Incident: On August 29, 2024, Mori Kirin released its 2024 mid-year report. The company's 1H24 revenue was 4.11 billion yuan, up 16.21% year on year; net profit to mother was 1.077 billion yuan, up 77.71% year on year; after deducting non-net profit, it was 1.059 billion yuan, up 81.56% year on year. The corresponding company's 2Q24 revenue was 1.995 billion yuan, down 5.7% month-on-month; net profit to mother was 0.574 billion yuan, up 13.87% month-on-month.

Comment: Benefiting from the increase in brand power and the implementation of tax rates, the company's tire sales increased year-on-year. According to the company's 2024 semi-annual report, the share of the company's tire products in the US replacement market exceeds 5% and the share of the European replacement market exceeds 4%. 1H24 completed tire production of 16.0866 million bars, an increase of 18.90% over the same period last year; among them, semi-steel tire production was 15.5955 million bars, an increase of 17.90% over the same period last year; all-steel tire production was 0.4911 million bars, an increase of 62.78% over the same period last year. Sales of 15.0971 million tires were completed, an increase of 10.35% over the same period last year; among them, sales of semi-steel tires were 14.6121 million bars, up 9.06% from the same period last year; sales of all-steel tires were 0.4849 million bars, an increase of 71.28% over the same period last year.

In terms of semi-steel tires, Chinese tires have a cost-effective advantage in the European and American markets. Order demand for 1H24's semi-steel tire products in the European and American tire markets continues to be in short supply, and the company continues to steadily develop domestic markets with high growth potential. In terms of all-steel tires, the company obtained a separate minimum tax rate of 1.24% from the US Department of Commerce in the first annual administrative review of anti-dumping investigations against Thai passenger car and light truck tires. At the same time, the company's Thailand Phase II project was put into large-scale production in 2023, which contributed to the company's all-steel tire sales. We are optimistic about the brand strength of the company's semi-steel tires in the European and American markets and the tax rate advantage of all-steel tires, and it is expected that the market share of the company's products will increase further.

1H24's sales expenses increased 18.92% year on year, sales expense ratio was 1.49%, up 0.04 pcts year on year; management expenses increased 13.00% year on year, management expenses rate was 2.18%, down 0.06 pcts year on year; financial expenses decreased 46.88% year on year, financial expenses rate was -1.74%, down 0.36 pcts year on year; R&D expenses increased 59.42% year on year, and R&D expenses increased by 2.39% year on year, up 0.65 pcts year on year.

The net cash flows of the 1H24 company varied greatly. Net cash flow from operating activities was $0.695 billion, down 4.12% year on year; net cash flow from investing activities was -1.566 billion yuan, down 422.49% year on year; net cash flow from financing activities was -0.452 billion yuan, down 320.32% year on year. The balance of cash and cash equivalents at the end of the period was $2.51 billion, up 16.96% year over year. Accounts receivable increased by 1.54% year over year, and the accounts receivable turnover increased from 3.58 in the same period in 2023 to 3.65. Inventories increased 8.31% year over year, and inventory turnover increased from 1.67 times in the same period in 2023 to 1.74 times.

The company optimizes its product structure and gradually increases its profitability. The company's product structure is mainly based on large-sized high-performance passenger cars and light truck tire products with rim sizes of 17 inches and above. They are suitable for models such as mid-size cars, off-road vehicles, city SUVs, pickups and commercial vehicles. The added value is higher, the premium capacity in the corresponding pricing process is stronger, and the gross margin is higher. According to the company's 2024 semi-annual report, the company's sales volume of 17 inch and above, 18 inch and above large-size high-performance passenger car and light truck tire products has remained above 65% and 40% respectively in recent years. The optimization of the company's product structure has enhanced the company's customer cooperation and stickiness in the global middle and high-end market, and the good product digestion ability of customers in the middle and high-end market has driven the company's profit level to continue to be at a high level. We are optimistic about the continuous optimization of the company's product structure, and the overall profit level is expected to increase.

The company's globalization strategy has been accelerated, and the Morocco project is progressing steadily. According to the company's 2024 semi-annual report, the company is speeding up the “Morikirin (Morocco) project to produce 12 million high performance cars and light trucks per year” and is steadily advancing the “Spanish project to produce 12 million high performance cars and light truck radial tires per year”. Currently, the company's Morocco factory is progressing steadily according to the plan, making every effort to start production and operation in the fourth quarter of 2024. We believe that in the future, along with the increase in production capacity at the Moroccan factory, the company's business scale is expected to continue to expand, opening up new room for profit growth.

Investment advice: We expect Mori Kirin's 2024-2026 revenue to be 9.621/11.827/13.865 billion yuan, up 22.7%/22.9%/17.2% year on year, and net profit to mother of 2.226/2.605/3.065 billion yuan, respectively, up 62.7%/17.0%/17.7% year over year, corresponding EPS of 3.01/3.53/4.15 yuan respectively.

Combined with the company's closing price on September 13, the corresponding PE was 8/7/6 times, respectively. Based on the following three aspects: 1) We are optimistic about the brand strength of the company's semi-steel tires in the European and American markets and the tax rate advantage of all-steel tires, and we expect the company's product market share to increase further; 2) we are optimistic about the continuous optimization of the company's product structure, and the overall profit level is expected to increase; 3) We believe that with the expansion of production capacity in the Moroccan factory, the company's business scale is expected to continue to expand, open up new profit growth space, and maintain the “buy” rating.

Risk warning: raw material price fluctuation risk, environmental risk, macroeconomic fluctuation risk, R&D risk, management risk, exchange rate fluctuation risk