Incidents:
On April 28, 2024, Soft Control Co., Ltd. released its 2024 quarterly report: in the single quarter of 2024Q1, the company achieved operating income of 1,464 billion yuan, +22.61% year over year; realized net profit of 68.42 million yuan, +266.90% year over year; realized net profit without return to mother was 55.83 million yuan, +404.38% year on year; net cash flow from operating activities was 79 million yuan, year on year +82.23 million yuan. Gross sales margin was 20.58%, a year-on-year decrease of 3.01 pct. Net sales margin was 5.81%, up 3.09pct year over year.
Investment highlights:
Net profit reached a record high in the first quarter in post-listing history
2024Q1 achieved net profit of 68.42 million yuan, +266.90% year-on-year; realized net profit of 55.83 million yuan, +404.38% year-on-year; in non-recurring profit and loss projects, the government subsidy included current profit and loss was 10.53 million yuan, mainly due to economic and technological government subsidies obtained.
Gross sales margin was 20.58%, a year-on-year decrease of 3.01 pct. Net sales margin was 5.81%, up 3.09pct year over year. We speculate that the decline in gross margin in the first quarter is mainly a product structure issue. Because there is uncertainty about when equipment is confirmed every year, materials with low gross margins are expected to account for a relatively high proportion of materials in the first quarter.
2024Q1 achieved net profit of 85 million yuan, an increase of 52.57 million yuan over the previous year, the highest net profit in the first quarter in history since listing. Achieved gross profit of 301 million yuan, an increase of 19.62 million yuan over the previous year.
Among them, in terms of period expenses, 2024Q1 sales expenses were 36.73 million yuan, an increase of 7.46 million yuan over the previous year; management expenses were 118 million yuan, an increase of 14.88 million yuan over the previous year; R&D expenses were 87.65 million yuan, an increase of 15.79 million yuan over the previous year, and financial expenses were 2.41 million yuan, a year-on-year decrease of 2.07 million yuan. 2024Q1, the company's asset impairment loss was 3.29 million yuan, a year-on-year decrease of 2.46 million yuan. Credit impairment losses in Q1 were 7.28 million yuan, an increase of 2001 million yuan over the previous year. Q1 Other revenue was 27.56 million yuan, an increase of 20.43 million yuan over the previous year.
Tire expansion led to a rise in demand for equipment. In 2023, the company achieved a major breakthrough in domestic and overseas orders. As of 2024Q1, the company's contract debt was 4.619 billion yuan, +10.80% month-on-month; cash received from sales of goods and services was 1,958 billion yuan, +49.65% over the same period last year. The scale of business increased significantly; in 2024Q1, the company's inventory was 5.663 billion yuan, +16.79% year over year, the highest inventory in the same period in history since listing.
The net profit of Chinese tire companies showed a clear upward trend in 2022 to 2023. Through an international layout, the trend of Chinese tire companies using cost advantages to rise globally is becoming more and more obvious, and capital expansion is showing signs of acceleration. The company currently has products such as vulcanizers, molding machines, drums, lining layers, cutting machines, etc., forming a full range of semi-steel/all-steel/off-highway product groups. Software and hardware products can cover intelligent equipment throughout the tire life cycle. In 2023, the company continued to stabilize, with a high completion rate in the domestic market and continuous optimization of the customer structure; overseas market orders reached a record high, cooperation with some high-end customers achieved breakthrough progress, and the international team continued to improve.
According to the related transaction forecast announcement issued by Sailun Tire on December 14, 2023, based on the strategic plan and actual situation, Sailun Tire is expected to increase the procurement volume of equipment, molds and liquid gold materials in 2024. In 2024, Sailun Tire plans to purchase equipment, molds, software, spare parts, etc. from Soft Control Co., Ltd. for a total amount of 1,520 billion yuan, with a related transaction volume of 749 million yuan in 2023; a total purchase of synthetic rubber of 1.5 billion yuan, and a related transaction amount of 1.02 billion yuan in 2023.
Equity incentives show confidence. The 2023 dividend payment rate reached 30.38%. On October 14, 2021, the company announced the 2021 restricted stock incentive plan. The total number of restricted shares awarded to the incentive target was 19.6 million shares, and the grant price was 2.55 yuan/share. The assessment target is based on net profit returned to mother in 2020, with net profit growth rates of not less than 30%, 50%, and 80% in 2021-2023. It is expected that 40%, 30%, and 30% bans will be lifted on October 24, 2022, October 23, 2023, and October 22, 2024, respectively.
On August 22, 2022, the company announced the 2022 stock options and restricted stock incentive plan. The number of stock options to be granted under the incentive plan is 23.8800 million shares, the exercise price of the stock options granted under the incentive plan is 6.17 yuan/share, the number of restricted shares to be granted under this incentive plan is 15.920 million shares, and the grant price of restricted shares granted is 3.86 yuan/share. The assessment target is based on net profit returned to mother in 2021, with net profit growth rates of not less than 25%, 75%, and 125% for the period from 2022 to 2024. It is expected that 40%, 30%, and 30% bans will be lifted on August 22, 2024, and August 22, 2025, respectively.
On August 15, 2023, the company announced the 2023 restricted stock incentive plan. The number of restricted shares to be granted under this incentive plan is 37.5 million shares, and the grant price is 4.00 yuan/share. The assessment target is based on net profit due to the mother in 2022, and the net profit growth rate for 2023-2024 is not less than 30% or 60% (the above net profit excludes all values affected by the share expenses of the incentive plan during the validity period). The 50% and 50% bans are expected to be lifted on August 28, 2024 and August 28, 2025, respectively.
In terms of dividends, according to the announcement of the company's 2023 profit distribution plan, based on the company's total share capital of 1,012 million shares on December 31, 2023, it is proposed to distribute a cash dividend of 1.00 yuan (tax included) and 0 bonus shares (tax included) to all shareholders. The total dividend is expected to be 101 million yuan, and the dividend payment rate is 30.38%.
EVEC rubber has low rolling resistance and excellent wear resistance. The gross margin increased significantly in 2023. By the end of 2023, the company's EVEC rubber design capacity was 108,000 tons. Compared with traditional materials, EVEC rubber has the following competitive advantages: the application of this type of product can make tires achieve a balance of rolling resistance, dry and wet grip, and wear resistance. It has a lower rolling resistance coefficient and high wear resistance, and the wear resistance is more than 10% higher than the current customer formula for road tests in the same vehicle and area.
In 2023, the company's new rubber materials achieved revenue of 1,587 billion yuan, +9% year on year; achieved gross profit of 1,319 billion yuan, +146% year over year; achieved gross profit margin of 16.89%, +9.39 pct year on year, the highest level in nearly 10 years.
Profit forecasts and investment ratings estimate that the company's 2024-2026 revenue will be 69.89, 82.62 billion yuan, and 8.762 billion yuan, respectively, and net profit to mother will be 502, 7.47, and 846 million yuan, respectively, corresponding to PE 18, 12, and 11 times, respectively. Considering the company's future growth, it will maintain a “buy” rating.
Risks indicate increased competition in the industry, fluctuating raw material prices, changes in environmental protection policies, a sharp decline in the economy, and falling product prices.