Tire industry: high-end market to break through

China is a tire production and consumption country, upstream raw material prices and the lack of high-end market has become the industry's two most intractable core problems.

Recently, tire companies have released 2022 performance forecasts: Linglong Tire is expected to achieve a net profit of 240 million yuan to 280 million yuan, down 65% to 70%; Qingdao Double Star pre-loss of 540 million to 670 million yuan, the loss of 2021 increased by 68.59% to 109.18%; Giti Tire is expected to achieve operating income of 3.332 billion yuan to 3.682 billion yuan, net profit attributable to shareholders of listed companies is 29.19 million yuan to 43.78 million yuan, withholding non-net profit is 25.45 million yuan to 38.18 million yuan.

From the performance forecast that has been released, tire companies have generally encountered no small difficulties.

Constant upstream pressure

The brand premium of Chinese tires is lower than that of foreign tires, so the gross profit margin of Chinese tire enterprises is lower. In the first three quarters of 2022, the gross profit margin of domestic tire leader Linglong Tire was 13.31%, the gross profit margin of Triangle Tire was 13.64%, and the gross profit margin of racing tire was 17.99%. As the gross profit margin of domestic tire enterprises is generally low, it is very sensitive to cost changes.

China's tire manufacturing costs are mainly composed of raw material costs, labor costs, depreciation costs, energy costs and freight costs, of which nearly 80% are raw material costs.

Taking Linglong tires as an example, in 2021, the raw material cost of Linglong tires accounted for 76.18%, and the raw material accounted for the largest proportion of rubber, reaching 50%.

Tire rubber is divided into natural rubber and synthetic rubber. In 2021, China's synthetic rubber output of 8.117 million tons, an increase of 9.72%; The output of natural rubber was about 850,000 tons, an increase of 22.80%. Due to the growing market demand, from 2016 to 2021, the annual production of natural rubber and synthetic rubber in China is on the rise.

At present, China has become the world's largest consumer of natural rubber. In 2021, China's demand for natural rubber was 5.949 million tons, a year-on-year increase of 98.30%, accounting for 42.25% of the global total consumption.

China's natural rubber gap is large, the need for a large number of imports every year. China's dependence on natural rubber imports is more than 85%, and the number of imports is far greater than the number of exports.

Customs data show that in 2022, the four countries with the largest source countries of China's natural rubber imports are Thailand, Vietnam, Malaysia and Indonesia, with annual imports of 2,696,100 tons, 1,496,400 tons, 651,400 tons and 180,000 tons, accounting for 44.48%, 24.69%, 10.75% and 2.97%. Thailand tops the list.

Not only that, the global natural rubber market supply is also very tight. According to the statistics of the Association of Natural Rubber Producing Countries (ANRPC), the global production of natural rubber in 2021 reached 13.88 million tons, an increase of 10.18%; Consumption increased 9.76 percent year-on-year to 14.079 million tons. From January to November 2022, the global consumption of natural rubber was 14.8 million tons, an increase of 1.9% year-on-year.

In the synthetic rubber market, China's synthetic rubber production in 2021 was 8.117 million tons, an increase of 9.72%; Apparent consumption was 11.899 million tons, down 15.37% year-on-year. Although consumption is decreasing and production is increasing, consumption is significantly greater than production, and a large number of imports are still needed every year.

Customs data show that in 2021, China's synthetic rubber imports were 4.38500 million tons, a decrease of 2.729 million tons from 2020; Exports amounted to 60,600 tons, an increase of 160,000 tons from 2020. Synthetic rubber imports far exceed exports.

In 2020, China's apparent consumption of synthetic rubber is about 14.066 million tons, an increase of 9.3%. In 2021, it will be 11.899,600 tons, a decrease of 15.37%. According to the "Rubber industry" 14th Five-Year "development planning guidelines", the rubber industry will maintain steady growth during the "14th Five-Year" period, and it is expected that the apparent consumption of synthetic rubber will reach 17.21 million tons in 2022. From this point of view, the supply of synthetic rubber in China in 2022 still needs a large number of imports.

Customs data show that in 2022, China's cumulative imports of natural and synthetic rubber (including latex) 7.36 million tons, an increase of 8.7%.

From this point of view, the cost pressure of upstream raw materials is difficult to change in the short term.

Growth can still be expected

From the supply side, data released by the National Bureau of Statistics show that in 2022, the output of rubber tires will be 856 million, down 5% year-on-year. In December 2022, the output of rubber tires in China was 69.908 million, down 15.2% year-on-year, and the decline in December was particularly obvious compared with the whole year.

From the demand side, according to the statistics of the Ministry of Public Security, the number of motor vehicles in the country in 2022 reached 417 million, of which 319 million were automobiles, an increase of 5.81%, accounting for 76.59% of the total motor vehicles. By the end of 2022, the number of new energy vehicles in the country reached 13.1 million, and 5.35 million new energy vehicles were newly registered nationwide in 2022, an increase of 81.48% year-on-year. The number of newly registered new energy vehicles has grown rapidly from 1.07 million in 2018 to 5.35 million in 2022. At the same time, the replacement rate of Chinese tires is also rising. In the past two years, the replacement rate of domestic tires has reached 1.3-1.5. If the average replacement rate of 1.5 tires per car per year is followed, the current demand for automobile tire replacement in China is about 625.5 million.

From the perspective of domestic supply and demand structure, China's tire market has been oversupplied, but a considerable proportion of Chinese tires are exported overseas.

Customs data show that in the whole year of 2022, China exported about 553 million new inflatable rubber tires, down 6.6% year-on-year. In December 2022, the export volume of new pneumatic rubber tires was 45.82 million, down 12.2% year on year.

Although the export market has a downward trend, if the domestic market demand bursts, the production of Chinese tires is less than the demand.

In order to better meet market demand, many leading tire companies are still expanding production capacity.

Linglong Tire recently announced plans to build a new high-performance radial tire project with an annual output of 14 million sets in the high-tech Industrial Development Zone in Lu 'an City, Anhui Province, with a total investment of 5.1 billion yuan; Cylun Tire plans to invest and build projects with an annual output of 30 million sets of high-performance radial tires, 150,000 tons of off-highway tires and 500,000 tons of functional new materials in Dongjiakou Chemical Park, West Coast New District, Qingdao, with a total investment of 17.48 billion yuan; On December 30, 2022, SenQilin announced the non-public offering of A-shares plan, the total amount of funds to be raised is not more than 4 billion yuan, and the net amount of funds raised after deducting the issuance cost is used for Spain's annual output of 12 million high-performance cars and light truck radial tires project and supplementary working capital.

Data show that as of the end of February, among the 45 companies in the A-share tire industry chain, about 10 companies have disclosed or updated refinancing issues, such as Lianke Technology, Daye Shares, Haohua Technology, Senkirin and other 7 companies disclosed the plan or latest progress of private equity. Yanggu Huatai, Qicheng shares, what shares and other companies announced the new progress of the public issuance of convertible bonds.

Not only that, the leading company's capacity is not saturated, in 2021, Linglong tires capacity utilization rate is 86%, racing tires is 71%.

The high-end market has yet to break out

In recent years, affected by multiple factors such as rising raw material costs, weak downstream demand, blocked shipping, and competition, most domestic tire companies have experienced shrinking performance.

Recently, Linglong Tire released a performance forecast, affected by the overall gross margin reduction, it is expected that the annual performance in 2022 will decline significantly, and it is expected to achieve a net profit of 240 million yuan to 280 million yuan, down 65% to 70% year-on-year; Qingdao Double Star will lose 540 million to 670 million yuan in 2022, increasing its loss by 68.59% to 109.18% compared with 2021, which has been a loss for four consecutive years since 2019; Giti Tire is expected to achieve operating income of 3.332 billion yuan to 3.682 billion yuan, net profit attributable to shareholders of listed companies is 29.19 million yuan to 43.78 million yuan, net profit after deducting non-recurring profit and loss is 25.45 million yuan to 38.18 million yuan; Triangle Tire achieved total operating revenue of 6.805 billion yuan in the first three quarters of 2022, up 2.3% year-on-year, and net profit of 470 million yuan to the mother, down 3.14% year-on-year; In the first three quarters of 2022, Guizhou Tire achieved total operating revenue of 6.252 billion yuan, an increase of 15.90%, net profit attributable to the mother of 255 million yuan, an increase of 3.46%, and withholding non-net profit of 270 million yuan, an increase of 16.36%.

In 2022, in the context of the global macroeconomic downturn, the challenges of China's tire industry are more severe.

At present, in the domestic tire market, the share of domestic brands is only 20%-30%, and more than 70% of the market is occupied by foreign brand tires, especially high-end brand tires are almost monopolized by foreign tires. From the price point of view, the average price of Chinese brands of tires is less than 380 yuan, while the average price of foreign brands of tires is 770 yuan, almost twice that of domestic tires. At present, the main foreign tire companies in China include: Bridgestone (Japan), Michelin (France), Goodyear (United States), Horse brand (Germany), Sumitomo Rubber (Japan), Pirelli (Italy), etc., foreign companies in the brand and market influence is better than domestic enterprises.

Due to the low brand premium rate, Chinese tire companies mostly take the route of cheap and high-quality, highlighting the advantage of cost performance and selling a large number of overseas markets, with an export rate of more than 60%.

Cylun tire is one of the leading tire industry in China, and its performance is very bright in recent years. In the first three quarters of 2022, the main income of Wheel tire was 16.718 billion yuan, an increase of 26.22%. Net profit returned to the mother was 1.065 billion yuan, up 6.24% year-on-year; Non-net profit was 1.081 billion yuan, up 14.14% year-on-year. However, in the first half of 2022, more than 80% of the company's tire business was sold overseas.

According to the export data released by the General Administration of Customs, in 2022, China's cumulative export volume of rubber tires was 7.65 million tons, and the export amount was 131.418 billion yuan, an increase of 16%. Chinese car tire exports to the United Kingdom, Mexico, Germany ranked in the top three.

Although domestic tire companies have occupied the affordable market with price advantages, for the current domestic tire companies, how to face the continuous price increase of raw materials and how to break through the high-end market and stand firm seems to be more important.