Recommended logic: 1) Tire demand continues to improve. In the first three quarters of 2023, domestic rubber tire tire production totaled 730 million tires, an increase of 14.6% over the previous year; exports totaled 460 million tires, an increase of 8.9% over the previous year, and the trend of demand recovery did not change. 2) The profit level of tire companies improved, focusing on cost transmission strength in the fourth quarter. In 2023Q1/Q2/Q3, the overall average gross sales margin of the tire components of Changjiang Securities increased by 2.3/2.2/2.3 pp over month, respectively. Raw material prices rose at the end of August. Focus on the transmission of tire costs in the fourth quarter. 3) The company's channel layout continues to be optimized, and Thailand's tax rate reduction performance is elastic. The company actively explores the market and forms a global development layout. If the “double reverse” tax rate for the Thai base is finally implemented, it is expected to drive up the volume of orders exported to the US and improve performance.

2023H1 supply and demand have both increased, and we continue to focus on the tire industry. Demand side: In 2016-2022, the global TBR market demand was more than 200 million units, and the PCR market demand was more than 1.51 billion units. 2023H1, the apparent consumption of all steel tires and semi-steel tires in China increased 18.0% and 15.9% year on year respectively. Inventories all fell sharply year on year, and demand picked up significantly. Supply side: In September 2023, the average operating rate of domestic semi-steel tires was 72.1%, +17.9 pp, +0.1 pp; the average operating rate of all steel tires was 63.2%, +12.8 pp, and +0.1 pp month-on-month. The industry recovery trend did not change.

The profit level of tire companies improved in the first three quarters, focusing on cost transmission in the fourth quarter. In the first three quarters of 2023, the profit level of tire companies continued to improve. In 2023Q1/Q2/Q3, the overall average gross sales margin of Changjiang Securities's tire components increased by 2.3/2.2/2.3 pp over month, respectively. 2023Q3, the average price index of tire raw materials rose 6.5% month-on-month from Q2, and changes in tire profit levels were inversely lagging behind the changes in our tire raw material price index for about 1 quarter. Cost pressure in the fourth quarter may reappear, but if cost pressure can be transmitted better, against the backdrop of continued recovery in demand in the fourth quarter, tire companies' fourth quarter performance still has potential for growth.

The product has been renewed, the channel layout continues to be optimized, and Thailand's tax rate reduction performance has been resilient to the upward trend. 2023H1, the company's new product sales volume totaled 4,032 million units, accounting for 34.6% of the total sales volume. In terms of distribution channel layout, 2023H1 has developed 61 new overseas distributors, distributed in 36 countries around the world. In 2021 and 2022, the share of the company's overseas revenue from the Thai base was about 43% and 54%, respectively. The initial tax rate for passenger car and light truck tires exported from the company's Thai base to the US was lowered from 17.06% to 4.52%. The final ruling is expected to be announced in the first quarter of 2024. If the “double reverse” tax rate for the Thai base is finally implemented, it is expected to drive up the volume of orders exported to the US and improve performance.

Earnings forecasts and ratings. The company's net profit CAGR for 23-25 is expected to be 30%. Considering that the company continues to strengthen its global layout, the initial tax rate for the Thai base has declined, and future performance is flexible upward. The company was given a valuation of 8 times in 2024, corresponding to the target price of HK$10.88. First coverage, giving a “buy” rating.

Risk warning: exchange rate risk, international trade friction risk, raw material price fluctuation risk.