Key points of investment:

The company released its 2024 mid-year report: According to the announcement, the first half of the year achieved revenue of 4.11 billion yuan (YoY +16.2%), realized net profit of 1.077 billion yuan (YoY +77.7%), and realized net profit of 1.059 billion yuan (YoY +81.6%); of these, 24Q2 achieved revenue of 1.995 billion yuan (YoY +6.2%, QoQ -5.7%), achieving net profit to mother of 0.574 billion yuan (YoY) +61.1%, QoQ +13.9%), achieved net profit without return to mother of 0.562 billion yuan (YoY +64%, QoQ +13.2%), and the performance was in line with expectations.

Demand for semi-steel continued to be strong. The company's production and sales continued to grow year-on-year in the first half of the year, and profitability improved driven by product structure and tax rebates. 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. According to the company's announcement, in the first half of the year, the company produced 16.09 million tires (YoY +18.9%), including 15.6 million semi-steel tires (YoY +17.9%), all-steel tires 0.4911 million (YoY +62.8%); completed tire sales of 15.1 million (YoY +10.35%), of which semi-steel tires sold 14.61 million bars (YoY +9.06%), all-steel tires sold 0.4849 Million bars (YoY +71.3%)

The company's Thai plant basically maintained full production. In the first half of the year, the Thai base achieved revenue of 2.61 billion yuan (YoY +41%) and achieved net profit of 0.71 billion yuan (YoY +110%). However, in the second quarter, the Thai factory confirmed that tax rebate revenue generated by a decline in half-steel tax rates reduced costs. As a result, the overall gross margin increased 10.84 pct to 33.24% year-on-year as production capacity utilization increased, half-steel continued to be fully produced, and tax rebate benefits. On the cost side, the overall sales expense ratio, management expense ratio, and R&D expense ratio increased slightly by 0.63 pct year on year. Financial expenses declined as interest income increased by more than 50 million yuan year on year. Overall, the net profit margin increased 9.07pct to 26.21% year over year.

The supply of steel continued to be in short supply in the second quarter. All steel was under slight pressure, and tax rebate revenue confirmed an increase in profitability. According to the company's announcement, the company's tire production in the second quarter was about 8.01 million bars (YoY +10.7%, QoQ -0.8%), of which semi-steel tire production is estimated at 7.856 million bars (YoY +11.1%, QoQ +1.5%) and all-steel tire production of 0.1553 million bars (YoY -6.6%, QoQ -53.8%); tire sales in the second quarter were about 7.49 million bars (YoY +5.5%, QoQ -1.5%), of which semi-steel tire sales were estimated to be about 7.33 million bars (YoY +5.7%, QoQ +0.7%), all-steel tire sales 0.1571 million bars (YoY -1.8%, QoQ -52%). The slight month-on-month decline in overall production and sales was mainly due to the rapid increase in shipping costs and the shortage of containers, which affected shipments. In addition, all steel was affected by the US anti-dumping duties on all Thai steel in May. Therefore, US demand for all steel from Thailand was good from January to April '24, which made some US customers have relatively high all-steel inventories, which affected the company's all-steel shipments in May-June. However, during the Q2 period, the company successively received tax rebates from Thai Semi-Steel, increasing gross margin by an estimated 2.5 pct-3 pct as a result. Overall, the company's gross margin for the second quarter increased by 3.95pct month-on-month to 35.27%. On the expense side, overall cost control was good. Financial expenses were significantly reduced by nearly 70 million yuan month-on-month due to an increase in exchange earnings and interest income. Overall, the net profit margin increased 4.92 pct to 28.76% month-on-month.

Morocco is about to start production, which is expected to enhance the company's high-end support and ability to withstand trade barriers. According to the announcement, as of the end of June 2024, the number of projects under construction by the company increased by about 0.6 billion yuan to 1.038 billion yuan compared to the beginning of the year, with the main increase of 0.54 billion yuan due to the increase of 0.54 billion yuan in the project under construction at the Moroccan base. Morocco's project to produce 12 million high-performance cars and light truck radial tires per year is expected to be put into operation by the end of September 2024, and is expected to contribute more than half of production by 2025. 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 of 2024-2026 is estimated at 2.31, 2.46, and 2.81 billion yuan, corresponding to PE about 10, 10, or 8 times, maintaining an “increase in holdings” rating.

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