The company's Q3 performance was in line with expectations, with net profit of 0.65 billion yuan, +67.5%/+13.0% month-on-month, growing steadily under unfavorable conditions such as raw material prices and exchange. The company is leading in profitability, the Moroccan factory has begun production, and a breakthrough has been achieved in high-end support. Maintain a “Highly Recommended” rating.

Q3 results were in line with expectations, and quarterly profit reached a new high.

1) Net profit: Q3 net profit of 0.65 billion yuan to mother, +67.5%/+13.0% YoY. Among them, exchange losses were 60 million yuan (Q2 was profit of 26 million yuan) and shipping subsidies were 46 million yuan (Q2 was 18 million yuan). After excluding these two factors, Q3 net profit increased significantly compared to Q2.

2) Revenue: Q3 revenue was 2.23 billion yuan, +1.1%/+11.8% YoY, mainly reflecting sales growth.

3) Sales: Q3 semi-steel tires sold 8.05 million bars, +10.1% month-on-month; all-steel tires sold 0.1916 million bars, +21.2% month-on-month.

4) Gross profit margin: The Q3 gross profit margin was 39.5%, +12.0pct/month-on-month, rising against the trend against the backdrop of rising raw material costs, reflecting the combined effects of declining double anti-tax rates, increased scale effects, and product structure improvements.

5) Expense rate: The total cost rate for sales, management, and R&D in Q3 was 6%, the same as -0.4 pct/ month on month; the financial cost ratio was 1.1%, -1.1 pct/month-on-month, and +4.7 pct, mainly reflecting the impact of exchange.

The Moroccan factory has been put into operation, and the globalization strategy is progressing steadily. The Morocco plant was officially put into operation on September 30, and it only took 11 months from the start of construction in October 23 to the start of production. The factory is designed to produce 12 million semi-steel radial tires per year. Production is scheduled to be achieved by mid-next year, with a target sales volume of 8 million bars in 25 years. Morocco exports to the US with zero tariffs, and the short shipping distance can save freight. The gross margin is expected to be higher than that of the Thai factory; the local tire factory is only Morikirin, so the risk of being anti-dumping is very low. We are optimistic that next year, the Moroccan factory will crawl to drive the company's performance growth.

Breaking through overseas high-end facilities, brand strength continues to improve. 1) The company has previously obtained supporting qualifications from German Volkswagen, and several models have received fixed nominations. It is expected that the first model, the Volkswagen Tiguan, will soon be supplied to the German Volkswagen headquarters. 2) The company obtained official supplier status from Toyota in Japan in the first half of the year. The two models are being tested and are expected to be delivered in 25 years. 3) The Moroccan factory is expected to receive front-end assembly from local Renault and Stellantis.

Maintain a “Highly Recommended” rating. Q3 Strong performance, steady growth under unfavorable conditions such as raw material prices and exchange, reflecting excellent operating ability. The forecast net profit for 2024-2026E is 2.38 billion/2.52 billion/3.05 billion yuan, +73.8%/+6.1%/+20.7% YoY, corresponding to 11x/10.3x/8.6x 2024-26EP/E. Maintain a “Highly Recommended” rating.

Risk warning: fluctuating raw material prices, falling short of expectations in production capacity, fluctuating exchange rates