Tire producer feels tariffs heat

| Avery Chen 8 Oct 2018

Prinx Chengshan (Cayman) is seeking to raise as much as HK$1.01 billion when it begins trading tomorrow on the main board.

The Chinese tire manufacturer is offering 135 million shares, with 10 percent for the public and 90 percent international placing shares.

The offer price was set at between HK$5.89 and HK$7.50 per share, while the minimum investment was HK$3787.79 for a board lot of 500 shares.

Prinx Chengshan designs, manufactures and distributes all steel radial tires, semi-steel radial tires, and bias tires that are sold mainly under four brands, namely "Prinx," a medium to premium tire brand, as well as "Chengshan," "Austone" and "Fortune."

The company was the fifth largest Chinese all steel radial tire manufacturer and the third within the replacement tire segment in terms of sales revenue and volume in 2017, according to Frost & Sullivan.

Its portfolio has over 2,400 products meant for trucks, buses, passenger cars, agricultural and industrial vehicles. These products are sold in about 130 countries through mainland and overseas distributors. There are also direct sales to vehicle manufacturers and private label customers.

Cooper is the largest customer of Prinx Chengshan, which contributed 14.8 percent of its total sales in 2017, and 13.3 percent for three months ended March 31 this year.

The company is negotiating renewals of offtake agreements, which expire next year, with Cooper. If they fail, the revenue and profitability could be materially adversely affected, the company says.

In addition, the continuing volatility in prices for its raw materials may negatively affect its business. Raw materials account for about 70 percent of total cost of sales.

Prinx Chengshan's net profit climbed from 163.14 million yuan (HK$186.11 million) in 2015 to 291.21 million yuan in 2016, then fell 40.4 percent to 173.57 million yuan in 2017, as a result of a sudden fluctuation of the prices of natural and synthetic rubber.

Net profit surged over 4.6 times year-on-year to 108.36 million yuan for the three months ended March 31 this year from 19.30 million yuan, as rubber prices declined.

Revenue increased from 3.52 billion yuan in 2015, to 3.82 billion yuan in 2016 to 4.84 billion yuan in 2017, representing a CAGR of 17.2 percent, while the revenue recorded 1.36 billion yuan for the three months ended March 31 this year, up 6.32 yearly.

Meanwhile, all tires Prinx Chengshan exported to the United States during the track record period were included in the additional tariff list, which was set at 10 percent and effective as of last month. Washington also has said the tariff will be further raised to 25 percent next year.

Sales from the Americas made up 17.5 percent of total sales for the three months ended March 31 this year, according to the prospectus.

The company says it can use strategies, including passing the tariff onto customers and end users, and selling products in other regions, as well as constructing or acquiring an overseas production base to mitigate the impact of Sino-US trade conflict.

Sinotruk (Hong Kong) (3808) is the pre-IPO strategic shareholder of Prinx Chengshan, with an investment of US$40 million (HK$313.4 million), and it will hold 9.98 percent after going public.

The company intends to use about 40.5 percent of proceeds for investment in the first and second stage of all steel radial tires capacity expansion.

About 19.8 percent of the proceeds will be used to expand the semi-steel radial tires capacity. And about 30 percent will be used for mergers and acquisitions. Another 9.7 percent will be for working capital.

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