Key points of investment:
The company released the 2023 annual report and the 2024 quarterly report: 1) In 2023, the company achieved revenue of 25.98 billion yuan (YoY +18.6%), realized net profit of 3.09 billion yuan (YoY +132%), and realized net profit of 3.146 billion yuan (YoY +135.6%); of these, 23Q4 achieved 6.97 billion yuan (YoY +34.4%, QoQ -5.6%), achieving net profit attributable to mother of 1.07 billion yuan (YoY +299%, QoQ +8.9%) At 1.05 billion yuan (YoY +313%, QoQ +8.6%), the results were in line with expectations. 2) In the first quarter of 2024, revenue of 7.296 billion yuan (YoY +35.8%, QoQ +4.7%), achieved net profit attributable to mother of 1,034 billion yuan (YoY +191%, QoQ -3.1%), and realized net profit of 1,015 billion yuan (YoY +177%, QoQ -3.1%), which is in line with expectations.
The industry returned to normal in 2023, with the company leading the global layout, rapid increase in production and sales volume, complete superposition product layout, and rapid increase in revenue and profit. According to the company's announcement, demand in the domestic tire market recovered significantly in 2023, and the impact of foreign distributors' inventory removal on the company's production and operation was gradually eliminated in the second half of the year. With the release of the company's production capacity and continuous increase in production capacity utilization, the company's production and sales of all-steel tires, semi-steel tires and off-road tires all reached record highs. In 2023, the company's tire production and sales volume was about 58.64 million (YoY +35.7%) and 55.79 million (YoY +27.1%), respectively. The main increase was due to the full production of semi-steel at the Cambodian base and the rapid increase in domestic sales. In 2023, the revenue and net profit of the company's Vietnam plant (including ACTR) were about 7.23 billion yuan (YoY -2.8%) and 1.59 billion yuan (YoY +46.9%), respectively. The year-on-year decline in revenue was mainly due to ACTR factory inflation and inventory removal affecting the sales volume and revenue of Goodyear's trademark brands. The significant increase in profit was mainly due to the increase in the share of off-road vehicles in Vietnam, especially the increase in the share of giant tires. The revenue and net profit of the Cambodian factory in 2023 were about 2.33 billion yuan (YoY +185%), and net profit was about 565 million yuan (about 30 million yuan in 2022), mainly due to the complete capacity of the Cambodian base in 23 and a half years of steel production. In addition, prices of various raw materials declined year on year in 2023, compounded by increased production and sales volume and product structure improvements, resulting in an overall increase in gross margin of 9.22pct to 27.64% year over year. On the cost side, the three fee rates have all increased. Among them, the sales expense ratio increased by 1.14 pct year on year due to domestic publicity and personnel cost increases, the management cost rate increased by 0.58 pct year on year due to personnel management expenses and equity incentive expenses, and the R&D cost rate increased 0.4 pct year on year with the layout and supporting layout of the company's new liquid gold model, and the company's equity incentive expenses in 2023 increased by about 96 million yuan. Furthermore, asset impairment losses increased by about 90 million yuan over the same period last year as the company expanded in size. Overall, the net profit margin increased by 5.81 pct to 12.33% year over year.
23Q4 China ushered in a low season. Revenue declined month-on-month, changes in product structure, and increased domestic prices brought about an increase in profitability. According to the company announcement, 23Q4's tire production and sales volume was about 16.62 million pieces (YoY +64.4%, QoQ +1.7%) and 14.93 million pieces (YoY +59.5%, QoQ -5.2%), respectively. Sales declined slightly from month to month, mainly due to the poor domestic season in the fourth quarter. However, since the prices of some raw materials were mainly rubber raw materials in September-October, showing a short-term upward trend, the price of raw materials declined somewhat. The company raised prices for the domestic market by more than 3%, and when the price of raw materials recovered, there was no price correction, so overall domestic profitability increased. In addition, the construction and relocation of domestic off-highway production capacity in Qingdao and Weifang ended in October. Q4 domestic giant tires were gradually put into operation, and capacity utilization increased, which also led to overall profit growth. As a result, gross margin increased markedly to 33.6% in the fourth quarter compared to the same period last year. On the cost side, with the estimation of bonuses and remuneration for personnel at the end of the year and the continuous promotion of domestic liquid gold tires, all expenses can be increased, bringing the net profit margin to 15.77% year-on-month.
24Q1 sales reached a record high, demand for semi-steel tires continued to be strong, and profit margins declined month-on-month due to changes in other product structures. According to the company announcement, 24Q1's tire production and sales volume was about 17.25 million pieces (YoY +49.8%, QoQ +3.8%) and 16.58 million pieces (YoY +43.7%, QoQ +11.1%), respectively. The quarterly production and sales volume reached record highs. The main increase was due to strong demand for semi-steel tires, good domestic and foreign semi-steel delivery, combined with the company's continuous investment in channels, and all-steel sales continued to increase. In terms of gross margin, there was a month-on-month decline due to changes in product structure and changes in cost calculation, but remained high year-on-year, at about 27.7%. On the cost side, sales expenses declined month-on-month after the maximum investment period. In addition, Q1 estimates that equity incentives were about 58 million yuan, and the overall three-fee rate declined month-on-month. Furthermore, due to the Vietnamese factory's estimated expenses of about 30 million yuan related to the global minimum income tax rate, the overall net profit margin for Q1 fell 1.38 pct to 14.39% month-on-month.
The global strategic layout continues, and Cambodia continues to expand and superimpose the layout of Mexico and Indonesia as its third and fourth overseas bases, contributing to growth in 2025 and beyond. By the end of the first quarter of 2024, the company's projects under construction amounted to about 1,123 million yuan (an increase of 266 million yuan over the end of 23). The company's main growth in 24-26 came from the release of domestic production capacity from Qingdao and Weifang giants and other off-highway production capacity; the increase in the utilization rate of Vietnam's Phase III production capacity; the second phase of Cambodia increased production capacity to 12 million pieces of semi-steel, which is expected to be put into operation by the end of 2024, contributing most of the production capacity by 2025; and Mexico and Indonesia are expected to start production in the first half of 2025. With the imposition of trade barriers in the US and other regions in the past two years, the company's global layout is leading. In '23, the company was also gradually adjusting the sales areas of its bases in Cambodia and Vietnam to avoid the risk of trade barriers as effectively as possible. The promotion of liquid gold is going well, and it is expected that it will work simultaneously in the supporting and terminal retail markets to enhance the high-end of products and brands. The company began promoting terminal retail liquid gold semi-steel tires in February 2023, and this year there were many promotions related to CCTV advertisements, Asian Games advertisements, etc., and domestic consumer awareness of brands and products gradually increased. The price of the company's domestic sales terminals is strictly controlled, and the product quality is excellent and the profit is high, so dealers and stores are highly willing to sell. In 2024, the company will continue to adjust the product structure to increase the proportion of high value-added products. Furthermore, since the launch of liquid gold tires, the company's supporting market has also gained momentum rapidly. Through assessment goals based on profit and brand as the main supporting targets, it has also gradually entered some best-selling models, accumulating insufficient revenue.
Profit forecasting and valuation: The company's production capacity has no cutoff period. There are large-scale reserves, channel reserves, and product reserves in the early stages, and revenue profits can be quickly released. Considering the gradual commissioning of the company's Mexican and Indonesian plants in 2025, maintaining 2024, slightly improving 2025, and adding the 2026 profit forecast, the net profit for the three years is estimated to be about 45.7, 54.3 (original forecast of 5.37 billion yuan), and 6.38 billion yuan, corresponding to PE about 12, 10, and 9 times, maintaining a “buy” rating.
Risk warning: Overseas demand falls short of expectations; capacity construction falls short of expectations, and a sharp rise in raw materials affects profitability