Domestic tire leading enterprises, to build a world-class brand

1. The domestic tire industry leader, and strive to build a world-class enterprise

1.1. Business Overview: Leading enterprises in the domestic tire industry steadily promote the "7+5" strategy

Based on the tire industry, and strive to build a world-class enterprise. The company is mainly engaged in tire research and development, manufacturing and sales. The company's main products include passenger and light truck radial tires, truck and bus radial tires and off-highway tires, which are widely used in passenger cars, commercial vehicles and construction machinery vehicles. The company's main brands include "Linglong", "Leo", "ATLAS", "EVOLUXX", etc. The products are sold to 173 countries around the world, and provide supporting services for more than 60 O&M factories around the world, such as Volkswagen, Audi, BMW, GM, Ford, Honda, etc., especially in the field of new energy supporting the company's overall market share ranks first among Chinese tire enterprises. We will steadily advance the "7+5" strategy and accelerate globalization. In order to promote the high-quality layout of the company's global industry and enhance the company's core competitiveness in the international market, the company steadily promotes the "7+5" global strategic layout (that is, 7 production bases in China and 5 overseas production bases). At present, the company has five production bases in Zhaoyuan, Dezhou, Liuzhou, Jingmen and Changchun in China, and plans to build two other production bases in Shaanxi and Anhui. It has two overseas production bases in Thailand and Serbia, and continues to investigate and build factories around the world to continue to develop the global tire market.

The production capacity of each base is steadily expanded to ensure the long-term growth of the company. According to the company's annual report for 2022, the company's design capacity of pre-tire is 120.56 million sets, the production capacity is 84.36 million sets, and the capacity utilization rate reaches 78%. At present, the company's Dezhou base expansion of 1.2 million sets/annual production capacity, Hubei base phase III half steel capacity, Jilin base phase I half steel capacity is expected to be completed in 2023, Serbia base is expected to start trial production in 2023. As the new production capacity of the company's bases continues to be released, the company's long-term growth is guaranteed.

Multi-brand common development, supporting and retail parallel. The company implements a diversified brand strategy, and has built brands including "Ling Long", "Leo", "ATLAS", "EVOLUXX", "GREEN MAX", "CROSS WIND" and so on. The company insists on matching and retail abreast. In terms of supporting, the company has provided supporting services for more than 200 production bases of more than 60 Oems in the world such as Volkswagen, Audi, BMW, GM, Ford and Honda, and entered the supporting system of 7 of the world's 10 largest car companies, ranking first in domestic tire supporting for many consecutive years. In addition, the company currently occupies a leading position in the field of new energy, is China's leading new energy vehicles SAIC General Wuling, BYD's largest tire supplier, in 2022, the company's new energy vehicle tire supporting more than 6 million, new energy tire supporting the overall market share of more than 22%, ranking first in China's tire enterprises. In terms of retail, the company put forward the "new retail" strategy to achieve a full-coverage sales network system on all continents, and its products are sold to 173 countries in the world.

1.2. Ownership structure: The ownership structure of the company is concentrated, and the Wang family is the actual controller

The ownership structure of the company is concentrated, and the Wang family is the real controller. As of March 31, 2023, the controlling shareholder of the company is Linglong Group Co., LTD., with a shareholding ratio of 39.94%. The second largest shareholder of the company is Intl Trading Limited, which holds 13.64% of the company's equity. The actual controllers of Linglong Group and Yingcheng Trading are Wang Xicheng, Wang Feng, Wang Lin and Zhang Guangying, and the Wang family indirectly holds 53.58% of the shares of the company through Linglong Group and Yingcheng Trading, and is the actual controller of the company. The company's ownership structure is concentrated, and the actual controller has strong control over the company.

1.3. Financial analysis: Profits have been under pressure in the past two years, and 23Q1 shows a recovery trend

In the past two years, the company's revenue and performance have been under pressure, and 23Q1 has recovered well. Benefiting from the development of the downstream automobile market and the rapid expansion of the company's own production capacity, the company's revenue scale and performance will grow steadily before 2020. After 2020, the company's revenue scale and performance are under pressure due to factors such as the epidemic suppression of demand, rising sea freight, and rising raw material prices. In 2022, the company achieved operating income of 17.06 billion yuan, down 8.47% year-on-year; The net profit returned to the mother was 292 million yuan, down 63.03% year-on-year. 2023Q1 The company's performance was outstanding, achieving a revenue of 4.385 billion yuan, an increase of 0.78%; The net profit returned to the mother was 214 million yuan, an increase of 332.26%.

Affected by the industry's prosperity, the profit margin has fallen after 2020, and 23Q1 has shown a recovery trend. Due to the impact of the epidemic combined with relatively weak overseas demand, the company's gross profit margin and net profit margin after 2020 show a downward trend. The Company's gross margin and net margin for 2022 were 13.61% and 1.72%, respectively, down 3.65pct and 2.52pct year-on-year, respectively. Since 23Q1, as the impact of the epidemic has subsided and the economy at home and abroad has gradually recovered, the prosperity of the tire industry has rebounded at the bottom, and the company's profitability has been repaired to a certain extent. In the first quarter of 2023, the company's gross profit margin and net profit margin were 16.96% and 4.87%, respectively, which improved significantly compared with 2022. The company's expense rate control level is good, and the expense rate of three expenses is gradually declining. Thanks to the company's excellent operation and management ability, the company's expense rate has been well controlled in recent years, and the expense rate of three expenses has shown a downward trend year by year. In 2022, the company's sales expense ratio, management expense ratio and financial expense ratio are 2.97%, 3.49% and 0.33% respectively, and the total expense ratio of three expenses is 6.79%, which is 0.23pct lower than that of 2021. In the first quarter of 2023, the company's sales expense ratio, management expense ratio and financial expense ratio were 3.29%, 3.44% and 0.57%, respectively.

   From the perspective of profitability, the company's gross profit margin in foreign markets is significantly higher than that in domestic markets. The gross margin of the foreign business in 2022 was 20.87%, which was better than the gross margin of the Chinese mainland business in the same period of 5.82%.

2 trillion tire industry space is broad, the industry has shown signs of recovery

2.1. Industry situation: The scale of the tire industry can reach trillions, and Chinese enterprises are rising rapidly

2.1.1. Market size: tires have a certain consumer rigidity, and the global market can reach trillions

Global tires are trillion-class racetracks. The development of the tire industry is related to the development of the global automotive industry, which will be affected by the macroeconomic cycle and downstream demand prosperity, and has a certain periodicity. However, as a necessary consumer product of the stock of automobiles, tires have certain consumption attributes, and to a certain extent, they have the consumption rigidity independent of the atmosphere of the automobile industry. Affected by the global epidemic in 2020, global tire sales and sales have declined to a certain extent, and began to recover in 2021. According to the data of China Business Information Network, Huajing Industry Research Institute and Tire Business, the global tire sales in 2021 reached 177.5 billion US dollars, an increase of 15.6% year-on-year, and the CAGR from 2016 to 2021 was about 3.51%. According to Michelin's annual report, global tire sales in 2021 reached 1.727 billion units, an increase of 8.0%.

2.1.2. Demand structure: The replacement market is the main downstream demand for tires

The replacement market is the main demand in the downstream demand of tires. The downstream demand for tires can be divided into two categories: replacement market and supporting market. Market tires refer to the tires that new cars are equipped with when they leave the factory, and the scale of demand is usually anchored to the production of cars in the current year. Replacement market tires usually refer to the replacement tires used to replace the original factory tires for subsequent use, and the scale of demand anchors the entire vehicle ownership. Since the number of cars in the market will be greater than the production of cars in the year, the downstream replacement market for tires is the largest source of demand. According to Huajing Industrial Research Institute and Michelin Annual report data, the global tire replacement market demand in 2021 is about 1.154 billion, and the supporting market demand is about 356 million, and the replacement market is the main demand for the downstream tire.

2.1.3. Competition pattern: The market share of the Big Three declines and Chinese enterprises rise rapidly

The market share of the Big Three has declined significantly, and Chinese companies have risen rapidly. Bridgestone, Michelin and Goodyear have seen their market share decline significantly in recent years. In 2003, Bridgestone, Michelin and Goodyear accounted for half of the global tire market, with a combined market share of 55.7%. In 2022, the combined market share of the Big Three has slipped to 36.4%. After more than ten years of rapid growth, the comprehensive strength of Chinese enterprises has been continuously enhanced. In the Top 75 global tire list released by Tire Business in 2022, the total number of tire companies from China and Taiwan reached 34, and the overall revenue accounted for 20.6% of the top 75 in the world.

  Among them: China Mainland's Zhongce Tire achieved sales of 4.528 billion US dollars, ranking eighth in the world; China's Taiwan Zhengxin Rubber achieved sales of 3.866 billion US dollars, ranking 10th in the world;  

2.2. Downstream demand: The huge automobile market has brought stable demand, and new energy vehicles have injected new momentum

The huge automotive market has brought stable demand to the tire industry. From 2010 to 2019, the compound annual growth rate of global automobile production and sales was 1.87% and 2.21%, respectively. Affected by the epidemic, global automobile production and sales declined in 2020, but as the impact of the epidemic dissipated, global automobile production and sales began to recover in 2021-2022. According to Wind data, the global automobile production and sales in 2022 will be 85 million and 82 million, respectively. With the global automobile production and sales returning to the growth track, the global automobile ownership will remain stable growth, promoting the continuous expansion of the tire market.

2.3. Industry prosperity: overseas demand recovers, raw material prices fall, and industry prosperity recovers

2.3.1. 2022: Replacement demand remains subdued and the shipping cycle leads to high overseas inventories in the second half of the year

Demand for passenger cars and light truck tires has not yet recovered to pre-epidemic levels, and demand for truck tires has declined. In 2020, affected by the global epidemic, the global tire market demand has declined to a certain extent. After 2021, as the global epidemic situation has eased, the global demand for passenger cars and light truck tires has gradually recovered, but it has not yet returned to the pre-epidemic level. According to the Michelin annual report data, the global passenger car and light truck market demand in 2022 increased by 1%, but there is still a 2% decline compared with 2019. In 2022, global demand for truck tires declined, down 4% from 2021. Passenger car and light truck tire replacement demand is still affected. In 2022, in addition to the CIS region, the demand for passenger cars and light truck tires in the rest of the region has maintained growth, but due to the impact of the epidemic and the relative weakness of the economy, the replacement demand in the CIS, China and North America has declined to a certain extent.

Demand for truck tyres in China has fallen sharply. In 2022, the demand for truck tires in the CIS region and China declined significantly, and the rest of the region maintained a certain growth. In 2022, China's truck tire demand fell by 26%, of which supporting demand fell by 44% and replacement demand fell by 14%.

Affected by the return of the shipping cycle to normal, there is a backlog of overseas inventories in the second half of 2022, which inhibits China's export demand. In 2022, China's tire exports declined to a certain extent, and a total of 553 million new inflatable rubber tires were exported in 2022, down 6.6% year-on-year. Especially in the second half of 2022, as the sea freight shipping cycle returns to normal, overseas tire dealers have high inventories, and it takes some time to reduce inventories, resulting in a decline in tire exports in the second half of 2022. New pneumatic rubber tires exported 272 million in the second half of 2022, down 3.4% from 281 million in the first half of 2022.

2.3.2. 2023: Exports show a recovery trend and raw material prices fall

Tire industry bottom pick up, overseas demand continues to repair. Since the first quarter of 2023, with the inventory of overseas dealers gradually approaching the completion of the elimination, overseas demand has picked up, and the export volume of Chinese tires has been significantly repaired. According to the General Administration of Customs and Wind data, the number of China's new pneumatic rubber tire exports in the first quarter of 2023 was 139.07 million, an increase of 1.04% compared with the first quarter of 2022, and an increase of 8.88% compared with the fourth quarter of 2022.

The price of raw materials has fallen, which is expected to open up the profit space. According to Zhuo Chuang Information data, the average price of butadiene rubber, styrene butadiene rubber and carbon black in the first quarter of 2023 was 11182.79, 11382.65 and 10411.27 yuan/ton, respectively, compared with +0.81%, +4.65% and -9.96% in the fourth quarter of 2022, respectively. Compared with the first quarter of 2022, it was -17.49%, -8.39% and +18.57%. The price of styrene butadiene rubber and butadiene rubber decreased significantly compared with the first quarter of 2022, and although the price of carbon black increased year-on-year, it was also in the quarter-on-quarter decline channel compared with the fourth quarter of 2022. Tire industry profit space is expected to open.