Key points of investment:

The company has built two overseas bases to achieve domestic and foreign dual circulation. The company was founded in 2002 and grew from all-steel to semi-steel, then the company began a global layout. In 2018, the company plans to invest 300 million US dollars to build production capacity in Thailand. The first tire went offline on December 28, 2019, the company's Thai base climbed rapidly, and achieved full production in Thailand in the first phase in 2023; the Cambodian base was announced in 2021, officially laid the foundation stone on January 27, 2022, and the first tire went offline on March 18, 2023, marking the full launch of the company's overseas double bases. In 2023, the company planned Thailand Phase II and Cambodia Phase II successively, and the company entered a period of rapid development. As of 2023, the company has production capacity of about 12 and 4.24 million pieces of half-steel and all-steel, respectively, of which the main production capacity is distributed at two overseas bases.

Before 2020, the company's revenue scale was 3-4 billion yuan. In 2021, with the gradual commissioning of the Thai base, the revenue scale increased markedly. According to the company's annual report, the revenue scale for 2011-2020 was stable at 3-4 billion yuan. In 2021, the Thai base was put into operation, resulting in a 13.9% and 23.4% year-on-year increase in sales and revenue, respectively. Production of the first phase of the project in Thailand was completed in 2023, and the Cambodian base also gradually entered the commissioning stage, bringing in sales and revenue increases of 39% and 23% year-on-year respectively. In 2023, the company achieved revenue of 5.06 billion yuan, achieving sales of about 11.86 million tires. Revenue and profits from the Thai factory have been released, driving an increase in overall profitability, and the Cambodian base is ready to go. According to the company's annual report, the profit of the Thai base changed in 2020, and net profit increased from 81.17 million yuan in 2020 to 596 million yuan in 2023, driving the company's gross margin and net profit margin to 15.74% and 4.27% respectively in 2023. As overseas demand continued to be strong in 2024Q1, the first phase of production at the Thai base continued to be fully completed, and the first phase of the Cambodian factory reversed losses. The gross margin and net profit margin increased to 18.05% and 10.59%, respectively.

The industry returned to normal after experiencing a low period in 2021-2022, and tire demand increased steadily. Looking back at 2021-2022, the impact of the pandemic and the sharp rise and fall in sea freight rates all had an impact on the demand and orders of Chinese tire companies and overseas channel inventories. Since entering 2023, the influencing factors of the past few years, the pandemic and shipping costs have all been eliminated, so we think the industry will return to normal in 2023. According to Michelin's 2023 annual report, global tire demand in 2023 was about 1,788 billion, up 2.17% year on year, but companies and enterprises also showed some differentiation before. For example, Michelin's sales volume declined year on year in 2023, unit price increased year on year, and domestic tire sales increased significantly year on year in 2023, indicating that on the one hand, industry demand in 2023 did not reach the peak of the industry boom, and secondly, the share of domestic tires is increasing.

The share of domestic tires continues to rise, and the company's dual base expansion drives the company's rapid growth. According to the “North American Tire Market Overview”, overall product consumption in the US market has been slightly downgraded. Over the past 20 years, the share of first-tier brands of American car tires and truck tires has declined, and the share of new first-tier and second-tier brands has increased. Among them, the share of cost-effective tire brands such as car tires, second-tier tires, and third-tier tires and below increased year by year from 26% in 2015 to about 34% in 2022. As a result, overall car tire consumption is moving closer to cost-effective products.

The cost performance advantage of Chinese tires is prominent. Furthermore, the company is currently one of the few domestic companies expanding at the same time. The company's production capacity is expected to nearly double in 2026 compared to 2023, and the expansion of the dual base will drive the company's rapid growth.

Profit forecasting and valuation: The company builds dual overseas bases to achieve domestic and foreign dual cycles, and the release of new production capacity in Thailand and Cambodia drives revenue and profit growth. The company's net profit due to mother in 2024-2026 is estimated to be about 662, 9.60, and 1,362 million yuan, corresponding to PE by about 14, 9, or 7 times. It is covered for the first time, giving it an “increase in wealth” rating.

Risk warning: Large fluctuations in raw materials affect profits; overseas demand falls short of expectations; construction or absorption of new production capacity falls short of expectations