Core views

Fengmao Co., Ltd.: leading domestic rubber transmission belt enterprise

The company's products are mainly precision rubber parts, including transmission system components, fluid piping system parts and sealing system components. In 2023, about 90.15% of the company's revenue came from the automotive sector.

24H1 achieved revenue of approximately 0.439 billion yuan, +10.64% year-on-year.

Rubber parts industry: The automobile and non-vehicle sector has rich terminal application scenarios, and the market capacity is large. Automotive sector: 1) Vehicle support: The cost of non-tire rubber parts accounts for about 2% of the vehicle cost. The size of the non-tire rubber market in 2023 is USD 28.7 billion, and is expected to reach USD 42.7 billion by the end of 2030, with a CAGR of about 5.88% between 2024 and 2030. 2) Aftermarket:

According to the McKinsey report, the global automotive aftermarket will continue to expand until 2030. Non-automotive sector: The company's transmission system components can be used in industrial machinery; among fluid piping components, bathroom water pipe products can be used in bathroom equipment; sealing system components such as O-rings, gaskets, special-shaped sealing rings, etc. can be used in industrial machinery, household appliances, etc.

The company's growth logic: based on the main transmission system, to create a new growth pole in the traditional automotive business field: 1) Overseas competition: The company gradually opened up overseas markets, and the revenue share of overseas customers among the top five customers increased from about 5.28% in 2020 to about 27.15% in 2023.

It has successively obtained licenses from brands such as Bosch and Schaeffler. The company will rely on the “Michelin” authorized brand to lay out a global sales network, speed up the establishment of dealer channels in various countries, and increase market share.

In the second half of 2021, the company was commissioned by Michelin to independently design, develop, and produce transmission belt products, and exclusively use its authorized brands for foreign sales within China. In May 2022, the company obtained further brand authorization from Michelin and was approved to sell products in some countries such as the European Union, Asia, and South America. In addition, the company plans to build new production capacity bases in Thailand and Malaysia. 2) Import substitution:

Transmission system products have entered the supply chain of independent and joint venture brands. They have been equipped with various models from mainstream brands such as SAIC-GM-Wuling, SAIC Motor Group, FAW Group, and Geely Automobile, and the domestic vehicle support market has gradually achieved import substitution. The domestic market share of automobile transmission belts and tension wheels increased from 11.56% and 1.62% in 2019 to 22.19% and 1.92% in 202H1.

New automotive business areas: 1) Existing products have expanded into commercial vehicles and new energy vehicles. 24H1 added a number of new commercial vehicle project targets. Furthermore, new energy supporting products such as battery cooling pipelines and hydrogen fuel cell pipelines are being developed on the basis of the original vehicle's supporting fluid piping system products.

2) Expand the air suspension business segment and create a second growth curve. Small orders for 24H1 commercial vehicle air spring products have been delivered. Non-automotive sector: New product expansion penetrates into various fields of industry, agriculture, and motorcycles, supporting high-quality customers such as Yunnei Power and Cummins.

Investment advice

We expect the company's revenue for 2024-2026 to be approximately 0.921 billion yuan, 1.059 billion yuan, and 1.218 billion yuan, respectively, about +14.9%, +15.0% year on year; net profit to mother will be about 0.159 billion yuan, 0.187 billion yuan, and 0.22 billion yuan, respectively, about +15.4%, and +17.7% year over year.

As a leading rubber transmission belt company, the company focuses on automotive applications, with a high level of end customers, covering many well-known car companies and parts manufacturers at home and abroad; new products continue to expand, laying out commercial vehicles and new energy vehicles, and new air suspensions are expected to open a new growth curve. As of November 13, 2024, the stock price for 2024-2026 PE was about 21.53 times, 18.34 times, and 15.58 times, respectively. First coverage, giving a “buy” rating.

Risk warning

Customer demand falls short of expectations, industry competition intensifies, raw material prices fluctuate, and exchange rates fluctuate.