Incidents:

On October 29, 2024, Fengshen Co., Ltd. released its report for the third quarter of 2024: for the first three quarters of 2024, the company achieved operating income of 4.88 billion yuan, an increase of 14.78%; achieved net profit attributable to shareholders of listed companies of 0.276 billion yuan, a year-on-year decrease of 2.05%; and the weighted average return on net assets was 8.30%, a year-on-year decrease of 0.82 percentage points. The gross profit margin on sales was 17.28%, down 2.39 percentage points from the previous year; the net profit margin was 5.65%, down 0.97 percentage points from the previous year.

The company achieved revenue of 1.731 billion yuan in 2024Q3, +17.07% year over month; realized net profit of 0.045 billion yuan, -59.57% year on year, -71.14% month on month; ROE was 1.34%, down 2.21 percentage points year on year and 3.37 percentage points month on month. The gross profit margin on sales was 14.60%, down 7.26 percentage points from the previous year and 4.41 percentage points from the previous year; the net sales margin was 2.60%, down 4.94 percentage points from the previous year, and 6.70 percentage points from the previous month.

Investment highlights:

Actively overcoming adverse factors such as shipping costs and exchange rate fluctuations, Q3 tire sales achieved a month-on-month increase of 2024Q3, and the company achieved revenue of 1.731 billion yuan, +0.252 billion yuan year over year, and +0.051 billion yuan month-on-month; realized net profit of 0.045 billion yuan, -0.07 billion yuan year on year, -0.067 billion yuan month on month; achieved gross profit of 0.253 billion yuan, year on year Compared to -0.067 billion yuan. 2024Q3, the price of the main raw materials for the company's tire products rose sharply. The comprehensive procurement cost of major raw materials such as natural rubber, synthetic rubber, carbon black, steel wire cord, and curtain cloth increased 3.27% month-on-month and 12.02% year-on-year. Among them, the procurement cost per unit of natural rubber increased by 3.61% month-on-month and 29.67% year-on-year, while the procurement cost per unit of synthetic rubber increased 7.61% month-on-month and 23.89% year-on-year. The increase in raw material costs led to pressure on the company's gross margin phase in the third quarter. In terms of price, the sales price of major tires fell 3.55% month-on-month and 4.03% year-on-year due to insufficient all-steel radial tire construction and increased domestic competition, compounded by fluctuating exchange rates in overseas markets and rising shipping costs. The company actively overcame short-term adverse factors, and 2024Q3 achieved sales volume of 1.4977 million bars, +5% month-on-month and +18% year-on-year.

In terms of period expenses, 2024Q3's sales/management/R&D/finance expenses were 0.46/0.041/0.071/0.025 billion yuan respectively, -0.04/-0.04/+0.016 billion yuan year-on-year, and +0.12/-0.01/+0.20/+0.032 billion yuan compared to the previous month. Financial expenses increased significantly month-on-month, and we presume that this was mainly due to exchange losses.

The new construction project will increase giant tire production capacity. I am optimistic that profits will increase after the project is put into operation. The company will have the ability to produce a full range of industrial tires, while gradually expanding giant tire production capacity. In the first half of 2024, the company quickly responded to market demand, actively developed new businesses, and gradually transformed its product structure to an off-highway tire strategy. According to the company's EIA, the 0.08 million giant and special seed afternoon tire project can increase production capacity of 74,000 special engineering radial tires and 6000 giant tires after delivery. It is expected to increase annual revenue by 0.927 billion yuan and achieve a total annual profit of 0.239 billion yuan. It has good economic benefits, and is the first step in the company's leading global plan for giant tire production capacity.

Furthermore, the 0.02 million high-performance mega-engineering radial tire expansion and efficiency project that the company plans to build is an important step for the company to achieve new quality productivity and drive the overall transformation and upgrading of the company's management system. According to the EIA of the company's project, the project can increase production capacity of 19,500 giant tires and 500 radial tires after delivery. It is expected to reach an average annual revenue of 1.803 billion yuan and achieve a total annual profit of 0.726 billion yuan. Giant tire products have high investment, high yield and high return, greatly enhancing the profitability of the company's products.

The cash dividend ratio for the first three quarters reached 31.47%. Taking into account the company's long-term development and shareholder returns on October 22, 2024, the company announced a shareholder dividend return plan for the next three years (2024-2026). The details of the plan are that when the company has the conditions for cash dividends, profits should be distributed using cash dividends. The cumulative profit distributed in cash for the last three years shall not be less than 30% of the average annual distributable profit achieved in the last three years. The plan ensures the sustainability and stability of the company's profit distribution policy, taking into account the company's long-term development and shareholder returns.

On October 29, 2024, the company issued an announcement on the profit distribution plan for the first three quarters of 2024. The company uses cash dividends to distribute profits for the first three quarters of 2024, and plans to distribute a cash dividend of 0.12 yuan (tax included) to all shareholders. As of September 30, 2024, the company's total share capital of 0.729 billion shares is calculated as a total of 87.5341 million yuan (tax included). The company's cash dividend ratio for the first three quarters of this year was 31.74%.

Profit forecasts and investment ratings

Taking into account the company's product prices and overall macro demand, we moderately adjusted the company's profit forecast. We expect the company's revenue for 2024-2026 to be 6.435, 6.73, and 7.331 billion yuan, respectively, and net profit to mother of 0.351, 0.472, and 0.642 billion yuan respectively, corresponding to PE 13, 10, and 7 times, respectively. We are optimistic about the company's growth and maintain a “buy” rating.

Risk warning

Policy implementation, new production capacity construction progress falls short of expectations, new production capacity contribution performance falls short of expectations, raw material prices fluctuate, environmental policy changes, exchange rates fluctuate sharply, and the economy has declined sharply.