Analysts doubt on Guizhou Tyre's additional placement plan

Guizhou Tyre Co., Ltd. has gambled its future on all-steel radial tire. However, whether it could secure the expected growth remained uncertain, industrial analysts said.

The company initiated an additional share issue on August 17, planning to raise up to 1.6 billion yuan to invest in a technology renovation project for all-steel radial tires.

-- Optimistic future of all-steel radial tires

In eyes of Guizhou Tyre, the future of all-steel radial tires is quite promised.

The company started a betterment project of its production lines in alien places in February 2011, with an investment of about 7.109 billion yuan and construction period set at six years.

The Phase One of the project involved an investment of 2.5 billion yuan and it is expected to realize an annual output capacity of 1.2 million high-performance radial tires for truck use and 50,000 high-performance all-steel engineering radial tires.

Only less than one year and a half later, in July 2012, the Phase One project was changed to a specialized one for all-steel engineering radial tires, with an annual output capacity of 260,000 such tires and construction period at 18 months.

The altered project, once put into operation, is expected to generate average annual sales revenue of two billion yuan and profits of 280 million yuan, with profit margin at 15.34%.

It all sounds good except for one thing – outside investors were still mudded about the progress of the Phase One project after its operating for already more than a year.

-- Radial tires constitute the trend for engineering-use tire products

“Radial tire for engineering vehicle use is an inevitable trend of tire technology development. In 2011, engineering radial tires accounted for only 16.21% of China’s domestically produced tires for engineering use, which indicated there’s still huge room for development,” said Guizhou Tyre.

“Radial tire, an upgraded product following diagonal tires, represents the focus of domestic tire makers to improve their product structure. The market of radial tires has seen a strong recovery after remaining pale for two years. Many enterprises have seen demand exceeding supply despite of already operating on full capacity. Along with the ever increasing downstream demand for automobiles, the market of radial tires will remain bullish for at least the short term,” noted Li Jianan, an analyst with CI Consulting.

But the consulting firm also points out that China’s domestic tire industry is still confronted with strong headwinds in the first half of this year, amidst intensifying market competition.

According to a tire industry report, as of the end of March 2012, there were a total of 521 tire enterprises with annual operating turnover at over 20 million yuan in China, with combined assets at 299.58 billion yuan, up 15.65% year on year. A separate data source shows that the radial tires produced in Shandong province accounted for 39.3% of the country’s total radial tire production in 2011.

However, the financial reports of global tire tycoons for the first half of 2012 showed that almost all tire enterprises had posted decline in sales in recent months.

Some industry observers believed that the point of life and death of steel-belted tire makers had grown to 3.6 million units, up significantly from the 2 million units two years ago.

Even for all-steel tire makers, they’ll have to produce at least 2 million units to secure profits, which might have explained the reason why Guizhou Tyre constantly sought expansion in output capacity in recent years.

Go back to Guizhou Tyre’s Phase One tire technology renovation project. Its scheduled operation rate in the second and the third year were at 30% and 80% respectively, and the project is expected to be in full operation in the fourth year.

But how about the market of all-steel radial tires four years later? Will it be big enough to digest the huge production capacity? The reporter has tried to contact with Guizhou Tyre in the hope of finding the answers but failed to get any response.

-- Profitability still hangs in balance

Upon completion of the project, the proportion of radial tires to Guizhou Tyre’s total production is expected to grow further, lifting its average annual operating revenues by 521%.

However, Guizhou Tyre’s profitability was still under a cloud affected by its recent lackluster market performance. In 2011, the company realized annual operating revenues of 7.536 billion yuan, with profits at 90.10 million yuan, down noticeably from the 150 million yuan logged in 2010.

In the first half of 2012, Guizhou Tyre’s revenues stayed at 3.47 billion yuan, whereas its net profits during the period came to only 45.6541 million yuan, accounting for 1.3% of the company’s revenue.

Facing adverse market condition, whether Guizhou Tyre could achieve the anticipated profits from the investment move is still uncertain.

“Firstly, most of Guizhou Tyre’s products are for domestic consumers, and only about 20% of products are delivered to overseas markets, the North America market, to be exact. And the profit margin of its export business has long been small. Secondly, Guizhou Tyre actually enjoys a comparatively big share in the diagonal tire segment, which could help the company withstand the headwinds of rapidly changing market condition. Lastly, under the traditional sales mode of “producing goods before selling products”,enterprises will have not only to bear the pressure of mounting prices of raw materials like natural rubber, but to tackle the intensifying market competition,” noted Li.

(Contributed by Olivia, Olivia@tireworld.com.cn)