Incidents:

The company released its 2019 annual report. During the reporting period, it achieved revenue of 7.940 billion yuan, +5.72% year on year, and achieved net profit of 847 million yuan, +75.38% year on year, 3.50 yuan for every 10 shares.

Comment:

Operation was steady in 2019, and production and sales increased steadily: in 2019, the company's tire production reached 19.0587 million, +13.62% year on year, sales volume 2022.16 million, +20.69% year on year. The increase in production and sales was mainly due to the expansion of production capacity in Huayang and Huamao branches. During the year, Huayang Branch increased production of high-performance passenger car tires by about 1.5 million during the year, and Huamao Branch Zone 2 increased production of high-performance commercial vehicle tires by about 300,000 during the year. In 2019, the Huamao branch completed the infrastructure construction of the relocation and upgrade project for the annual output of 2 million high-performance intelligent all-steel radial tires, and the Huayang branch's annual output of 8 million high-performance passenger tires. Looking at the product structure, the proportion of the company's commercial vehicle tires without inner tubes reached 66%, +3pct, passenger tires 16 and above accounted for 40.6%, +3pct.

Cost declines, cost rates are well controlled, and performance elasticity is evident: the overall operation in 2019 was relatively steady. On the one hand, there was a slight decline in raw materials, combined with a decline in the cost side brought about by the adjustment of the export tax rebate policy. Therefore, on top of the 5.72% increase in the company's overall revenue, the increase in operating costs was only 3.63%. Furthermore, control on the expense side has further increased operating profits and increased the flexibility of performance. In 2019, due to the expiration of the “National Brand Plan” advertisement, sales expenses decreased by 123 million yuan year on year, sales expenses rate also decreased from 7.91% to 5.93%, and operating profit increased 79.21% year on year to 1,239 million yuan.

Profit forecast: The net profit attributable to the mother in 2020-2022 is estimated to be 874/90/981 million yuan, the corresponding PE is 12/12/11 times respectively, and the corresponding EPS is 1.09/1.13/1.23 yuan respectively. The first coverage gave a “buy” rating.

Risk warning: Drastic changes in exchange rates and the macroeconomic downturn have caused a sharp decline in demand.