Incident: On March 28, the company announced its 2023 annual results announcement. In 2023, it achieved operating income of 99.49 billion yuan, up 22.04% year on year; net profit to mother was 1,033 billion yuan, up 162.18% year on year; gross margin was 21.3%, up 7.0 pp year on year, net interest rate was 10.4%, up 5.6 pp year on year.

Demand in the tire industry recovered in 2023, and sales of the company's products increased dramatically. According to data from the National Bureau of Statistics and the General Administration of Customs, in 2023, domestic rubber tire production totaled 990 million pieces, an increase of 15.5% year on year; exports totaled 620 million pieces, up 11.6% year on year, and tire consumer demand rebounded significantly. In 2023, the company achieved 25 million tire sales, an increase of 35.1% over the previous year. Among them, sales of all-steel tires were 8.1 million, up about 20.5% year on year; sales of semi-steel tires were 16.4 million, up 42.7% year on year; sales of oblique tires were 480,000, up about 76.4% year on year. All-steel tires, semi-steel tires and oblique tires each accounted for 62.3%/36.1%/1.6% of the company's tire revenue.

After resuming work during the Spring Festival in 2024, the operating rate of the industry was high, and the price of raw materials rose. According to data from China Rubber Information and Trade Network, the operating rate of the automobile tire industry is at a historically high level. As of March 28, the operating rates of semi-steel tires and all-steel tires were 80.4% and 69.5% respectively, up 7.3/4.0pp from the same period last year. In terms of the price of tire raw materials, according to our statistics, the average price index for tire raw materials in 2023 was 110.9, down 6% from the 2022 average of 118.0. Benefiting from lower prices for some raw materials, the company's gross margin improved significantly in 2023. As of March 29, 2024, the tire raw material price index was 121.1, up 9.2% from the 2023 average. From January 1, 2024 to March 29, 2024, the average raw material price index was 115.7, up 4.4% from the 2023 average. Currently, demand for tires is strong, and profitability may be limited by rising raw material prices. It is recommended to pay attention to raw material price trends in the later stages.

The company has a high capacity utilization rate in 2023, and will increase production capacity of 2.33 million units/year of semi-steel tires in 2024. Currently, the company's Thailand/Shandong tire production base has a production capacity of 200/7.4 million tires per year and 800/11.2 million tires per year for semi-steel tires. In 2023, the capacity utilization rate of all-steel tires at the Thailand/Shandong tire production base was 81.0%/90.0%, and the capacity utilization rate of semi-steel tires was 90.1%/96.8%. On August 31, 2023, the Shandong Company's production capacity optimization bill was passed. After the production capacity optimization is completed, the production capacity of half steel tires will be raised to 11.53 million units/year (+330,000 ties/year). The Thai tire production base phase III project was passed, and the production capacity of the second half of the steel tires will increase by 2 million units/year after completion of the project. The above projects are expected to continuously develop production capacity by the first half of 2024. Once the project is completed, it will contribute incrementally to the company's 2024 results.

Thailand's tax rate has declined, and there is room for future performance to improve. In January 2024, the tax rate for passenger car and light truck tires exported from the company's Thai base to the US was reduced from 17.06% to 4.52%. In 2023, the company achieved sales volume of 17.36 million products through international dealer channels, up 32.8% year on year, revenue of 6.326 billion yuan, up 11.9% year on year. Among them, revenue from Thailand/Shandong tire production bases accounted for 49.1%/50.9%, respectively, -4.9%/+4.9% year on year. The reduction in the base tax rate in Thailand is expected to drive a recovery in the company's order volume exported to the US and improve performance.

Profit forecast and rating: The company's net profit CAGR for 24-26 is estimated to be 14%. Considering that the company continues to strengthen its global layout and optimize the distribution channel layout, the variety of new products and the reduction in the tax rate at the base in Thailand, future performance is resilient. The company was given 6 times PE in 2024, corresponding to a target price of HK$11.98, maintaining a “buy” rating.

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