2023H1's net profit rose 80.0 per cent year-on-year to 110.0 per cent. The company estimates that the profit attributable to 2023H1 owners is about RMB 2.85 to RMB 333 million, up about 80 per cent to 110 per cent year-on-year. The board of directors expects a significant increase in profit compared with the same period last year, mainly due to the recovery of the domestic economy and the increase in demand in overseas markets, the obvious recovery in demand in the tire industry, and the continuous adjustment of product structure and business structure by seizing market opportunities. Product sales have increased significantly. 2023H1 Group achieved tire sales of 11.5 million units, an increase of 22.8% over the same period last year. At the same time, the company's gross profit margin improved significantly, benefiting from the decline in the price of raw materials.

Actively promote capacity expansion. The Group's current Thailand Phase II project and Shandong tire production base all-steel radial tire 105 million / year and semi-steel radial tire 2.8 million sets / annual production expansion project have reached production in 2022Q1 one after another. In 2022, the capacity utilization of all-steel radial tire and semi-steel radial tire in Thailand tire production base was 94.4% and 57.1%, respectively. In 2022, the capacity utilization of all-steel radial and semi-steel radial tires in Shandong tire production base was 69.0% and 85.8%, respectively.

Implement comprehensive and strict quality control and production management system. In 2022, the group continued to increase the degree of automation, reduce manual labor and improve production efficiency. The man-hour efficiency of all-steel / semi-steel radial tire in Shandong tire production base increased by 3.8% and 8.4% respectively compared with the same period last year; the man-hour efficiency of all-steel / semi-steel radial tire in Thailand tire production base increased by 20.9% and 2.7% respectively compared with the same period last year.

Actively open up the market and optimize the layout of channels. In 2022, the group developed 17 new domestic dealers and 109 new five-star stores. In 2022, the cumulative contribution of customers of five-star stores accounted for 41.4% of the total sales of the group's domestic all-steel replacement market, and the group's market share in domestic all-steel replacement was further increased. In 2022, the group newly developed 88 overseas distributors, and the revenue from international distribution business increased by 31.9% over the same period last year. The company's overseas market has maintained rapid growth in recent years, and has successfully signed 260 overseas dealers, serving more than 100 countries around the world.

Driven by technological innovation, lean production to improve efficiency. The group is the first to create five-drum molding machine and flexible winding technology of truck tread for all-steel radial tire, breaking the monopoly of foreign new technology. Through the implanted RFID electronic chip inside the tire, the group can monitor the ID card of the tire and realize the automatic data identification of the tire production, sales, use and refurbishment process, so as to realize the whole life cycle management and traceability of the tire. In 2022, the company aimed at new energy vehicles, increased the development of new products, the application of new materials and new technologies, and developed 375 new products in the whole year.

Profit forecast and investment rating: we downgrade our performance due to lower-than-expected sales in the first half of the year. We estimate that the 23-25 net profit of the company will be 7.01 (- 45%), 7.70 (- 43%) and 847 million yuan (newly introduced) respectively. Based on the valuation of comparable companies in the same industry and taking into account the fact that Hong Kong shares are valued at 6.6 times PE in 2023, the corresponding target price is HK $8.44 (the previous target price is HK $7.18, based on 9 times PE,+18% in 2022), with an investment rating of "better than the market".

Risk tips: macro environmental risk; US tariff risk; overseas investment risk.