Rebuilding Sailun: Multi-billion dollar plans for new tyre and materials factories analysed

The recent news that Sailun Tyre plans to invest 17.48 billion yuan in setting up two factories in Dongjiakou, Qingdao, has received widespread coverage in Chinese media. The investment in the tyre factory is 15.18 billion yuan, involving 20 million sets of semi-steel radial tyres, 10 million sets of all-steel radial tyres, and 150,000 tons of OTR tyres. The investment in the 500,000-ton new material factory is 2.302 billion yuan. Sailun’s various production bases will mainly use the material factory’s products. According to Sailun’s calculations, the Dongjiakou tyre factory will achieve 21.9 billion yuan revenue and 2.96 billion yuan profit yearly. The annual turnover of the material factory is 12.035 billion yuan, and the average annual net profit is 923 million yuan.

In an interview with China’s Jiemian publication, the representative of Sailun Securities Department talked about the investment’s purpose: “Although the tyre market is not particularly optimistic at the moment, (Sailun) believes that the (unoptimistic situation) is only short-term. In 2021, domestic car ownership exceeded 300 million, a year-on-year increase of 7.47%. The demand for replacement (tyre) is relatively strong and has a certain scale. Meanwhile, (Sailun) company’s business mainly exports, and orders in the export market are in short supply. (Sailun) put forward a production expansion plan after comprehensively considering various environmental factors in the market.”

Sailun’s large-scale investment has provoked extensive discussion in China’s tyre industry. The Shanghai Securities News stated that the tyre industry’s plight had accelerated the exit of small and medium tyre factories, and the leading enterprises have broken through the industry reshuffle by expanding production capacity and adjusting structure.

The Jiemian and Qingdao Daily described the tyre manufacturer’s investment as “rebuilding Sailun”. In 2021, Sailun’s revenue was 17.998 billion yuan, and the net profit attributable to shareholders of the listed company was 1.313 billion yuan. If both Dongjiakou factories are put into operation, Sailun’s revenue and net profit may more than double.

Sailun’s investment makes the slogan “rebuilding Sailun” look like comment on future production capacity. After the Dongjiakou tyre plant is put into operation, the intended annual production capacity of Sailun’s semi-steel tyres will increase by 29.41 per cent from the current 68 million pieces to 88 million, and all-steel tyres will increase from 16.6 million to 26.6 million, an increase of 60 per cent. The annual capacity of OTR tyres will grow from 160,000 tons to 310,000 tons, almost doubling.

It is worth noting that after the Dongjiakou tyre factory is implemented, Sailun will be able to produce 114.6 million radial tyres and 310,000 tons of OTR tyres every year. The Qingdao Daily stated that Sailun would enter the “club of tyre companies with an annual output of 100 million tyres” to explain the bright prospects of this tyre company.

A few media soures questioned Sailun’s investment. The Changjiang Times expressed doubts about the source of funds for Sailun’s investment and reminded the tyre manufacturer not to be blind and aggressive, to prevent the hidden risks of expanding financial pressure.

The 21st Century Business Herald interview explained the purpose of Sailun’s expansion from another level. Zhang Yansheng, chief analyst of the chemical industry in Cinda Securities, said: “In the context of the Chinese government’s stricter scrutiny of energy consumption and production capacity quotas, Sailun may obtain quotas in advance through the Dongjiakou plant’s investment, paving the way for future capacity expansion. Regarding the actual capacity expansion arrangement, Sailun prioritises the expansion of OTR tyres with higher barriers and better profitability. The construction of semi-steel tyres and all-steel tyres can be adjusted flexibly according to market conditions.”

Another chemical industry researcher at a securities company interviewed by the 21st Century Business Herald expressed a similar view: “The purpose of the Sailun Dongjiakou Factory is to seize quota through project approval. It will be more and more difficult to approve quotas for such a large capacity in the future. In recent years, the Shandong government has made more and more efforts to adjust the tyre industry structure, requiring the industry to transform and upgrade. Therefore, although the current industry boom is not optimistic, Sailun has to carry out this expansion and use phased construction to ‘exchange time for space’ to deal with the cycle of the industry.”