Matters:
Triangle Tire (601163) published its 2018 semi-annual report on August 27, 2018. During the reporting period, the company achieved operating income of 3.680 billion yuan, or -9.86% year on year; net profit of the mother was 201 million yuan, or -26.04% year on year. Our comments on this are as follows:
Comments:
Weak sales dragged down performance, and falling raw material prices raised gross profit levels. In 18Q2, the company achieved revenue of 1,874 million yuan, or -2.52% year on year; net profit of the mother was 102 million yuan, or -11.20% year on year. The decline in performance during the reporting period was mainly due to weak demand due to declining sentiment in the transportation market, and the company's tire sales fell 18.36% year-on-year. During the reporting period, the price center of Tianjiao, the main raw material of the product, fell sharply, driving the company's gross sales margin to increase 2.67 pct to 20.85% year-on-year in the first half of the year; the company's sales expenses ratio and management expenses ratio increased 2.37 and 1.23 pct respectively over the same period last year, causing the company's net interest rate to drop 1.21 pct to 5.47%.
Domestic production capacity is expanding steadily, and volume is expected to be released in 2019. The company currently produces 22 million tires per year, including 6 million commercial vehicle tires, 16 million passenger tires, 230,000 oblique engineering tires, 150,000 radial engineering tires, and 1,500 radial engineering giant tires. It has more than 5,000 product specifications, leading production capacity and product structure in China. The company's listed fund-raising projects, Huamao Phase II and Huayang Phase II, are scheduled to be put into operation in the second half of 2018. At that time, production capacity of 1 million high-performance commercial vehicle tires and 4 million high-performance passenger tires will be added. The additional production capacity is expected to reach production volume in the first half of 2019. At that time, it will provide a basis for the release of the company's performance.
The US factory is nearing construction, and a breakthrough in the trade woes can be expected. The company's US plant project is being planned. Among them, the first phase of the project with an annual output of 5 million high-performance passenger car tires is scheduled to be built this year and put into operation in 2020; the second phase of the project with an annual output of 1 million high-performance commercial vehicle tires is scheduled to be built in 2020 and put into operation in 2023. The expansion of the company's production capacity in the US is expected to avoid trade barriers such as high tariffs and reduce potential export trade risks; further optimize the global market layout and increase the company's penetration rate into the US and surrounding markets.
Embrace intelligent manufacturing and create differentiated products. The company currently has three national R&D platforms and has set up a US technology research and development center based on manufacturing upgrading. In the future, as the development model of China's tire industry shifts to high-end and branded, the company is expected to take advantage of its innovative R&D advantages and leading level of intelligent manufacturing to launch competitive differentiated products such as fire-retardant tires one after another. Performance can be expected to improve.
Risk factors: 1) the risk of international trade friction; 2) the risk of fluctuations in raw material prices; 3) the release of production capacity falls short of expectations.
Maintain a “buy” rating. The company's performance is under pressure in the short term, but the industry as a whole has bottomed out. We are optimistic about the company's many years of brand, technology accumulation and forward-looking layout in intelligent manufacturing. We maintain the 2018/19/20 EPS forecast at 0.74/0.87/1.01 yuan/share, and maintain the target price of 25 yuan (corresponding to 34 times 18 years) and the “buy” rating.