Investment logic:
Stability: Build competitive advantage by relying on comprehensive product planning and forward-looking overseas layout.
The company completed the product layout of half-steel tire+all-steel tire+off-road tire (including giant tires) within 7 years after establishment. The rich and comprehensive products meet the needs of more customers while also reducing the risks brought about by changes in the industry segment's prosperity. As the first domestic tire company to build an overseas factory, the company currently has two major overseas bases in Vietnam and Cambodia, and is also planning two new bases in Indonesia and Mexico. The double anti-tax rate for passenger car tires exported from the Vietnamese base to the US is 6.23%, and the other overseas bases have a zero tax rate. The overall export tariffs are low, and policies and related risks can be better prevented through a multi-base layout. From an operational perspective, the company has also optimized inventory and expense management, while at the same time minimizing the impact on performance caused by non-operating profit and loss such as exchange. With its strong competitive advantage, the company had strong performance resilience during the downturn in the industry and showed good performance flexibility during the recovery. The performance forecast shows that it is expected to achieve operating income of about 26 billion yuan in 2023, an increase of about 18.7% over the previous year, and net profit of about 3.1 billion yuan to the mother, an increase of about 132.8% over the previous year.
Growth: In the context of a boom in the industry, we rely on adequate production capacity planning to quickly meet demand and shape brand value through the promotion of “liquid gold” products. The tire industry has a broad market space and relatively stable demand. In the context of consumption downgradation, the cost performance ratio of domestic tires has been highlighted, and the global market share has increased. The price of rubber, the core raw material, is still relatively low. It is expected that the tire industry's good profit situation will be maintained due to poor price performance in the future. By the end of 2022, the company had production capacity of 11.95 million all-steel tires, 51.6 million semi-steel tires, and 124,600 tons of off-road tires. With technical improvements and production expansion at domestic bases, production capacity at overseas bases in Vietnam and Cambodia, and the commissioning of production capacity at two new bases in Indonesia and Mexico, the company's production capacity is expected to increase to 16 million all-steel tires, 77 million semi-steel tires, and 297,000 tons of off-road tires by 2025. The company also entered the high-end market by promoting liquid gold tires, increasing the price of single tires while forming a brand premium.
Profit forecasts, valuations, and ratings
We predict that in 2023/2024/2025, the company will achieve operating income of RMB 260, 330.6, and 38.17 billion yuan, +18.7%/+27.1%/+15.5% YoY, net profit of RMB 31,400,4.6 billion, +132.7%/+29.1%/+14.9%, corresponding EPS of 0.99, 1.22, and 1.4 yuan.
The corresponding valuation of the current stock price is 17.21, 14.02, and 12.2 times PE, respectively. Considering that the company's own competitive advantage and growth potential are very strong, and the brand value brought by superimposing liquid gold tires, the current valuation is relatively low, and it is still given a “buy” rating.
Risk warning
Prices of raw materials fluctuated greatly; the release of new production capacity fell short of expectations; international trade frictions; promotion of liquid gold tires fell short of expectations; sea freight rates fluctuated greatly; exchange rate fluctuations; and guarantee risks.