax expenses dampened 4Q13 profit growth. In 2013, the Company opened Chengdu market, Tongerpu Phase II market and the Haining Phase V market. The expansion boosted its rental income to increase by 61.1% YoY to Rmb1.54bn, and the rental income as a percentage of total turnover up 10.4ppts to 53%. This effectively underpinned fast growth of the Company’s rental earnings. Against zero income from property and shop sales settlement, the Company’s business tax and surcharges surged by 70.4% to Rmb190mn in 4Q13, due to the one-off provisioning for the land appreciation tax of the Tongerpu Phase I project. This slowed the Company’s 4Q13 earnings growth and meanwhile, created a low comparison base for 2014. During 2013, the Company’s business tax and surcharges increased by 104.1% YoY, and it as a percentage of the Company’s revenue hit an all-time high at 20.6%. We expect both metrics to decline noticeably in 2014. Consolidated gross margin rose 11.7ppts to 71.6%; SGA expense ratio dipped 1.0ppt; and net margin jumped 3.9ppts to 35.9%. In 2013, the Company reported net operating cash inflow of Rmb1.35bn, suggesting abundant cash conditions. Thanks to increase of the rental rate in mid-2013, gross margin of the Company’s shop rental business jumped 0.5ppt YoY to 88.8%; and due to the high unit selling price of Chengdu market, the gross margin of shop sale business increased by 25.0ppts YoY to 79.7% (Chengdu project needs to pay land appreciation tax equivalent to 37% of its sales revenue). The Company boasts a higher barrier to entry in terms of the business model, and it is subject to little pressure from the labor and marketing expenses. During the report period, the Company’s SGA expense ratio dipped 1.0ppt to 7.0% due to the economies of scale, while its net operating cash inflow totalled Rmb1.35bn and capex was Rmb970mn, showing favourable cash turnover. Market innovation broadens: supply chain finance + smart market construction + Korean apparel outlets. 1Q14E EPS of the Company is estimated to increase by +25%~+30% YoY. In 2014, the Company will start cooperation over and rapidly push ahead the construction of smart markets, including big data tenant service and O2O service. It also launches the supply chain financial service along the leather industry chain (a guarantee company has been established in 2013) to provide import/export financing service and private fund clearing service, in order to lower the tenants’ financing cost and increase its profits. Additionally, according to the annual report, F/4 of the Tongerpu Phase III project and the Chengdu Phase II project are exploring the Korean apparel outlet segment, which could widen the Company’s growth potential. The annual report expects two markets (Harbin market/Tongerpu Phase III market) will be opened and 2~3 new markets will be signed in 2014. The Company is expected to finish its building of presence among the provincial capitals by 2016. In our view the external expansion is tipped to fuel continued fast growth of the Company’s rental income. We project its 1Q14 EPS to grow by +25%~+30% YoY (basically including no settlement income from shop sales). Potential risks: 1) impact of macro economy and weather on the leather consumption; 2) lower-than-expected revenue from the external expansion. Earnings forecast and valuation: Based on the Company’s annual report, we project 2014-15E EPS of it to be Rmb1.20/1.50 (Rmb0.95/1.15 from rental business, former forecast of 2015 EPS is Rmb1.55), and project its 2016E EPS to be Rmb1.59 (based on the current in-operation projects; we will update the forecast after the Company announces opening of new markets in future; Rmb1.32 from shop rentals). The current share price implies 11x 2014E PE, and the 2014-16 CAGR of its rental business is estimated to be 24%. We maintain the BUY rating with TP at Rmb24.0.