2016 performance was lower than expected

Xingda International announced its 2016 results: the company's revenue was 5.47 billion yuan, an increase of 15.5% over the same period last year, and its net profit was 277.8 million yuan, an increase of 59.9% over the same period last year, corresponding to 0.19 yuan per share. The company's net profit is slightly lower than we expected by 8%, mainly due to: 1) the lag in the impact of product price increases, which is expected to be reflected in the first half of 2017; 2) the increase in freight costs in the fourth quarter of 2016. The company's 2016 gross margin rose 4 percentage points to 21.9%, while the company's dividend payout ratio remained at a high level of 71%.

Trend of development

As the volume and price of products rise, the company's gross profit margin and net profit margin are expected to rise further in 2017. As the largest manufacturer of tire cord in China, the improvement of Xingda international gross profit margin comes not only from the recovery of the tire industry, but also from the supply-side reform of the radial tire cord industry. In 2016, the annual production capacity of Xingda International steel cord increased to 670000 tons, and the capacity utilization rate reached 92%. The company has plenty of orders on hand, it was in full production in the first quarter of 2017, and the company started work ahead of time to reduce the impact of Spring Festival factors. As the company's sales increase (expected to grow by 10% year-on-year) and average sales price rise (expected to increase by 13% year-on-year), we expect Xingda International's 2017 gross margin to rise further to 25%.

Thanks to the abundant cash on hand, the dividend payment rate of the company is higher. Over the past six years, Xingda International's dividend payout ratio has been maintained at a high level of 460.98%. We expect the dividend payout ratio to be maintained at around 70% over the next few years, and dividend yields are expected to reach 8% in 2017 and 11% in 2018.

Profit forecast

We cut the company's 2017 net profit forecast by 6% to 530 million yuan and the company's 2018 net profit forecast by 10% to 724 million yuan.

Valuation and suggestion

The company's current share price corresponds to 8.7 times 2017 earnings and 6.5 times 2018 earnings. Maintain the company's "recommended" rating and lower its target price by 2% to HK $4.2, corresponding to 10 times 2017 price-to-earnings ratio.

Risk.

Demand growth is lower than expected; raw material prices are rising; valuations are falling.