Established in 2003, Shandong Daye Co., Ltd. is a national high-tech enterprise focusing on the development, production and sale of new materials for metal frames, which focuses on the R&D, production and sales of tire ring steel wire, steel cord and hose steel wire. It is the main designated unit for the “steel wire for bead” national standard. The company is the world's largest manufacturer of bead steel wire, accounting for more than 20% of the global bezel steel wire market (accounting for nearly 1/3 of the Chinese bezel steel wire market); in addition, the company is also the third largest manufacturer of bead wires in the world and the second largest in China. The company has established production capacity for full-specification ultra-high-strength bead steel wires and full-specification high-breakage steel cords. Currently, it is a leading domestic company focusing on the entire industry chain business in the tire frame materials industry. The company's core products are bezel steel wire, steel cord and hose steel wire. The company's products are mainly used in the tire and automobile industry, and are key products to encourage development in the country's strategic emerging industries.
The bezel steel wire business is the company's competitive pillar business segment. Bezel steel wire is a type of steel wire made of high carbon steel and coated with bronze or brass on the surface. It is a production element where the tire is tightly fixed to the rim. From the perspective of production, the compound growth rate of the company's tire ring steel wire production reached 8.3% in the past four years, and the domestic market share increased by 6.76 pct. By 2022, the total production and market share of the company's tire ring steel wire had reached 352,100 tons and 39% respectively. The company has become the absolute leading enterprise in the domestic tire ring steel wire industry.
The company's tire ring steel wire production capacity utilization rate and production and sales rate are extremely high. The average utilization rate and production and sales rate of the company's tire ring steel wire reached 105.4% and 99.7% respectively in the past four years, showing the strong competitiveness and strong growth of the business. Furthermore, there is room for optimization in the gross profit level of this business.
In the 2020-2022 period, the gross margin of bezel steel wire fell to 4.23% due to large fluctuations in raw material costs and impact costs generated during the trial production process under the continuous expansion of the company's production capacity. Considering that the company's production capacity has entered the production optimization stage in 2024, and the combined raw material costs and industry demand have entered a stage of stabilization and expansion, we expect the gross profit level of this business to be continuously repaired and optimized, or increased to 12% by 2025.
The steel cord business is expected to drive the company's second highest growth rate. Steel cords are thin steel wire ropes formed by drawing and twisting φ5.5mm wires. They are the core production element of radial tires. The company's steel cord business has experienced structural expansion. After completing the acquisition of Shengtong Steel Cord in 2020-2022, the production capacity of the business increased from 200,000 tons to 465,000 tons, with a compound growth rate of 52.5%. From the perspective of production and capacity utilization, the company's steel cord production increased from 187,600 tons to 347,200 tons (CAGR = 36%) during the same period, but the capacity utilization rate dropped from 93.8% to 74.7% due to the failure of effective production capacity due to the restructuring of Shengtong Steel Cords. Given that the effective production capacity of steel cords has returned to normal in 2023, it is estimated that the company's steel cord production may exceed 400,000 tons. According to an estimate of China's total steel cord output of 2.895 million tons in 2022, the company's steel cord business market share may rise to 13.8% (this figure was 7.6% in 2020). On the other hand, the company's average production and sales rate of 98.2% for steel cords in 20-22 means that the business has a strong ability to generate cash flow. Since the company has systematically carried out tasks such as integrated procurement and sales, capacity recovery, and process optimization, it is expected that the profit status of the steel cord business will change qualitatively (for example, 23H1's steel cord business has achieved profit). We believe that the continuous expansion of the steel cord business as a share of the company's main revenue (the share of the business has risen to 49.3%), the continuous optimization of the gross profit level of the business (gross margin may increase to 10% or more in 25 years), and the continuous contribution to business profit (estimated gross profit contribution of about 409 million yuan until 25), the strong growth of this business may be expected to drive the second growth of the company.
The hose and steel wire business continues to develop steadily. Hose steel wire is a steel wire made of high-carbon steel with a brass-coated surface. It is the framework material for rubber hoses. The revenue and gross profit of the company's hose and steel wire business remained stable. As of 2022, the revenue share and gross margin were 7.52% and 8.14%, respectively. In view of the fact that the share of hose steel wire export sales has risen, and considering that the increase in the average sales price combined with the increase in the company's actual production production of hose steel wire will benefit from the expansion of steel cord production capacity and the increase in production capacity utilization, it is expected that this business will help drive the scale of the company's benefits. From the perspective of market demand, the company's hose and steel wire products also maintained a very high production and sales rate. In 2020-2022, the production and sales rates of this business were 101.3%, 100.1% and 98.9% respectively, increasing to the 23H1 production and sales level to 101.7%. Overall, the company's hose and steel wire business still has the characteristics of steady growth.
The company maintains its growth advantage from three aspects. The company's continued growth is reflected in an increase in production capacity and sales volume, an increase in overseas market revenue share, and profit margins may have entered an optimization cycle. From a production capacity perspective, the company's production and sales scale is expected to reach 830,000 tons, 900,000 tons, and 1 million tons in 2023-2025, which means that the company's production and sales scale will reach 12.6% CAGR between 2022 and 2025 (7030,000 tons in 2022). Looking at the share of overseas market revenue, the company's share of overseas business revenue increased from 15.94% in 2018 to 24.76% in 2022. Considering the continued rise in sales share of the company's ultra-high strength (ST, SST) and ultra-high strength (UT) steel cord products and the increase in sales volume of self-developed cable bezel products, it is expected that the company's share of overseas market revenue may rise to more than 40% in the next three years. From the perspective of the company's profit, the increase in product margin, the demonstration of economies of scale brought about by the rise in the share of overseas business revenue, and the positive changes in cost optimization and financing structure brought about by ESG implementation have all helped increase the company's overall gross profit level from 2.08% to 11.23%.
The company has seven core comparable advantages. The company has technical R&D and brand advantages, product, scale and regional advantages, industrial chain integration advantages, industry barrier advantages, business model advantages, customer advantages and policy advantages in the metal framework materials industry.
The company's industry is in a period of booming expansion. The automotive bezel steel wire market is in a stage of rapid development. LP Infor predicts that the global tire ring steel wire market is about US$1.26 billion in 2022, and the market size is expected to reach US$1.66 billion by 2029, of which the CAGR is 4.7%; the size of the steel cord market also has room for continuous growth. According to GIR research forecasts, the global steel cord market revenue in 2021 is about US$5.190 billion, and the CAGR is expected to reach US$7.246 billion by 2028, with a CAGR of 4.9% . In addition, the company's main downstream demand areas are tires, automobiles, robotics and other industries, which are all booming and developing rapidly.
Company profit forecast and investment rating: Considering the characteristics of the company's products, capacity growth and the expansionability of the industry in which it is located, combined with forecasts of production capacity, capacity utilization, production and sales rate and gross margin of the company's various business lines, we forecast that the company's revenue for 2023-2025 will be $57.98/73.98/8.190 billion yuan, respectively, up 11.2%/27.6%/10.7% year-on-year, and the comprehensive gross margin will be 6.91%/9.72%/11.23%, respectively. Net profit attributable to mother was 1.12/2.31/402 million yuan, reversing the year-on-year growth losses/ +105.8%/+73.8%. The current stock price corresponds to 2023-2025 PE values of 26.4X/12.8X/7.4X, respectively.
Covered for the first time, with a “recommended” rating.
Risk warning: Raw material prices fluctuate greatly, market demand falls short of expectations, production capacity release falls short of expectations, risk of declining gross margin, risk of technological innovation, risk of market competition, and policy risk.