The launch of the company's new production capacity in 2019 led to a boom in tire production and sales. Combined sales expenses dropped sharply. The net profit of the mother was 847 million yuan for the whole year, a sharp increase of 75.4% over the previous year. In the first quarter of 2020, the company achieved net profit of 160 million yuan to the mother, +5.4% year on year. We are optimistic that the company will achieve long-term growth driven by the release of new domestic production capacity and the layout of overseas production capacity. We predict that the company's EPS will be 1.13/1.19/1.22 yuan respectively in 2020-2022, maintaining the target price of 17.0 yuan and the “buy” rating.
The introduction of new production capacity in 2019 led to a boom in tire production and sales, and performance increased sharply over the same period last year. In 2019, the company achieved operating income of 7.941 billion yuan, +5.7% year on year; net profit of the mother was 847 million yuan, +75.4% year on year.
Benefiting from the launch of the second phase of the fundraising projects of Huamao Branch and Huayang Branch, as well as continued market development, the company's tire production and sales grew rapidly. The company produced 19.06 million tires throughout the year, +13.6% year on year, and achieved 2022 million tire sales, +20.7% year on year. Due to falling raw material prices, the unit production cost of tires in 2019 was -14.1% year on year, and the average tire sales price was -12.4% year on year.
The decline in raw material prices boosted gross profit margins, and sales expenses fell sharply. Benefiting from falling raw material prices, the company's gross margin level increased year-on-year during the reporting period, achieving a gross profit margin of 22.9% in 2019, +1.4pct year-on-year. In terms of cost rate, due to the expiration of the company's “National Brand Plan” advertisement in 2019, market development expenses decreased by 163 million yuan year-on-year, and the annual sales expenses rate was -2.0pct to 5.9% year-on-year. Benefiting from an increase in gross margin and a sharp decrease in sales expenses ratio, the company achieved a net interest rate of 10.7% in 2019, +4.2pct over the previous year.
First-quarter results bucked the trend, and profitability increased year over year. In the first quarter of 2020, the company achieved operating income of 1,811 million yuan, or -3.8% year on year; net profit of the mother was 160 million yuan, +5.4% year on year. Benefiting from the release of additional production capacity, the company produced 4.55 million tires in the first quarter, +12.8% year on year, and achieved sales of 4.56 million tires, +6.3% year on year. As product prices fell due to falling raw material prices, the average tire sales price in the first quarter was -9.4% year on year, but profitability increased year on year. The gross profit margin for the first quarter was 22.3%, +1.1 pct year on year.
New production capacity has been steadily released, and I am optimistic about the company's long-term development. The company currently has a production capacity of more than 24 million tires, including 6 million commercial vehicle tires, 18 million passenger tires, 230,000 oblique engineering tires, and 150,000 radial tires, leading the country in production capacity and product structure. In 2019, the company Huamao Phase II (1 million commercial vehicle tires) and Huayang Phase II (4 million passenger car tires) were put into operation one after another, and 2020 is expected to fully release performance.
The company's US plant is currently undergoing land leveling and plant design. It is optimistic that the company's tire production and sales will increase further after completion and commissioning in the future, and that the company will develop in the long term.
Risk factors: A sharp drop in product prices; the risk of fluctuations in raw material prices; the release of production capacity falling short of expectations; the risk of international trade friction; falling short of control of the epidemic drags down demand as expected.
Investment advice: We are optimistic that the company will achieve long-term growth driven by the release of new domestic production capacity and overseas production capacity layout. Due to the sharp reduction in sales expenses due to the expiration of the company's “National Brand Plan” advertisement in 2019, the company's net profit forecast for 2020-2021 was raised to 906/951 million yuan (the original forecast was 734/867 million yuan), and the new 2022 return net profit forecast was 978 million yuan. The corresponding EPS forecast for the 2020-2022 EPS forecast was 1.13/1.19/1.22 yuan, respectively. Maintain the target price of 17.0 yuan (corresponding to 15xPE in 2020) and the “buy” rating.