Incident: The company issued an announcement and 24Q3 quarterly report on the investment project to build a production base in Morocco.

As of 24Q3, the company achieved operating income of 3.84 billion yuan during the year, a year-on-year decrease of 7.97%; realized net profit to mother of -0.108 billion yuan, a year-on-year decrease of 202.10%; and basic earnings per share fell from 0.33 yuan in '23 to -0.32 yuan. During the reporting period, the price of main products declined due to increased competition in the industry, compounded by increased shipping costs and the impact of anti-dumping tariffs in overseas markets, causing the company's current business to show losses. We believe that during the year, the company underwent comprehensive stress tests at the level of industry competition and business operations. Considering that the subsequent completion and operation of the company's production base in Morocco will effectively increase the company's profit margin and help the company further expand the offshore market and reduce the disruptive impact of shipping costs, the company is expected to achieve an effective performance reversal.

It is a leader in the tire ring steel wire industry, and the gross profit level is expected to be optimized after industrial integration. Currently, the tire ring steel wire industry has entered the stage of capacity integration, and the continuous decline in market prices will force small and medium-sized manufacturers with low economies of scale to exit the market, putting some pressure on the company's performance. However, with the gradual completion of mergers and restructuring of the industry's superior resources, the company, as the leader in the bezel steel wire market, is still very flexible in releasing future performance. We expect the business's gross profit level to rebound and optimize, or increase to 12% by 2025. According to published data, the company's tire ring steel wire business achieved revenue of 1.118 billion yuan, accounting for a revenue ratio of 1.118 billion yuan, rising from 41.6% in 23 to 42.5%; achieving gross profit of 0.062 billion yuan, the gross profit share fell to 41.3% from 49.1% in 23, and gross margin decreased by 4.2 pct to 5.54% from 23. 2024H1 From the perspective of production capacity and output, the company's tire wire production capacity increased by 30% to 0.88 million in '23, and production increased by 21.55% to 0.428 million tons, with a market share of 38.3%. The company's tire ring steel wire production capacity utilization rate and production and sales rate are extremely high, reaching 107% and 101.5% respectively in 23 years, showing the strong market competitiveness and strong fluidity creation ability of the company's tire ring steel wire products.

The production capacity of the steel cord business continues to expand. The steel cord business has grown into the company's second growth curve. With the completion of the second phase of the construction of the first phase of the steel cord factory in the Kenli factory area, the company's steel cord production capacity will continue to expand. 2024H1, the company's steel cord business achieved revenue of 1.285 billion yuan, accounting for a revenue ratio of 48.8%; achieved gross profit of 0.062 billion yuan. The gross profit ratio fell from 43.2% in '23 to 41.3%, and the gross margin decreased by 2.1 pct to 4.86% from '23. From the perspective of production and capacity utilization, the company's steel cord production in 2023 was +22.08% to 0.3595 million tons, and the capacity utilization rate rose to 77.3%, indicating that actual production capacity began to resume effective operation after the restructuring of Shengtong Steel Cords. We believe that the steel cord business will continue to grow as a share of the company's main revenue in '25, and the level of business profit and gross profit is also expected to rebound and optimize (the gross profit contribution is expected to be about 0.409 billion yuan by '25, and gross margin may increase to more than 10%).

The construction of a production base in Morocco helped the company grow its overseas business. The company's growth is due to an increase in the scale of production and sales and an increase in overseas market revenue share. In 24H1, the domestic market was affected by the rapid expansion of production capacity, and sales volume decreased by 3.03% year on year. However, the company continued to expand in overseas markets, and sales increased by 12.92% year on year. The company announced on October 30, 2024 that it plans to invest about 1.485 billion yuan to invest in the construction of a bezel steel wire and steel cord production base in Morocco. Among them, the first phase invested about 0.85 billion yuan (corresponding tire ring steel wire production capacity 0.04 million tons/year, steel cord production capacity 0.04 million tons/year), and the second phase invested 0.635 billion yuan (corresponding bezel steel wire production capacity 0.06 million tons/year, steel cord production capacity 0.06 million tons/year). Construction of the first phase of the project is scheduled to begin in January 2025 and is expected to be completed and put into operation in December 2026. Looking at the company's overseas market expansion data, the company's overseas business revenue has increased sharply from 0.4475 billion yuan in 2020 to 1.349 billion yuan in 2023, an increase of +201.4%; during the same period, the gross margin of overseas business rose to a new high of 19.57% (only 4.65% of domestic business gross margin), and the share of overseas gross profit increased sharply from 24.8% to 57.9% (while the share of overseas revenue during the same period only increased from 14.6% to 24.3%). However, due to disturbances caused by the 24H1 Russian-Ukrainian conflict and the Middle East and Red Sea crises, a sharp increase in global shipping routes boosted the increase in shipping costs; at the same time, anti-dumping tariffs and technical trade barriers in the European market forced the company's export prices to drop, putting pressure on the company's profits during the year. After the Moroccan factory is completed, the company's products can be shipped directly from Morocco to the European market, which will help the company cope with international trade frictions and strengthen its ability to control costs in overseas markets, which will further enhance the company's gross profit level in overseas markets. In addition, the actual production costs of the company's domestic products have also entered the optimization cycle. The company's online implementation of distributed wind power projects in the later stages (estimated power generation capacity of 0.5 billion kWh or more), biomass boilers (saving 0.78 million cubic meters of natural gas per year), and the continuous development of photovoltaic projects (cumulative annual power generation of 84,800 MWH) will drive the optimization of the company's overall revenue curve and help increase the company's overall gross profit level to 2026 or 11.79%.

Profit forecast and investment rating: Considering the company's product characteristics, capacity growth and the expansibility of the industry in which it is located, combined with the forecast of production capacity, capacity utilization, production and sales rate and gross margin of the company's various business lines, we predict that the company's revenue for 2024-2026 will be 5.737/6.675/7.611 billion yuan respectively, up 3.26%/16.34%/14.03% year-on-year, achieving net profit to mother 0.034/0.242/0.379 billion yuan, a year-on-year increase of -64.67% /+ 614.25%/+56.56%. The current stock price corresponds to 2024-2026 PE values of 63.86X/8.94X/5.71X, respectively, maintaining the “recommended” rating.

Risk warning: Raw material prices fluctuate greatly, market demand falls short of expectations, production capacity release falls short of expectations, risk of declining gross margin, risk of technological innovation, risk of market competition, and policy risk.