Purin Chengshan's shareholders' net profit fell 7.5% year-on-year to RMB 245 million in the first half of 2021, falling short of growth expectations due to falling gross margin. Gross margin fell 4.8 percentage points to 16.5% in the first half of 2021 due to a sharp rise in raw material prices. However, revenue was basically in line with our expectations, rising 31.9% year over year to RMB 6.283 billion, and tire sales increased 45.4% year over year to 9.1 million pieces due to increased new production capacity. Among them, sales of all-steel/semi-steel tires increased 17.7%/71.6% year-on-year, respectively.

Production capacity expanded in Anhui. The company plans to add 800,000/5 million all-steel/semi-steel radial tires after completion in 2023. Total tire production capacity will reach 35.55 million tires by 2023, an increase of 71.1% over 2020. The new plant is expected to increase revenue by RMB 1.6 billion a year.

We lowered our net shareholder profit forecast for 2021 to 2023 by 37.5%/26.2%/12.1%, respectively. After the adjustment, we expect net shareholder profit to fall 18.6% year over year in 2021, but increase 47.6% and 51.8% year on year from 2022 to 2023, respectively, which is equivalent to a three-year compound annual growth rate of 22.2% from 2021 to 2023. We lowered our gross margin assumption during the forecast period to account for rising raw material costs.

The results for the first half of 2021 were greatly affected by raw materials. This was largely uncontrollable and was basically in line with industry trends. Nevertheless, revenue growth is as strong as expected, and the expansion of production capacity in Anhui will increase revenue growth and profitability. We maintain our “collected” investment ratings, but lowered our target price to HK$7.99 to reflect the reduced earnings forecast. Our target price is equivalent to 8.6 times the 2021 price-earnings ratio and 5.8 times the 2022 price-earnings ratio.