Incident: The company released its performance report for the third quarter of 2019. The company achieved revenue of 3.136 billion yuan, an increase of 8.65% over the previous year; Guimu's net profit was 289.614 million yuan, a decrease of 46.26% over the previous year; net profit after deducting non-Gumo's net profit was 74.2463 million yuan, a decrease of 26.22% over the previous year. The company achieved revenue of 977 million yuan in a single quarter in the third quarter, an increase of 7.26% over the previous year, and achieved net profit of -685,400 yuan (-22871,000 yuan in the same period last year), and achieved net profit of 31,5961 million yuan after deducting non-return to the mother, a decrease of 52.12% over the previous year. During the reporting period, the company's net cash flow from operating activities was -160 million yuan, and the operating cash flow for the same period last year was -236 million yuan.
The production capacity of the radial tire project is at a climbing stage, and cost increases are dragging down performance: during the reporting period, the company achieved a comprehensive product gross profit margin of 13.89%, a year-on-year decrease of 2.08 pct. Among them, the single-quarter gross profit margin for the third quarter was 13.92%, down 2.22 pct from the previous year, and a decrease of 0.42 pct from the previous month. The decline in the company's gross margin is mainly due to the company's previous environmental relocation, transformation and upgrading. The high-performance passenger car tire project at the Green Tire Industry 4.0 demonstration base is still in the stage of climbing production capacity, leading to an increase in the fixed cost of the company's products per unit. We believe that in the future, with the full commissioning of the company's Shiyan subsidiary's Dongfeng Tire Industry 4.0 plant and the company's subsequent industrial integration with Hengyu Technology, the company's profitability is expected to gradually improve.
The four-fee ratio has been reduced, and the intelligent factory has a big advantage: during the reporting period, the company's four-fee ratio totaled 16.10%, a year-on-year decrease of 1.29 pct. Among them, sales expenses, management expenses, R&D expenses, and financial expenses accounted for 6.15%, 3.92%, 2.74%, and 3.28% of operating income, respectively, down 0.22 pct, 0.82 pct, 0.03 pct and 0.22 pct, respectively. Currently, the production capacity of the company's all-steel radial tires and half-steel radial tires uses intelligent manufacturing technology. We believe that with the gradual improvement of production capacity upgrades, the company's smart factories are expected to gradually develop their own advantages, and the company's cost rate is expected to be further reduced.
The merger and acquisition of Kumho Tire is expected to develop collaboratively: In July 2018, there was a new major development in the merger and acquisition of Kumho Tire by Double Star Group, the second-largest tire manufacturer in South Korea. Double Star reached an agreement with the Kumho Tire creditor group led by Korea Industrial Bank (KDB). Shuangxing held 45% of Kumho Tire's shares for about 3.9 billion yuan and officially became its controlling shareholder. Meanwhile, creditor groups such as KDB will continue to hold 23% of the shares and maintain their position as the second largest shareholder. Shuangxing completed the merger and acquisition of Kumho Tire in a “snake-eating” manner. We are optimistic about this round of mergers and acquisitions between Double Star Tire and Kumho Tire. We think if Qingdao Double Star and Kumho Tire can learn from each other's strengths and weaknesses, the two are expected to develop collaboratively and become new giants in the tire industry.
A strategic cooperation agreement was signed with Hainan Rubber, and the company's cost-side competitiveness is expected to improve: On October 12, 2019, the company and Hainan Rubber signed a “Strategic Cooperation Agreement” in Haikou, Hainan. The two parties are expected to become strategic partners in the tire and rubber fields to jointly develop the market. If successfully implemented, this strategic cooperation can not only reduce the company's inventory of natural rubber raw materials, but also improve the response speed of the supply of natural rubber raw materials. At the same time, it can also reduce the capital consumption of the company's raw material inventory, which is conducive to the reduction of the company's financial expenses and the improvement of cost-side competitiveness.
Investment advice: As a leading enterprise in the domestic established tire industry, the company took the lead in laying out “Industry 4.0”
Intelligent production. As the company's production capacity renewal is gradually completed, the company's profitability is expected to increase. Furthermore, we are optimistic about the company's merger and acquisition of Kumho Tire. We believe that Qingdao Double Star and Kumho Tire are expected to complement each other's strengths and develop collaboratively, and the company is expected to become a new leader in the tire industry in the future. It is estimated that in 2019-2021, the company will achieve revenue of 4.186 billion, 4.906 million, 5.775 million, up 11.8%, 17.7% year-on-year; net profit of 33 million, 67 million, and 155 million yuan, up 20.9%, 100.8%, and 132.9% over the previous year, corresponding to PE 117.33X, 58.44X, 25.10X. Give a “Recommended” rating.
Risk warning: risks such as competition in the industry; new production capacity falling short of expectations; rising raw material prices; falling tire demand.
