As we believe that the risks facing automakers still exist in the future, we have more investment opportunities for other suppliers in the industry chain. In 2019, against the backdrop of the global economic downturn, sales in the world's major auto markets recorded a year-on-year decline. Sales in China fell 10.3% in the first nine months compared with the same period a year earlier.
Of this total, passenger car sales fell 11.7% year-on-year, while commercial vehicle sales fell only 3.4%. Therefore, if sales are heavily dependent on new car sales or China, suppliers will be under a lot of pressure. The tire industry is one of the noteworthy industries, as sales mainly come from the replacement market (about 75%) rather than directly to carmakers. As a result, it has been slightly affected by the decline in global new car sales. The average tire replacement period of commercial vehicles is 9-12 months and that of passenger vehicles is about 3-4 years, so the tire growth is mainly due to the stock market and economic activity.
Pu Lin Chengshan (or "the company") is the only listed tire manufacturer in Hong Kong, and production capacity has remained high so far this year, with the company selling 6.07 million tires in the first half of 2019, up 10.4 per cent from a year earlier. In particular, sales of all-steel radial tires increased by 13.6% over the same period last year, while sales of semi-steel radial tires increased by 4.8% compared with the same period last year. By sales channel, sales contribution mainly comes from dealers (revenue growth of 23.2% year-on-year), especially international dealers. Sales in all regions except the United States recorded year-on-year growth. The decline in sales in the United States may be due to a decline in orders from private-brand customers and the impact of tariffs.
One risk is that the export market imposes additional duties and taxes on companies, which applies to most Chinese tire companies, such as anti-dumping / countervailing duties and additional duties issued on Chinese tire companies in Europe and the United States. As a result, US imports of Chinese tires fell 18.8 per cent from January to September 2019 compared with the same period last year, accounting for 17 per cent of US overseas imports, the lowest since 1997. The company completed the order ahead of schedule in the first quarter of this year, adopting a defensive strategy against US sales. At the same time, the company has expanded its production base to Thailand. The first phase of the Thai plant is expected to start production in mid-2020, increasing the production capacity of 800000 all-steel radial tires and 4 million semi-steel radial tires. Capacity is expected to double by the time the second phase is completed in 2020. The Thai factory is expected to serve customers from the United States and Europe to avoid additional tariffs from the relevant governments. Opening overseas factories is a common practice for many Chinese tire companies to expand their operations. Southeast Asian countries are regular destinations for tire factories, mainly attracted by their low production costs and proximity to rubber supplies. For example, China Strategy Rubber and Linglong Tire have built a production base in Thailand, while Racing Wheel Tire has chosen to build a factory in Vietnam.
The low oil price environment is good for tire manufacturers, and we expect the company's gross profit margin to show a sustained and steady growth trend. A key determinant of the increase in gross profit margin is the stable price of rubber, as the price of raw materials accounts for 75% of the cost of sales, of which more than 50% are rubber costs. From the perspective of historical trends, oil prices are highly related to rubber prices because synthetic rubber is based on oil production. Therefore, stable oil prices are very important to the profits of tire manufacturers. Gross profit margin remained stable at 19.2% in the first half of 2019. We expect oil prices to remain low in the future, as the slow growth in crude oil demand remains a major concern, which has begun to put pressure on oil prices. In terms of seasonality, production in the second half of 2019 will be better than that in the first half, as the peak season will come in the fourth quarter and economic activity will become more active with the increase in China's logistics demand.
We have a "buy" investment rating on the company, with a target price of HK $7.90, equivalent to 8.5 times 2019 earnings and 6.2 times 2020 earnings. Downside risks to the company include: 1) a sharp rise in international oil prices; 2) the possible failure of new business at Thai factories; and 3) more international sanctions on Chinese tire companies.