For days, several rounds of information indicating the rise in tire price was overwhelming, in which four listed tire enterprises including Triangle Tire, General Science Technology, Linglong Tire and Sailun Jinyu all announced to raise the selling price. Up to August 31, nine listed tire companies had released their semiannual reports successively. It is seen that both production and sale of enterprises in the industry were booming and data was boosting against the trend, while the gross profit rate of enterprises fell obviously, and two enterprises had a loss in net profit. It indicates that the increase in tire price still falls behind of the increase in the price of raw materials.
However, due to the strategic inventory strategy, two tire dealers listed on the “New OTC Market” were not impacted in the fluctuation of tire price, some of which made a sound profit growth.
“With the using up of the low-price tire inventory of the dealers, the gradual implementation of the price adjustment measures and the coming of the peak selling season of traditional tires, it is predicted that the sales volume of tires will increase substantially and manufacturing enterprises will have a turning point in the economic benefit.” A market participant analyzed.
Rising Cost & Falling Profitability
There is a strong positive correlation between the fluctuation of rubber price and the production cost of tires, and a stable purchasing price of raw materials is benefit for controlling the cost in the tire industry. However, once the price of raw materials such as NR rises, the rising of the selling price of tire products may fall behind to some extent, and the rising range is not as big as that of the price of raw materials. Especially for the enterprises with a high proportion of export orders, they usually set the price 1~2 months in advance, which causes the rise in the price of raw materials can’t be transmitted to tire products timely and effectively. As a result, manufacturing enterprises will be faced with the risks of rising cost and falling gross profit rate, thus affecting the profitability and business performance.
Since the second half year of 2016, the price of main raw materials of tires such as rubber, carbon black and chemicals have kept rising and fluctuating largely, making tire enterprises be generally vulnerable to the pressure of the rising cost and greatly affecting their profitability. Though the price falls to some extent at present, it is still much higher than that in 2016.
“More output leads to more loss.” A principal of one enterprise indicated helplessly.
“In the first half year, the output of integrative casing of 41 member enterprises increased by 10.12% (on a year-on-year basis, similarly hereinafter), and the sales revenue increased by 14.89%. However, the realized total profits of 38 tire enterprises in the statistics decreased by 62.63%. The profit rate of sales revenue concerning tires was only 1.17%, which decreased by 3.02%.” Shi Yifeng, the secretary-general of CRIA Tire Branch introduced. This situation is also fully embodied in the interim report of 9 listed companies.
The semiannual report of Sailun Jinyu Group Co., Ltd. shows that because the price rising of raw materials was mainly concentrated in the fourth quarter of 2016, and this company was still using the original inventory at the beginning of the price rising of raw materials, taking the whole year of 2016 as a whole, this company still kept a good profitability level. Up to the first quarter, the cost of raw materials was at a high level, and the price hike effect made by this company on some tire products since November 2016 hasn’t been totally reflected, so the business performance suffered from a loss in the first quarter; in the second quarter, with the sufficient adjustment of the product price, this company realized a profit and the business performance turned better obviously, but the net profit still decreased by 37.97%. Therefore, in the first half year, though the business income of Sailun Jinyu increased by 26.72%, the net profit decreased by 90.76%.
As calculated and estimated by this company, in the first half year, the price of NR increased by 63.16%, that of SR increased by 66.20%, that of carbon black increased by 64.12%, and that of all-steel cord increased by 25.51%.
The sharp rise in price of raw materials also brings about the changes in the net cash flow generated from operating activities - sharp price rise and increasing inventory, leading to increasing payment for purchase and negative net cash flow with a decrease of 153.83%.
In the first half year, the operation revenue of Giti Tire Co., Ltd. increased by 25.51%, but the operation profit in the corresponding period decreased by 75.48%. As analyzed by this company, the increase in operation revenue was partly caused by the increase in the sales volume of tires, and partly caused by the rising of the selling price of tire products. However, because there was a time lag in the adjustment of the selling price of products, the rising range of the average unit purchasing price of main raw materials was much higher than the adjustment range of the selling price of products. As a result, the net profit in the first half year fell substantially, and the return on equity also decreased.
From the view of the cash flow reflecting the operating activities, though the cash inflow of Giti Tire increased by RMB 269 Million Yuan due to the increase in sales volume, the cash outflow also increased by RMB 956 Million Yuan due to such reasons as price rising of raw materials and stock increase. Data shows that in the middle of the year, the inventory of this company rose by 39.08% than that at the beginning of the year; and the accounts receivable increased by RMB 75 Million Yuan than those at the beginning of the year, which increased by 58.51%.
The net cash flow generated from operating activities of Qingdao Doublestar Co., Ltd. decreased by 500.53%. This company analyzed that the decrease in the net cash flow generated from operating activities was mainly caused by the increase of the accounts receivable (the increased matched sale of the car plant led to the balance increase of accounts receivable), the increase of the inventory balance, and the concentrative redemption of bills payable in due course.
The operating cost of Guizhou Tire Co., Ltd. increased by 28.81%, the net cash flow generated from operating activities decreased by 88.45%, and the cash paid for purchasing goods and accepting labor services increased accordingly, which also because the price of raw materials rose substantially.
In the first half year, the operation revenue of Triangle Tire Co., Ltd. increased by 22.79%, but its operation cost increased by 37.94%, its net profit decreased by 29.88%, and the net cash flow generated from operating activities decreased by 117.31%. As analyzed by this company, one of the main reasons for the decrease in net profit was that the profit/loss on export exchange decreased the profit of the current period, and the other was that the selling price lag in the domestic market affected the profit; and the decrease in net cash flow was mainly caused by the increase in the purchase amount of raw materials in the first quarter and the changes in the payment methods of some purchasing business. However, in the second quarter, after Triangle Tire adopted scientific operation and management modes, the net operating cash flow increased obviously, and the realized net cash flow was RMB 408 Million Yuan.
The business cost of Jiangsu General Science Technology Co., Ltd. increased by 19.0%, and the net cash flow generated from operating activities decreased by 133.94%. The cause of change was the same as that of Triangle Tire.
The operation revenue of Shandong Linglong Tire Co., Ltd. increased by 42.01%, fulfilling 58.54% of the annual planned target; the operation cost increased by 61.83%; but the net profit decreased by 22.11%, only fulfilling 41.30% of the annual planned target; and the net cash flow generated from operating activities decreased by 165.22%.
The operation revenue of Aeolus Tire Co., Ltd. increased by 4.46%, the net profit attributable to shareholders of listed company suffered from a loss with a decrease of 218.33%, and the net cash flow generated from operating activities decreased by 110.57%, mainly caused by the increase in cash payment required by paying for purchasing the materials.
The income from tire manufacturing business of Shanghai Huayi Group Co., Ltd. increased by 13.44%, the business cost increased by 19.14%, and the net profit also suffered from a loss.
Shandong Land & Mining Huitong Special Tire Co., Ltd., a listed company relying on its parent company Shandong Land & Mining Group Co., Ltd., is a representative of middle and small-sized enterprises, whose main products include semi-steel engineering tires, semisteel agricultural tires and special tires. In the face of the rising price of raw materials, it couldn’t easily respond to the situation. In the first half year, the operation revenue was only RMB 356 Million Yuan, which increased by 7.36%, but the operation cost increased by 26.09%, and the gross profit rate was only 6.94% with a decrease of 13.82%.
Tire Dealers Mingled Hope and Fear
As analyzed by the market participants, due to the successive price adjustment of tires in the first quarter, the distributors stocked up a lot of goods, and the rise in purchasing price was lower than that in the selling price of the distributed tires. As the price of raw materials fell in the second quarter, distributors generally destocked their goods while waiting and seeing, and the inventory gradually returned to a normal level.
It is known from the financial data in the semiannual report of two enterprises which are listed on the “New OTC Market” as tire dealers, namely Wuxi Fenghua Intelligent Tyre Co., Ltd. and Nanjing Ninglun Tire Co., Ltd., the operation revenue of Fenghua Tyre increased by 24.80%, but the operation cost only increased by 14.7%. The gross profit rate was 13.89%, which increased by 7.85% compared with that of 6.04% in the corresponding period of last year. The growth rate of net profit attributable to the shareholders of the listed company was 249.40%, which was -376.02% in the same period of last year. As for the net cash flow generated from operating activities, the net inflow was RMB 3.32 Million Yuan, however, in the same period of last year, the net outflow was RMB 20.59 Million Yuan.
According to the analysis of this company, the reason for the increase in gross profit rate was that due to the strategic inventory strategy in the earlier stage, it purchased some tires which are well sold for stock when the price of tires was low, so the carry-over purchase cost reduced accordingly and the gross profit rate increased greatly. In addition, because of the increase in operation revenue, the carry-over rebates received from tire enterprises also increased. It not only guaranteed the clients’ purchase demand for tires, but also made contributions to the profit of the company.
In the first half year, the operation revenue of Ninglun Tire increased by 16.35%, and the gross profit rate increased by 8.06%, which decreased by about 2%. However, the net profit increased by 76.17%, which was 21.84% in the same period of last year. The inventory amount increased by 48.06%, which was mainly caused by the price rising of raw materials and increase in stocks.
Tire enterprises need to respond to the price fluctuation risk of raw materials, however dealers need to respond to the price fluctuation risk of tires. “In this round of price fluctuation of tires, many dealers were unable to resist and exited the market competition in the first half year.” Lei Changchun, the secretary-general of CRIA Marketing Committee, introduced, “The annual sales scale of two enterprises was both around RMB 100 Million Yuan. The scale was not very big, so it was not universal. After all, there were many tire dealers whose annual sales amount was around RMB 500 Million Yuan. In the first half year, some dealers indeed made a profit, but most of them complained about the tough business. Because tire enterprises raised the price but couldn’t get the goods while taking actions immediately. Although they got the goods, the downstream retailers felt hard to calmly accept the rising price and the sales situation became very difficult.”
The Effect of Price Hike in Tires Will Be Reflected in the Later Stage
While analyzing the possible risks in the future operation, besides competition risk, trade barrier risk and exchange rate risk in both domestic and overseas market as well as overseas operation risk for enterprises with plants abroad, all listed tire enterprises considered the price fluctuation risk of main raw materials as an important one.
In order to respond to the downturn trend of economic benefit, tire enterprises raised price one after another recently. Four listed companies released the range of price adjustment in its operation data announcement in the second quarter.
The product price of Triangle Tire increased by 6.02% compared with that in the first quarter. The tire price of Linglong Tire in the second quarter increased by 8.02% compared with that in the first quarter of last year. The average selling price of semi-steel tires of Sailun Jinyu increased by 14.55%, and that of all-steel tires increased by 15.70%. The tire price of General Science Technology in the second quarter increased by about 5% compared with that in the first quarter.
While adjusting the product price, listed enterprises also focus on responding to the price fluctuation of raw materials such as NR.
Triangle Tire keeps ascending its globally-developed brand position, improving the product quality and increasing the structural adjustment of products.
With regard to cost control and product quality, Sailun Jinyu improves the operating efficiency of the production organizations through the implementation of informatization projects and automation projects to reduce the cost efficiently and further control the cost inward as well as reduce the waste. With regard to scientific research and innovation, it will increase the input and reduce the cost fluctuation risk of raw materials by technical improvement and product transformation and upgrading.
Aeolus Tire indicates that it will scientifically research and judge the changes in the NR market, carry out strategic centralized purchasing, and promote the concordance and cooperation with Pirelli concerning the global purchasing business to jointly respond to the price fluctuation risk and reduce the purchasing cost of raw materials, thus improving the profitability and increasing the revenue by such ways as strengthening the integration of sales channels.
General Science Technology will focus on judging the price trend of NR and take unbalanced purchasing methods to purchase more NR at a low price; for other raw materials, it will continue increasing the purchase bidding and strive to reduce the purchase cost.
According to the analysis of the market participants, the effect of price hike on improving the profitability of tire enterprises wasn’t obviously shown in the second quarter. With the gradual stabilization of price and the implementation of the adjustment measures on the selling price of products, especially that the third quarter is a traditional booming quarter for the tire demand, it is predicted that the sales volume of tires will be greatly increased, and the profitability of the tire industry will be improved to some extent.
“In the first half year, due to the huge fluctuation in the price of raw materials, the Chinese tire market also fluctuated drastically. At the same time, the changes of demand, channel and price all bring big challenges to tire enterprises. However, there are opportunities in crisis, and we should take the difficulties in the industry as our opportunity.” Shen Jinrong, the president of Zhongce Rubber Group said in the dealer conference in the middle of the year.
