Key points of investment:

The company released a performance forecast for the first half of 2024, and the performance was in line with expectations. According to the company's announcement, net profit due to mother was 1-1.2 billion yuan in the first half of 2024, up 64.95%-97.94% year on year, and realized net profit deducted 1-1.2 billion yuan, up 71.5%-105.8% year on year; of these, 24Q2 realized net profit to mother 0.496-0.696 billion yuan (median value of about 0.596 billion yuan, 24Q1 about 0.504 billion yuan), an increase of 39.39% to 95.56% year on year. Net profit not attributable to mother was 0.503-0.703 billion yuan (median value of about 0.603 billion yuan), a year-on-year increase of 46.83%-105%, and a month-on-month increase of 1.41%-41.69%.

The company's overseas orders for semi-steel continued to be in short supply, and all-steel sales declined in the second quarter due to early US Q1 orders. Since 2024, the order demand for the company's high-quality, high-performance semi-steel tire products in the European and American tire markets has continued to be in short supply, and the company has continued to steadily develop the domestic market with high growth potential. Currently, insufficient production capacity has become an important factor limiting the company's further development. The company urgently needs to expand its existing production capacity and enhance its competitive strength. Currently, the company is still maintaining full production. All-steel sales declined month-on-month, mainly due to the US imposing an anti-dumping duty rate on all Thai steel in May, so US demand for Thai steel was better from January to April '24. According to the Rubber Information Trade Network, Thailand's total steel exports to the US increased 57% year-on-year to 6.2 million bars in January-April 2024, making some US customers' all-steel inventories relatively high, causing the company's overseas total steel volume to decline in the second quarter. Subsequent all-steel sales are expected to increase as inventories are gradually digested.

Shipping Q2 had a slight impact. Due to partial stockpiling of raw materials, the impact was limited. According to Baichuan data, natural rubber, styrene-butadiene rubber, butadiene rubber, and carbon black increased 6.8%, 9.9%, 8.3%, and 1.5% respectively in the second quarter. Overall raw material costs increased month-on-month. The company previously stocked up some rubber raw materials in the first quarter, so it is estimated that the impact on raw material costs in the second quarter was limited. In terms of shipping, shipping prices have risen rapidly since the second quarter. According to the Baltic Sea Freight Index, freight rates to the US West and US East increased from 3294 US dollars and 4,309 US dollars at the beginning of April to 7052 US dollars and 8,253 US dollars at the end of June, but currently overseas distributors' inventory is relatively normal, so there is a wait-and-see mentality. The willingness to place orders has decreased slightly, and a small number of customer companies have given subsidies to increase their enthusiasm to pick up goods. It is expected that orders and shipments will resume as freight rates decline.

The advantages of intelligent manufacturing continue to be reflected, and the benefits of tax rebates gradually became apparent in Q2. The company continues to improve the management level of the intelligent manufacturing model, unleash the effects of intelligent manufacturing to the greatest extent, continuously reduce costs and increase efficiency, and improve per capita efficiency, production efficiency, and product quality. The refined management model that matches the company's intelligent manufacturing has further enhanced the company's profitability. Furthermore, in Q1, the company obtained a separate minimum tax rate of 1.24% from the US Department of Commerce in the first annual administrative review of Thai passenger car and light truck tires. Price increases and tax refunds gradually became apparent in 24Q1 and 24Q2, respectively, demonstrating that the company's operational management compliance and ability to participate in international competition are at the leading level in the world.

Morocco is about to start production, which is expected to enhance the company's high-end support and ability to withstand trade barriers. Morocco's project with an annual production of 12 million high-performance cars and light truck radial tires is expected to be put into operation by the end of September 2024. We expect to contribute more than half of our production by 2025 and achieve full production in 2026. Currently, some North American customers have already made orders and are expected to support local vehicles Renault and Strantis. Furthermore, the Moroccan base is expected to help the company better resist trade barriers and allow flexible production capacity allocation.

Profit forecast and valuation: Maintain profit forecasts. Net profit to the mother is estimated to be about 2.31, 2.46, and 2.81 billion yuan in 2024-2026, corresponding to about 11, 10, or 9 times PE, maintaining an “increase in holdings” rating.

Risk warning: large fluctuations in raw materials affect profitability; production capacity investment falls short of expectations