(Report Producer/Analyst: Guojin Securities, Chen Yi, Li Hanyu)
First, both internal and external expansion began, ushering in a performance inflection point
1.1 The product structure continued to be optimized, and the expansion of production capacity was steadily promoted
The company originated from Southern Rubber and is controlled by Hongdou Group and has a relatively stable shareholding structure.
On August 19, 2002, Southern Rubber, Mr. Dai Kexin and Ms. Chu Jufen, a natural person, jointly invested in the establishment of Hongdou Group Wuxi General Rubber Co., Ltd., which was listed on the Shanghai Stock Exchange in September 2016.
From the perspective of shareholding structure, the company's largest shareholder is Hongdou Group, which directly holds 41.62% of the shares as of the third quarter of 2023, and indirectly holds 1.52% of the company's equity through Wuxi Hongdou International Investment.
The ultimate actual controllers of Hongdou Group and the company are Zhou Yaoting, Zhou Haijiang, Liu Lianhong, Zhou Haiyan and Gu Cui, who respectively hold 37.41%, 40.63%, 1.45%, 2.82% and 1.21% of the shares of Hongdou Group Company.
Hongdou Group currently focuses on the three industries of clothing, tires and pharmaceuticals, and has more than 10 subsidiaries, including Hongdou Co., Ltd. and General Motors, two main board listed companies, as well as Yew Pharmaceutical's new third board innovation layer listed enterprises.
The company's products extend from the original motorcycle tires to automobile tires, and the category continues to be enriched.
From the perspective of the company's product layout, on July 31, 2004, the company's first all-steel wire radial truck tire 10.00R20 was successfully developed, and the company began to officially enter the automobile tire market.
In May 2005, the company changed its name to Jiangsu General Technology Co., Ltd., began to focus on the production and research and development of all-steel tires, and in March 2010, the company launched a project of 2 million all-steel radial tires, and quickly promoted the project to be put into production.
In June 2017, the development of new semi-steel tires was completed, and it officially set foot in the field of semi-steel tires, and the product layout has been further improved.
At present, the company's products include passenger car tires, all-steel truck and bus tires, bias tires, motorcycle tires, electric vehicle tires, etc., with a comprehensive layout and a wide range of products for different market segments.
The company started with all-steel tires, and the proportion of semi-steel tire revenue continued to increase.
From the perspective of the company's product layout history, in the past, the company only had all-steel tires and bias tire products, and only began to contribute revenue after officially entering the field of semi-steel tires in 2017, and with the expansion of the production capacity of semi-steel tires, its proportion in the company's revenue structure has also continued to increase, from 0.7% in 2017 to 42% in the first half of 2023.
From the perspective of profit performance in the first half of 2023, the gross profit margins of the company's semi-steel tires, bias tires and all-steel tires are 19.6%, 6.2% and 7.2% respectively.
With the production and production of the Southeast Asian base, the company's overseas revenue proportion has increased rapidly and its profitability has also begun to improve.
In December 2019, the company's first child in Thailand rolled off the production line, and in 2020, it began to contribute performance, and the company's overseas revenue accounted for 69% in the first half of this year from 14% in 2019, and the proportion of overseas gross profit increased from 16% in 2019 to 94% in the first half of this year.
In recent years, the profitability of the domestic market has been under significant pressure, the company's domestic gross profit margin has decreased from about 15% in the past to 1% in the first half of this year, and overseas profitability has been relatively stable, fluctuating at about 15% in recent years.
At present, the company has three production bases in China, Thailand and Cambodia, realizing a global layout and steadily expanding its production capacity.
By the end of 2022, the company had 4.2 million all-steel tires, 9 million semi-steel tires, 1 million light trucks and agricultural bias tires, 2.8 million motorcycle tires, and 2.9 million all-steel tires, 17 million semi-steel tires and 200,000 engineering tires under construction.
From the perspective of the long-term planning of the distribution of production capacity bases, by the end of 2022, the domestic Wuxi base will have 3.2 million all-steel tires and 3 million semi-steel tires, and 100,000 engineering tires are expected to be put into operation in 2024, and 6 million semi-steel tires are expected to be put into operation in 2025;
The Thailand base has 1 million all-steel tires and 6 million semi-steel tires, and plans to add 800,000 all-steel tires and 6 million semi-steel tires, of which 300,000 all-steel tires have been put into production this year, and 500,000 all-steel tires and 6 million semi-steel tires of the second phase of the project are expected to be put into production in 2025;
The Cambodian base plans to add 900,000 all-steel tires and 5 million semi-steel tires, both of which have been put into production this year and are expected to reach production next year.
In addition, the company has also planned a Baotou base project in China, including 1.2 million all-steel tires and 100,000 engineering tires, which are expected to be completed and put into operation in 2025.
The company's bases are planned to have a wealth of projects under construction, and the company's performance will be significantly increased after it is put into production.
In the past, the layout of the company's overseas bases was relatively weak, but with the official completion of the dual-base layout of the Cambodia project, the projects currently planned and under construction include the technical transformation projects of Thailand, Baotou project and Jiangsu base.
In terms of project planning and investment income of the sub-base, the total investment of the second phase of the project in Thailand is 1.88 billion yuan, the source of project funds is borrowing and self-raising, the construction period is 24 months, and the annual income is expected to be 2.13 billion yuan and the net profit is 370 million yuan.
The investment amount of the Baotou project is 1.51 billion yuan, the source of project funds is self-raising and bank loans, the construction period of the project is 20 months, the annual income is expected to be 1.56 billion yuan, and the net profit is 140 million yuan. Wuxi base has two projects of semi-steel tire and engineering tire technical transformation, of which the total investment of engineering tire technical transformation project is 170 million yuan, the source of funds is self-raising and bank loans, the project construction period is 18 months, the estimated income is 520 million yuan after reaching production, and the net profit is 40 million yuan, and the planned investment of semi-steel tire technical transformation project is 880 million yuan, the construction period is 18 months, and the annual income is expected to be 1.03 billion yuan and the net profit is 90 million yuan.
The construction period of the Cambodian project is 18 months, has been successfully put into operation this year, is currently in a state of climbing, is expected to achieve 2.21 billion revenue and 220 million net profit after reaching production, the total investment of the project is 1.91 billion, of which 800 million funds are raised through non-public offerings, the total amount of funds raised is 1.02 billion yuan, the remaining funds are used to supplement liquidity, the number of shares issued is 290 million shares, the issue price is 3.48 yuan / share, the issued shares have been listed in March this year.
1.2 The performance bottomed out and rebounded, and the internal management was optimized
The trough period has passed, the company's performance continues to improve, and profitability has rebounded rapidly.
Judging from the company's past historical performance, the company's revenue fluctuated around 3.5 billion yuan from 2016 to 2020, and the net profit attributable to the parent company showed a downward trend, from 170 million yuan in 2016 to 90 million yuan in 2018.
The reason for the lack of significant growth in revenue during the period is that the company did not expand production before 2018, and the subsequent new production capacity was in a ramp-up period after the launch of limited contribution to performance, and the decline in profits was affected by overseas trade policies, and in 2016, the United States began to launch a double reverse investigation on domestic truck and bus tires, although China won the lawsuit in 2017, but in 2018, the European Union began to implement double reverse for Chinese truck and bus tires until 2022 During the anti-dumping period, domestic tire companies were obviously under pressure, and because the company's overseas base did not roll off the production line for the first child until December 2019, there was no overseas production base during the period, resulting in a decline in the company's performance.
Since the beginning of 2021, although with the expansion of the company's overseas bases, the production, sales and revenue of tires have increased significantly, with revenue reaching more than 4 billion yuan, but under the influence of unfavorable factors such as the impact of the epidemic, sluggish domestic demand and soaring sea freight, the company's performance has declined sharply, and the net profit in 2021 has fallen to 10 million yuan, a year-on-year decrease of 87%, and various indicators such as sales gross margin, sales net profit margin, ROE and ROA, which reflect the company's profitability, have also fallen to the bottom, and the sales gross profit margin has fallen to 10% , with a net profit margin of just 0.2%.
In the first three quarters of this year, the company achieved a total operating income of 3.68 billion yuan, a year-on-year increase of 12.4%, and a net profit attributable to the parent company of 160 million yuan, a year-on-year increase of 594.6%.
With the recovery of demand and the commissioning of new overseas bases, the company's tire sales have rebounded rapidly.
Before 2019, the company's tire sales fluctuated between 6 million and 7 million pieces, with the production volume of overseas bases in 2020, the sales volume increased significantly, the sales volume exceeded 9 million in 2021, and the sales volume fell back to 8.54 million in 2022 under the background of industry pressure, and this year, with the improvement of demand and the rapid recovery of tire sales of the company's new base in Cambodia, the sales volume in the first three quarters was 8.92 million pieces, a year-on-year increase of 32%.
From the perspective of sales scale and revenue volume, the company is still relatively small compared with its peers, although the pace of change has been delayed to a certain extent due to the relatively late layout of overseas bases, but the overall change trend is basically the same as that of the same kind.
The company's profitability has improved significantly, and there is still room for improvement after the optimization of the production capacity structure.
With the recovery of the industry's prosperity this year, the company's net profit attributable to the parent company has been quickly repaired, and the net profit in the first three quarters was 160 million yuan, a year-on-year increase of 595%, which was a significant increase in the same industry under the background of last year's low base.
In terms of profitability, due to the relatively high proportion of the company's all-steel production capacity, the improvement of sales gross profit margin is relatively slow, and the profitability is expected to continue to improve with the increase of semi-steel production capacity in the future.
Cost reduction and efficiency improvement continued to be promoted, and internal management was continuously optimized.
From the perspective of expense control, the company's sales expense ratio has been maintained below 3% in recent years, the lowest among comparable companies, the management expense ratio has shown a downward trend, from 7.3% in 2019 to 4.6% in the third quarter of this year, which is in a low position among peers, and the company's R&D expense ratio is relatively low compared with its peers, and there is still room for improvement in the future.
Equity incentives cover a wide range and are fully motivated, and the performance targets demonstrate the company's confidence.
The company released the equity incentive plan on October 20, covering a total of 44 senior executives and core backbone personnel, with a trigger value of 250 million yuan and a target value of 330 million yuan in 2024, and a net profit of 380 million yuan in 2025 or a cumulative net profit of 630 million yuan in 2024-2025, and a target value of 500 million yuan in net profit or 8.3 in 2024-2025 100 million yuan, through the business performance target fully demonstrates the company's confidence.
Second, the tire industry has returned to a high boom, and domestic tire companies have accelerated their growth
The 2.1 trillion market has a broad space, and the demand is stable and resilient
The demand for tires is resilient, and the industry market is huge.
In the past two years, in the context of the global economic downturn and the epidemic restricting travel, automobile production has been affected, and at the same time, the decline in travel demand has led to a decrease in tire wear, and tire sales have declined from about 1.8 billion units in the previous period to 1.6 billion units in 2020, and in 2021, as the epidemic situation slows down, the overall sales volume has rebounded to more than 1.7 billion units, and the overall demand has stabilized in 2022, with sales of 1.75 billion units.
In the long run, benefiting from the steady expansion of the global car ownership scale, the demand for matching tires and replacement tire products will continue to improve in the future.
After 2015, the sales of the global tire market were also relatively stable, with overall fluctuations between $150 billion and $170 billion, and in 2022, with the recovery of demand, the overall sales also achieved significant growth, increasing by 5.3% year-on-year to $186.8 billion, reflecting the rigid demand and growth potential of the tire market to a certain extent.
The global tire consumption is dominated by the replacement market, and the proportion of the domestic tire replacement market is at a low level, and there is still broad room for growth in the future.
Compared with the global market, China's automobile and tire industry started late, the maturity of the end consumer market is not as good as that of Europe and the United States, and the automobile industry chain has gradually shifted to China in recent years, which also leads to the fact that China's tire market is still significantly different from international markets such as Europe and the United States in terms of structure.
In 2022, China's tire replacement market accounted for only 53%, far lower than the global average of 76%, except for the Asian market, the replacement demand in Europe and the United States and other regions in 2022 has accounted for more than 80%.
The compound growth rate of car ownership in mainland China in the past five years is 8%, and in 2022, the number of car ownership in mainland China will increase by 5.6% year-on-year to 320 million units.
With the simultaneous recovery of the automotive industry, domestic demand still has growth potential in the context of industrial chain transfer.
From the perspective of annual output changes in the downstream automotive field, the global automobile production fluctuated around 90 million from 2014 to 2019, and the tire supporting consumption fluctuated in the range of 450 million to 500 million, and the two began to show a negative growth trend in 2018.
In 2020, under the influence of the epidemic, the global consumption of supporting tires fell rapidly to 405 million, and from 2021 to 2022, with the recovery of the industry's production and operation, the demand also began to repair upward, and the overall demand in 2022 rebounded to 428 million.
From the perspective of the mainland market, automobile production has shown a bottom-up trend in the past two years, with the total output reaching 27.18 million units in 2022, a year-on-year increase of 3.5%.
The domestic demand of the all-steel tire market has contributed significantly, and the semi-steel tire market in Europe and the United States is still the main consumer market.
Since 2015, the global demand for all-steel tires has basically fluctuated around 220 million, due to the large scale of downstream infrastructure construction in the mainland and the high new demand for heavy construction vehicles, so the demand in the global market is relatively high, but in recent years, with the decline in transportation and infrastructure demand, the consumption of all-steel tires has fallen, and the proportion of consumption in the mainland has also decreased from 39% in 2020 to 26% in 2022.
In the future, considering the promotion of policies such as the Belt and Road Initiative, it is expected that the consumption demand of all-steel tires in the mainland is expected to be maintained, and the demand in Africa and other regions still has room for improvement.
In terms of semi-steel tires, the current demand in Europe and the United States still dominates, with consumption in Europe and North America accounting for 55% in 2022, and the consumption in the Chinese market accounting for only 16%, but considering the continuous increase in China's current automobile production and ownership, it is expected that China's demand share in the semi-steel tire market in the future will still have good room for improvement.
2.2 Domestic tire companies accelerated their overseas layout and steadily increased their market share
Under the supply-side reform, the domestic small production capacity has been cleared, and the industry has entered a stage of high-quality development.
Since 2014, affected by the national supply-side reform and environmental protection related policies, the tire industry has begun to carry out structural adjustments and gradually eliminate low-end backward production capacity in the industry, and the number of registered enterprises in the market has been greatly reduced from more than 500 before 2016 to 180 in 2022.
Domestic tire companies rely on cost-effective advantages to seize the global market, and the market share of enterprises that have achieved multi-base layout is expected to increase.
After years of development, the performance and quality of mainland tire products have been continuously improved, and they have gradually been recognized by the global market, but due to the lack of development time, the brand power is still lacking, so domestic enterprises mainly rely on cost performance to compete with overseas brands.
Among the top 75 mainland Chinese companies in the world in 2023, only Zhongce Rubber will enter the top 10 in sales (sales are 2022 data), and the top 10 sales will account for 63.8%, in addition to Linglong Tire and Sailun Tire in the top 20.
In 2022, the market share of some domestic companies will decline under the influence of repeated epidemics and soaring sea freight, with the global market shares of Zhongce, Linglong, Sailun, Triangle, Sen Kirin and GM being 2.2%, 1.3%, 1.8%, 0.7%, 0.5% and 0.3% respectively, of which Linglong and Sailun both had a global market share of less than 1% in 2016 and 5 in the past In the next two years, with the ramp-up of production capacity in Thailand and Cambodia and the promotion of technical transformation and expansion projects at home and abroad, the company's market share is expected to increase after realizing the multi-base layout and scale expansion.
2.3 Raw materials and sea freight returned to normal, and profitability was restored
The price of core raw materials has fallen from a high level, and the overall profitability of the industry is expected to recover. The cost of tire enterprises is mainly composed of raw materials, labor, energy, equipment depreciation and other expenses, of which the cost of raw materials generally accounts for more than 70%.
From the perspective of raw material structure, natural rubber and synthetic rubber account for the highest proportion, so rubber price fluctuations have a great impact on the production cost of tire enterprises.
In 2021, under the influence of various factors such as repeated epidemics, bad weather and rising crude oil prices, rubber prices continued to rise, and natural rubber, styrene-butadiene rubber, and butadiene rubber increased by 12%, 18%, and 15% year-on-year respectively, and the gross profit margin of tire companies was also under pressure.
Since 2022, rubber prices have begun to show a downward trend, and in the second half of this year, as the downstream demand continues to improve, the current rubber price fluctuates at about 13,000 yuan/ton, considering that the supply and demand of the industry itself is not tight, and the downstream demand is weak in the fourth quarter, the rubber price support is weak, and with the easing of raw material pressure, the gross profit margin of the tire industry will also improve.
Ocean freight prices returned to normal, and overseas demand continued to recover after high inventories eased.
Affected by the epidemic, serious delays in shipping schedules, port congestion caused by the shutdown of container terminal operations, and extremely tight shipping in the second half of 2020, freight rates continued to rise, and there was a surge in 2021, with the annual average values of the US East route, the US West route, and the European route in the China Export Container Freight Index (CCFI) in 2021 increased by 95%, 103%, and 270% year-on-year respectively, and reached a historical high in 2022. The annual average of the European route freight index continued to increase by 24%, 18% and 4% year-on-year.
The continuous increase in shipping costs not only affects the cost-effective advantage of mainland tire products, but also inhibits the enthusiasm of customers to purchase, so overseas sales and profitability are also damaged.
With the gradual recovery of capacity from the second half of 2022, sea freight rates have gradually begun to return to normal, but due to the arrival of a large amount of sea inventory in the early stage, the superimposed sea freight rates have fallen rapidly under the background of high inventory, and the procurement momentum of dealers has been suppressed again.
Since the beginning of this year, with the official return of sea freight to normal, the industry orders have begun to recover after several months of consumption of overseas inventory, and the overseas business of mainland tire companies has returned to a prosperous state.
3. The "5X Strategic Plan" has been steadily advancing and opening up room for growth
3.1 Overseas dual bases are working simultaneously, with both cost and channel advantages
The international layout has accelerated, and the advantages of Thailand and Cambodia's overseas dual bases have been highlighted.
The company seized the domestic and international dual-cycle development opportunities, actively responded to the "Belt and Road" initiative, and officially released the 5X strategic plan in April 2021, striving to achieve 5 major production bases, 5 major R&D centers, 500 strategic channel providers, 5,000 core stores, and more than 50 million production capacity at home and abroad in the next 10 years.
From the perspective of production capacity layout, the company currently has three production bases in Wuxi, Thailand and Cambodia, and a new base in Baotou is also planned in China, and the global industrial layout has been optimized and improved.
The tax rate on passenger car tires at the Thai base is expected to be reduced, and the company's overseas business is expected to increase in volume and price.
On June 29, 2020, the U.S. Department of Commerce launched an anti-dumping investigation on Thai passenger car and light truck tires, and the final result of the original investigation was that the original trial tax rate was 14.59% for Sumitomo Tire (Thailand) of Japan, 21.09% for Linglong Tire (Thailand), and 17.06% for other Thai tire companies exporting to the United States. On September 6, 2022, the U.S. Department of Commerce launched an anti-dumping review investigation into Thai passenger car and light truck tires.
In July 2023, according to the results of the preliminary ruling, the separate tax rate of the preliminary ruling of the review of Mori Kirin Thailand was 1.24%, the preliminary tax rate of Sumitomo Tire (Thailand Company), another compulsory respondent company, was 6.16%, and the preliminary tax rate of other Thai tire companies exported to the United States was 4.52%.
The review is currently in the final determination investigation stage, and the final determination is expected to be announced in the first quarter of 2024, and the specific anti-dumping duty rate will be adjusted after the final determination is announced.
Compared with the original tax rate, the corporate tax rate was reduced from the original 17.06% to 4.52%, a reduction of 12.54pct, if the final tax rate of the review is maintained by the preliminary ruling, the company's Thai base tax rate will be significantly reduced, on the one hand, benefiting from the improvement of the cost performance of the product, the export sales to the United States are expected to grow, on the other hand, the profitability of the Thai company will also be repaired.
Seize the opportunity to promote the second phase of the expansion project in Thailand and consolidate the advantages of overseas bases.
On August 29 this year, the company released the feasibility study report of the second phase of the expansion project in Thailand, planning to expand the tire production capacity in the Thai-Central Rayong Industrial Zone, Rayong Province, Thailand, with an annual output of 500,000 all-steel tires and 6 million semi-steel tires.
At present, the first phase of the company's Thailand project has been fully put into operation, with an annual production capacity of 1.3 million all-steel tires and 6 million semi-steel tires, and the production capacity of 1.8 million all-steel tires and 12 million semi-steel tires can be reached after the completion of the second phase.
The construction period of the second phase is planned to be 24 months, and the product market is still mainly positioned in the United States, Europe and other international markets, taking into account the neighboring countries and regions of Thailand, with an estimated annual revenue of 2.13 billion yuan and a net profit of 370 million yuan after reaching production.
On the one hand, Thailand, as the largest producer of rubber, the company's Thai base can reasonably save import taxes and transportation costs of natural rubber to reduce the cost of raw materials, and on the other hand, the Thai government has introduced a competitive 8-year tax holiday, a number of tax exemptions and preferential import tariffs, which are conducive to reducing tax costs and promoting the improvement of the company's operating performance.
Cambodia base has both tax rate advantages and channel advantages, and the company's performance can be rapidly improved after the production capacity ramp-up.
On May 13, 2020, the United States USW applied for a double anti-dumping investigation against Vietnam, Thailand, South Korea and Taiwan, China, to further limit the number of cheap tires exported to the United States, and the area covered by the survey has also expanded compared with before.
On May 25, 2021, the U.S. Department of Commerce announced the final ruling on the anti-dumping cases in Thailand, South Korea, Vietnam, and Taiwan, China: the anti-dumping duty rate in Vietnam is 0-22.3%, and the countervailing duty rate is 6.23-7.89%, the anti-dumping duty rate in South Korea is 14.72-27.05%, the anti-dumping duty rate in Thailand is 14.59-21.09%, and the anti-dumping duty rate in Taiwan is 20.04-101.84%.
The company's Cambodia base of 900,000 all-steel tires and 5 million semi-steel tires have been successfully put into production, is currently in the production capacity ramp-up stage, considering that Cambodian tires exported to the United States do not need to pay the "double anti" tax rate, on the one hand, the products in the Cambodia base not only have the low-cost advantage of production in Southeast Asia, but also avoid being taxed; on the other hand, the company's Cambodia factory has reached a strategic cooperation with the world's leading tire dealer API, and the sales channels have been further expanded, and the company's products have obvious advantages in the export field.
3.2 Intelligent production reduces costs and increases efficiency, and the results of brand building are gradually revealed
Accelerate intelligent manufacturing and digital transformation, and make simultaneous efforts on the manufacturing side and the product side.
The company's semi-steel tire factory "black light workshop" is operating well, and refining work experience to be replicated by other factories internally, 1.2 million sets of high-performance all-steel tire intelligent factories are planned in accordance with the "Industry 4.0" standard, based on the industrial Internet platform, through the PLM, MES, ERP highly collaborative value model driven digital operation management system, and combined with APS automatic scheduling, energy management platform and simulation technology application, to achieve the interconnection of various business systems, remote monitoring of equipment, Product quality control and process optimization, through the big data platform, RFID tag identification and tracking system, AGV trolley, cargo sorting system, etc., constitute a complete three-dimensional intelligent warehousing and logistics management system, to achieve the enhancement of production intelligence capabilities, business management and control capabilities, so as to achieve the three major improvements of "human efficiency, product efficiency, and energy efficiency" of the factory.
At the same time, we will learn from the successful experience of the "black light workshop" of the domestic semi-steel tire factory and the "5G carbon cloud smart factory" of the all-steel tire factory to build an intelligent model factory for tires in Cambodia, so as to enhance the operation and control capabilities and further improve the overall production efficiency.
Focus on scientific and technological innovation, and carry out in-depth strategic cooperation with scientific research institutes, universities and world-class suppliers. As of the first half of 2023, the company has obtained 418 authorized patents, including 82 invention patents, ranking at the forefront of the industry.
In terms of R&D of new materials, multi-dimensional carbon materials are the first to be applied to all-steel tire application tests, focusing on improving the static mechanical properties of tires and reducing rolling resistance, and the second-generation XR290Y tire series using the international advanced level of Eucommia ulmoides rubber formulation technology has been iteratively upgraded, and the application process of Eucommia ulmoides rubber has become more stable, effectively solving the pain points of long-distance driving wear resistance and high heat generation, and as the only tire brand in the industry, it has been awarded the "2022 National Market Quality Credit AA Customer Satisfaction Product" by the China Association for Quality.
In terms of commercial vehicle tires, the all-steel tire bearing series XR582 and XR682, as the representative of the "new generation of safety tires", apply advanced technologies such as high-strength structural design and crown side technology, and cooperate with low-heat generation formulation, to improve durability by more than 20%.
In terms of passenger car tires, we continue to increase the layout of the new energy track, a new generation of silent cotton anti-puncture tires, the first in the industry to adopt patented technology, with customized polyurethane sponge to suppress cavity noise, comfortable and silent while using CELISEALTM self-repair technology, to achieve rapid and automatic repair of nails, no need to repair tires and no air leakage, to provide users with high safety guarantees, so that new energy vehicle users can enjoy silence at the same time, have the fun of control, won the Xi Zhong Award 2022 Best Self-repairing Tires.
Persist in promoting brand building, and the brand value of "Maxima" continues to improve.
The company has well-known brands such as "Maxima, Chitu Horse, Qima, Tongyun, Xidatong, Dark Horse", and is an AAA quality credit enterprise in Jiangsu Province, and has successively won many honors such as China's famous brand products, national customer satisfaction products, China's 500 most valuable brands and China's top ten most influential tire brands. The brand value of "Maxima" has increased from 14.3 billion yuan in 2019 to 28.5 billion yuan in 2023, and the brand ranking has also increased from 346 to 321.
4. Earnings forecasts and valuations
4.1 Profit Forecast
Revenue Forecast:
(1) Semi-steel tires: At present, the domestic Wuxi factory has a production capacity of 3 million tires, the overseas Thailand first phase has a production capacity of 6 million tires, and the Cambodia base has a production capacity of 5 million tires this year, and is currently in the production capacity ramp-up stage. Among the planned new production capacity, 6 million pieces of technical transformation projects of the Wuxi plant and 6 million pieces of the second phase of Thailand are expected to be put into operation in 2025.
In the context of the overseas layout of domestic tire enterprises, with the increase in the capacity utilization rate of the company's overseas bases and the commissioning of the production capacity under construction, considering that the company's overseas base export products have cost-effective advantages, the new production capacity can be well digested in the global market, and it is expected to achieve revenue of 24.4, 3.26 and 3.97 billion yuan from 2023 to 2025.
(2) All-steel tires: At present, the production capacity of Wuxi No. 2 factory in China is 2 million, and the production capacity of the third phase is 1.2 million, considering that some of the old production capacity planning technology is changed to engineering tires and semi-steel tires, it is expected that the production capacity of the domestic base will be further optimized; the first phase of overseas Thailand has a production capacity of 1.3 million tires, and the production capacity of 900,000 units in Cambodia has been put into operation this year, and it is currently in the stage of capacity climbing.
Among the planned new production capacity, 500,000 tires in Thailand Phase II and 1.2 million tires in Baotou are expected to be put into operation in 2025. Considering the production capacity of overseas bases, it is estimated that the company's revenue in this segment will be 25.6, 3.12 billion, and 3.77 billion yuan from 2023 to 2025.
(3) Engineering tires: The company plans to have 100,000 tons of engineering tire projects in Wuxi base and Baotou base, of which the Wuxi base project is a technical transformation project announced in June 2021, which is expected to be officially put into operation next year, and the Baotou base project is expected to be put into operation in 2025 and is expected to achieve batch sales during 2024-2025.
Considering the high price of a single tire of engineering tire products, it is estimated that the revenue of the company's engineering tire segment from 2024 to 2025 will be 2.6 million yuan and 520 million yuan respectively.
Profit forecast: Since the beginning of this year, the tire industry has picked up, and the price of core raw material rubber has shown a trend of shock and decline since 2022.
In the context of the gradual return to normalcy of sea freight and orders, comparing the profitability difference of the company's domestic and foreign business, it can be found that in the first half of this year, the company's overseas gross profit margin was 17%, and the domestic gross profit margin was only 1%.
(1) Semi-steel tires: Considering that the current good profitability of overseas bases is expected to be maintained after the ramp-up of production capacity, the gross profit margin is expected to remain at 22% in the next three years.
(2) All-steel tires: After the technical transformation and optimization of some old production capacity, the overall capacity utilization rate will be improved, the cost pressure will be further alleviated, and the production capacity of overseas bases will jointly promote the profitability of the all-steel tire sector, and the gross profit margin is expected to be 8%, 10%, and 12% respectively from 2023 to 2025.
(3) Engineering tires: Profitability and selling price refer to the company's feasibility study report, assuming that the gross profit margin is maintained at 20%.
Cost assumptions: In terms of sales expenses, taking into account the increase in the sales ratio of the company's semi-steel tires and the production volume of follow-up engineering tires, the sales expense rate should continue to increase, and it is expected that the sales expense rate will be 2.7%, 2.8% and 2.9% respectively from 2023 to 2025, and the management expense rate is expected to remain at 3.6%; in terms of R&D expenses, considering the company's product structure optimization and new product innovation and other investments, the R&D expense rate should show a slight increase trend, which is expected to be 2023-2025 The annual R&D expense ratios are 2.2%, 2.3%, and 2.4%, respectively.
Based on the above assumptions, it is estimated that the company's total operating income from 2023 to 2025 will be 5.19 billion yuan, 6.85 billion yuan and 8.5 billion yuan respectively, with a year-on-year growth rate of 26.1%, 31.9% and 24.2% respectively, and the net profit attributable to the parent company will be 2.5, 3.7 and 520 million yuan respectively, with a year-on-year growth rate of 1382.3%, 48.7% and 37.8% respectively.
4.2 Valuation
The company is a well-known tire company in China, this year began to form a global multi-base industrial layout, with the ramp-up of overseas base production capacity and the continuous optimization of product structure, the company will usher in a performance inflection point.
Based on the above assumptions, we forecast that the company's net profit attributable to the parent company from 2023 to 2025 will be 2.5, 3.7 and 520 million yuan respectively, and the corresponding EPS will be 0.16, 0.24 and 0.33 yuan respectively.
The median PE of comparable companies in 2024 is 16.33 and the average is 19.01, the median PE of several domestic leading tire companies, Linglong Tire, Sen Kirin, Sailun Tire, Triangle Tire, as well as Jingu Co., Ltd., which mainly produces steel rolling wheels, and Redick and Zhaofeng Co., Ltd., which also belong to the auto parts sector, are comparable.
Considering that the tire industry is still prosperous, the company's marginal improvement in all aspects is obvious, and the growth of the company's performance in the next few years is very significant, and there can be a certain valuation premium, so we give the company 20 times PE in 2024 with a target price of 4.74 yuan.
5. Risk Warning
1. Raw material prices fluctuate sharply:
Raw materials such as rubber, carbon black and steel cord account for more than 70% of the company's production costs, and if the price of these raw materials rises significantly, the company's gross profit margin will be affected.
2. The release of new production capacity is lower than expected:
At present, the company has many projects under construction at home and abroad, and if the project is affected by force majeure factors, the production progress may be less than expected, which will affect the company's revenue.
3. The overseas construction of domestic enterprises leads to intensified competition:
At present, many domestic tire companies are building factories overseas, and the increase in industry supply after the project planning capacity is put into operation may lead to intensified competition in overseas markets, which in turn will affect the revenue and profit of the company's overseas business.
4. International trade frictions:
The overseas sales market of the company's products is mainly concentrated in the United States and the European Union and other regions, in the past two years, the continuous "anti-dumping, anti-subsidy" and other international trade frictions have had a significant impact on the export of domestic tire companies, if there are new trade frictions and trade policy changes in the future, the company's export market will be affected.
5. Huge fluctuations in sea freight:
During the period from 2021 to 2022, sea freight rates experienced sharp rises and falls, which had a great impact on the company's export sales and product profitability.
6. Exchange rate fluctuations:
At present, nearly 70% of the company's product sales revenue and more than 90% of gross profit are from overseas markets, and if the RMB exchange rate fluctuates significantly, the company's revenue may be affected.
7. Pledge of major shareholders:
Hongdou Group, the company's largest shareholder, holds a total of 657 million shares and has pledged a total of 526 million shares, accounting for 79.98% of the company's total shares and 33.34% of the total share capital.
8. Lifting of restricted shares:
On September 22, 2023, the company had 284 million shares of private placement of institutional placement shares, accounting for 18% of the total share capital, and on September 23, 2024, the company had 8.62 million shares of private placement of institutional placement shares, accounting for 0.55% of the total share capital.
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