Pulin Chengshan's shareholder profits rose 0.2 per cent year-on-year to 480 million yuan in 2019, which was lower than we expected. The poor performance was mainly due to weak sales growth and lower-than-expected gross margin in the second half of 2019. Revenue rose 7.4% year-on-year to 5.589 billion yuan in 2019, mainly due to sales growth. Among them, tire sales were 12.33 million, an increase of 11.2% over the same period last year. The average selling price has fallen due to the weak car market, continued tight trade between China and the United States, and significant price pressure from the expansion of overseas dealers. Despite the decline in the unit cost of raw materials, the gross profit margin remained stable, falling slightly by 0.1 percentage point year-on-year to 19.2%.
The growth outlook continues. We expect the company to outperform its peers because its recovery rate is about 90%, which is higher than 60% and 70% in the same industry. A variety of sales locations (China: 60% vs. overseas: 40%) and product demand (replacement volume: 70% vs. direct sales: 30%) keep their sales target in double digits this year. The Thai plant will start production in the second quarter of 2020, which will be a strong growth engine for the company.
We have pushed the base year to 2020. We have lowered our profit forecasts for shareholders from 2020 to 2021 by 25.9% by 32.8% respectively. We have lowered our forecasts for 2020 and 2021 because we have taken a more conservative stance on sales and gross margin growth. We expect shareholder net profit to grow by 16.7%, 33.4% and 23.5% from 2020 to 2022.
Due to novel coronavirus's overseas uncertainty, we downgraded our investment rating to "Collection" and lowered our target price to HK $8.00, equivalent to 8.1 times 2020 price-to-earnings ratio and 6.1 times 2021 price-to-earnings ratio.
The company's downside risks include: 1) a sharp rise in international oil prices; 2) the possible failure of new business to build a plant in Thailand; and 3) more international sanctions against Chinese tire companies.
