The company's tire sales declined in 2018, dragging down revenue; sales stopped falling and picked up in 19Q1, and the purchase price of raw materials fell, leading to a sharp increase in performance. We are optimistic that the company's long-term performance will improve as domestic production capacity expands and overseas two-wheel drive deployment. The company's 2019-21 EPS forecast was raised to $0.78/0.92/1.08, maintaining the target price of $17 and the “buy” rating.
The decline in tire sales in 2018 dragged down the decline in performance. In 2018, the company achieved revenue of 7.511 billion yuan, or -5.2% year on year; net profit of the mother was 483 million yuan, -0.3% year on year. Affected by factors such as trade frictions and weak downstream demand in 2018, the annual tire sales volume was 167.5552 million, -10% compared to the previous year, which was the main factor dragging down the decline in revenue. However, benefiting from falling raw material prices, the company's gross margin increased 2.22pcts year-on-year to 21.34% in 2018, increasing profitability.
Sales picked up in the first quarter of 2019, and performance increased dramatically. In 19Q1, the company achieved operating income of 1,882 million yuan, +4.3% year on year; it achieved net profit of 152 million yuan to the mother, +53.3% year on year. Benefiting from the recovery in the sales environment, the company sold 4,5626 million tires in the first quarter of 2019, +15% year on year. At the same time, due to the year-on-year decline in procurement prices of major raw materials, the company's gross profit margin in the first quarter was 21.14%, an increase of 1 pct over the previous year.
Domestic production capacity is expanding steadily, and volume is expected to be released in 2019. The company currently has a production capacity of 22 million tires, including 6 million commercial vehicle tires, 16 million passenger tires, 230,000 oblique engineering tires, and 150,000 radial tires, leading the country in production capacity and product structure. Huamao Phase II (1 million commercial vehicle tires) and Huayang Phase II (4 million passenger car tires), which are under construction, are expected to be put into use in the first half of 2019, and are expected to be released in 2019, providing a foundation for the company's sales and performance growth.
A breakthrough in the trade dilemma can be expected, and I am optimistic about the company's long-term development. The company's US plant project has been built. The first phase of the 5 million passenger tire project is scheduled to be put into operation in 2020; the second phase of the 1 million commercial tire project is scheduled to be put into operation in 2023. The company's capacity expansion in the US is expected to avoid trade barriers such as high tariffs, reduce potential export trade risks, further optimize the global market layout, and be optimistic about long-term performance development.
Risk factors: risk of international trade friction; risk of fluctuations in raw material prices; production capacity release falls short of expectations.
Investment advice: We are optimistic about the company's long-term performance improvement as domestic production capacity expands and overseas two-wheel drive deployment. Since tire sales in 19Q1 were far higher than expected, the net profit forecast for the year 2019-20 was raised to 626 million/734 million yuan (the original forecast was 443 million/531 million yuan), and the forecast for 2021 was increased to 867 million yuan. The corresponding EPS was 0.78/0.92/1.08 yuan respectively. Maintain the target price of $17 (corresponding to 22 times PE in 2019) and the “buy” rating.