China's tire industry is a growth logic, and high-quality tire companies are expected to be among the world's top

2.1 External: Policy & Automobile export & new energy, tire enterprises to meet the opportunity for leapfrog development

From the external environment, we believe that domestic tire enterprises have ushered in a leapfrog development opportunity. First, under the policy push, 2023-2025 domestic backward production capacity is expected to accelerate clearance, and the development of high-end tire projects is supported. On August 18, Shandong Province, a major tire production province, issued a document clearly pointing out that for tires and casting enterprises below the energy efficiency benchmark level, it is necessary to ensure that the energy efficiency transformation and improvement program is completed by the end of April 2025; It is necessary to speed up the elimination and withdrawal of low-end projects, and submit the exit projects of various cities to the relevant departments before the end of September 2023. This move will speed up mergers and acquisitions within the industry, promote industrial upgrading, weaken the price of internal volume, form a differentiated competitive pattern, the head of the enterprise can "the stronger the stronger", positioning the global head enterprises; Second, China's automobile export volume ranks first in the world, Chinese tire enterprises are expected to leverage China's strong automobile industry to further expand overseas markets, enhance visibility to achieve leapfrog development; Third, the evaluation system of new energy automobile tires weakens the brand influence of traditional tire companies, and provides domestic tire companies with the opportunity to compete at the same starting line. A number of Chinese domestic tire brands have been included in the supporting/replacement system of ordinary models and high-end models of new energy vehicles, which is expected to lay the foundation for entering the tire supply system of more foreign car companies and establish long-term comprehensive competitiveness with the help of the leading position of Chinese auto companies in the new energy vehicle market and the huge export volume.

First, in recent years, China's backward tire production capacity has accelerated its withdrawal, and industry concentration has been improved. Taking Shandong Province, a major tire production province, as an example, in 2021, Shandong issued the notice of the Province's Implementation of the "Three Resolute" Action Plan (2021-2022). It is proposed that by 2022, all steel radial tires with an annual output of less than 1.2 million (except engineering tires, aviation tires, and wide section tubeleless) and semi-steel radial tires with an annual output of less than 5 million will be integrated and withdrawn. According to data from the Shandong Provincial Department of Ecology and Environment, from January to October 2022, Shandong Province shut down 11 tire production enterprises and eliminated 19.8 million backward and inefficient production capacity. At the same time, from the perspective of the internal development law of the tire industry, the domestic industry has also ushered in the integration of the good and bad, and some high-quality tire enterprises have carried out horizontal and vertical mergers and acquisitions to enhance their own strength, and the concentration of the domestic tire industry has further improved. The clearance and integration of domestic tire production capacity, the optimization of the development environment of domestic tires, the industry phenomenon of racing to compete at low prices is expected to gradually improve, tire companies will have a better research and development innovation and marketing environment, can further cultivate internal skills, improve the quality of domestic tires and brand image.

Policy upgrading, clear 2023-2025 important time node, to promote tire focus on high-end, intelligent, green, cluster development, industrial upgrading has become the main theme, the industry or will accelerate mergers and acquisitions reshuffle, the competitive environment is expected to further optimize. On August 18, 2023, the Shandong Provincial Development and Reform Commission issued the Notice on Matters related to the optimization of tire casting project Management (hereinafter referred to as the Notice), which pointed out that it is necessary to support the accelerated development of high-end projects, promote the transformation and upgrading of mid-end projects, accelerate the elimination and withdrawal of low-end projects, and promote the development of parks and clusters. The "Notice" clearly points out that it is necessary to promote the transformation and upgrading of mid-end projects, and ensure that the energy efficiency transformation and upgrading program is completed before the end of April 2025 for tire and casting enterprises below the energy efficiency benchmark level; Low-end projects should be submitted to the relevant departments before the end of September 2023 to withdraw from the project, and accelerate the elimination of low-end projects. Under the guidance of the "Notice", the development of high-end tires has been supported, and small and medium-sized tire enterprises that lack funds for upgrading and transformation will accelerate clearance, and the industry will usher in further reshuffle. At the same time, technology and intelligence are the focus of the "Shandong Province High-end tire casting project Development Guidance Directory (2023 edition)", and the tire industry is expected to form a multi-level and differentiated competitive pattern.

Second, China's automobile export volume ranks first in the world, and Chinese tire enterprises are expected to leverage China's increasingly powerful automobile industry to achieve leapfrog development. According to the China Auto Association and Japan Auto Industry Association data, 2023 January to June China's auto exports reached 2.141 million, the same period of Japanese auto exports of 2.023 million, China has surpassed Japan to become the world's largest auto exporter. As China's automobile industry continues to optimize quality control, improve maintenance and repair after-sales service system, its competitiveness is expected to further improve. China's tire enterprises can leverage car enterprises to further enhance customer stickiness by entering their supporting system, and at the same time, automobile exports can improve the overseas visibility of Chinese tires, and thus achieve leapfrog development.

Third, the great development of China's new energy vehicles provides an important opportunity to improve the brand influence and long-term competitiveness of China's tire enterprises. In the field of new energy vehicles, Chinese car companies have established a leading edge. From the sales data, according to the China Automobile Association, the sales volume of new energy vehicles in China in 2022 reached 6.887 million, with a CAGR of 78.7% in 2019-2022; According to Clean Technica, global sales of new energy vehicles in 2022 will be 10.09 million, and China's EV sales in 2022 will account for 68.25% of the world's total. In terms of brands, according to Clean Technica, BYD, a Chinese car company, ranked first in the world with sales of 1.8478 million vehicles in 2022, accounting for 18.31% of global sales. In addition, among the top 10 global new energy vehicle sales in 2022, 5 are Chinese brands, namely BYD, GAC, SAIC, Changan and Chery, and SAIC-GM-Wuling is a Sino-US joint venture brand. The voice and influence of Chinese car companies have been further established and strengthened in the great development wave of new energy vehicles. Compared with foreign car companies, Chinese tire companies are easier to enter the supporting system of China's new energy vehicle companies, and domestic tires are included in the supporting/replacement system of new energy vehicle ordinary models and high-end models, which is not only conducive to obtaining a huge Chinese new energy vehicle tire supporting and replacement market, but also expected to rely on a huge export volume. Lay the foundation for subsequent entry into the tire supply system of more foreign car companies, so as to further leverage the demand market, enhance brand influence, and build long-term competitiveness.

Chinese tire companies have achieved a lot in the field of new energy vehicles, supporting many high-end models. There are big differences between new energy vehicles and traditional fuel vehicles in vehicle weight, power output, torque, noise performance, etc., and the tires applied in new energy vehicles need to have better performance in terms of grip, low noise, wear resistance, energy saving, and green environmental protection. The evaluation system of new energy automobile tires weakens the brand influence of traditional tire companies and provides domestic tire companies with the opportunity to compete at the same starting line. Chinese tire companies have different strategies in the new energy vehicle business, but they all seize the opportunity to create cost-effective tires suitable for new energy vehicles, and the results are fruitful. Taking Linglong Tire as an example, Linglong tire is currently the largest tire supplier of SAIC Wuling General Motors and BYD, and its supporting models are not limited to low-end models, but also included in FAW Hongqi high-end SUV-LS7, Geely Auto high-end model "Star" series, Lynk & Co 06 high-end models, Chery high-end models - Tigo8 and other high-end model supporting systems.

2.2. Internal: Global operation demonstrates strength, copy and upgrade to create a profit upward spiral

From the point of view of internal factors, China's tire enterprises have the ability to operate globally, from the early concentrated layout of Southeast Asia, began to explore Europe and Africa, highlighting the continuous enhancement of the comprehensive ability of China's tire enterprises. China's tire enterprises can further establish raw material advantages through global operations, enjoy low tariffs, expand a larger market, and disperse the layout to reduce international trade risks. And overseas base gross profit margin is usually higher than the domestic, has successfully established overseas production base and efficient operation of the enterprise is expected to accelerate the overseas operation model copy and upgrade speed, to create a profit upward spiral, with the expansion of production capacity and comprehensive strength, is expected to occupy a place in the head of the world tire industry.

In terms of capacity expansion, Chinese enterprises have accelerated the layout of overseas production bases to enhance production capacity, and further explored overseas markets with higher profitability. Although China's tire production capacity is overall excess, but a considerable part of it is low quality and small business tires, from the capacity of a single enterprise, the international head tire companies are much higher than Chinese tire companies, Chinese tire companies want to enter the world's first echelon of tires, still need to carry out quality tire production capacity expansion. 2021-2022 China's tire enterprises under construction projects continue to hit a new high. In terms of the layout of production bases at home and abroad, on the one hand, the domestic competitive environment is relatively harsh, and in recent years, under the environment of strengthening environmental management, it is more difficult for Chinese tire companies to approve the construction of tire production capacity in China, and from the sales point of view, because China's tire exports face high tariffs, domestic tire export profits are suppressed. Reviewing the gross profit margin of China's tire industry sales at home and abroad from 2012 to 2022, the gross profit margin of tire export is higher than that of the country for most of the time, and overseas factory construction is close to the terminal market, usually with obvious customs and tax advantages, therefore, overseas factory construction has become an important direction of tire enterprises. Michelin, Goodyear and other giant tire manufacturers have a number of production and development bases in the world, and building factories overseas is the only way for Chinese tire companies to grow into global giants.

To achieve the smooth operation of overseas bases is an important embodiment of a stronger comprehensive management ability of enterprises, and the enterprises that take the lead in building factories are expected to create a profit upward spiral. Due to the challenges faced by many overseas factories, such as government relations, language and culture, laws and regulations, infrastructure conditions, business environment, exchange rate changes, and raw material transportation, the success of the whole process of site selection, construction and operation not only tests the strategic vision of entrepreneurs, but also reflects the strong comprehensive management ability of enterprises. Tire enterprises that successfully build factories overseas can copy and upgrade the experience in the process, and establish an upward spiral of "successful operation of overseas bases - expansion of overseas markets - improvement of profitability - abundant cash flow - further strengthening of domestic and overseas construction and upgrading of comprehensive capabilities". Southeast Asia is close to the main raw material producing areas of tires, which is the center of gravity of the layout of tire enterprises in China. Southeast Asia is the main planting region and the main export region of natural rubber, of which Thailand is the largest producer of natural rubber, 2010-2021 Thailand's natural rubber production accounted for more than 30% of the world's total. Of the natural rubber imported by China in 2021, about 90% of natural rubber originated from Southeast Asia. Among them, the proportion of natural rubber imported from Thailand is the highest, close to 50%, followed by Malaysia, Indonesia, Vietnam and Laos, accounting for 14.9%, 7.6%, 7.4% and 6% of China's total imported rubber. In addition to the proximity to high-quality raw material production areas, the low labor costs in Southeast Asia are also conducive to reducing the production costs of tire companies.

We sorted out the overseas production bases of major listed tire companies in China, and in the early stage of going to sea (2012-2019), most tire companies were located in Thailand and Vietnam in Southeast Asia, and the infrastructure construction conditions and geographical location of the two countries had obvious advantages over other Southeast Asian countries at that time. However, since June 2020, the United States has carried out a double-reverse investigation of passenger car and light truck tires of tire companies in some countries and regions in Southeast Asia. In May 2021, the US Department of Commerce announced the final ruling, imposing anti-dumping duties of 14.62%-21.09% on passenger car and light truck tires imported from Thailand, imposing anti-dumping duties of 0%-22.27% on Vietnam, and imposing countervailing duty rates of 6.23%-7.89% on Vietnam. Although the tax rate will be adjusted in the later period, this also reflects the accumulation of a large amount of production capacity and exports in a certain area, or more susceptible to international trade risks, to tire companies in the production base layout to remind.

In the second phase of going to sea (2020-present), Chinese enterprises are diversifying overseas, turning their eyes to Cambodia and other countries/regions except Southeast Asia, and tire export tariffs are a key factor affecting the layout. Since 2020, Cambodia has become the focus of the layout of tire enterprises. Cambodia enjoys greater tax incentives from Western countries, has rich and cheap human resources, a more secure political environment, preferential trade status, etc., the above advantages help it attract a lot of foreign investment, and there is no double reverse tax rate for tire products exported from Cambodia to the United States, which is a big benefit for tire exports. In addition to Southeast Asia, China's tire companies also began to lay out in Morocco, Serbia and other European regions. Rusen Kirin builds a production base in Morocco, which is located in the key transportation hub of Europe, the Middle East and Africa, and implements the preferential corporate income tax policy of "five exemptions and then half" for Chinese investment enterprises, and its tire products enjoy zero tariffs when exported to the United States and Europe. The rich experience accumulated by Chinese tire enterprises in building factories in Southeast Asia makes it possible to have more overseas production layout, which can radiate a broader market and disperse the tariff risks of centralized layout. In addition to Southeast Asia, the layout of the region is also a direct manifestation of the strength of Chinese tire companies.