Cost & demand improvement, recovery for the main line of the whole year, 23-25 years of economic upswing

1. Recovery: The three main reasons are superimposed, the industry has been under pressure for two years, and the profit is a low base

Recovery: Under the three main factors of skyrocketing sea freight and plunging, high raw material prices, and declining terminal demand, the tire industry has experienced a two-year profit trough in 2021-2022. From the perspective of revenue, the operating income of China's tire enterprises from 2015 to 2022 has grown steadily, but at the profit end, the net profit of China's tire enterprises in 2021 and 2022 has experienced two years of decline. In 2021, due to the rise in the main raw materials of tire production and sea freight prices, raising the cost of tire enterprises, the average gross profit margin of China's tire industry fell from 27.47% in 2020Q3 to 10.83% in 2021Q4; The main reason for the low profit margin in 2022 is that raw material prices are still high, and under the background of a sharp drop in sea freight prices, overseas dealers' inventory is high to suppress the export of China's tire enterprises; At the same time, domestic tire terminal demand declined in 2022. Under the superposition of three main factors, the profit margin of China's tire industry in 2021-2022 is at the bottom position.

2. The three main reasons are easing & demand is expected to continue, and the industry recovery is the main line throughout the year

In 2023, the tire industry will open the repair mode and the economy will rise. Since 2023, the operating rate of China's tire enterprises has been running at a high level, tire production and exports have been increasing simultaneously, and the economy has continued to repair. We believe that the reasons for the rapid increase in domestic and outlet demand for tires in China are mainly as follows: First, the recovery of domestic travel; The second is the Russia-Ukraine conflict on China's tire demand pull; Third, under the high inflation in the European and American markets, China's cost-effective tires have significant advantages; Fourth, with the improvement of the trade environment, the Brazilian market contributed to the increase in demand. In the first half of 2023, the operating rate and output of China's tire production are at a high level. According to Baichuan Yingfu data, from January to June 2023, the average monthly operating rate of semi-steel tires in China was 68.70%, an increase of 11.83pct year-on-year; The average monthly operating rate of all steel tires was 61.01%, an increase of 12.09pct year-on-year. In terms of production, in the first half of 2023, the output of rubber tires in China reached 476 million, an increase of 14.02%.

Since 2023, domestic travel has steadily recovered, driving the demand for tires. From January to June 2023, road freight volume increased by 7% year-on-year. Highway freight turnover increased by 7% year-on-year, and the highway logistics freight index was steadily repaired. With the continuous introduction of domestic economic stimulus policies, the later travel data is expected to continue to repair, and then pull the demand for tires.

China's tire exports have increased significantly. According to the General Administration of Customs data, from January to June 2023, China's tire exports reached 4.28 million tons, an increase of 13.8%. For the continuous increase in the number of tire exports, we believe that there are mainly the following reasons: First, high inflation in Europe and the United States will continue, and the advantages of cost-effective tires are highlighted. At present, the overseas tire inventory accumulated in the early stage has been digested, and the current high inflation in Europe and the United States continues to stimulate the demand for cost-effective tires in China. And the first-line brands have repeatedly proposed price increases, and the cost-effective advantage of China's tires has been strengthened. Since 2023, the number of U.S. tire imports has remained at a high level. Looking forward to the future market, high inflation in Europe and the United States is difficult to ease in the short term, and the advantage of China's cost-effective tire exports to Europe and the United States is expected to continue to be maintained.

Second, the Russia-Ukraine conflict on the demand of China's tires. Since the conflict between Russia and Ukraine, a number of tire manufacturers have withdrawn their business layout in Russia, and since 2022, Russia's demand for tires in China has significantly increased. According to Baichuan Yingfu data, from January to July in 2022 and 2023, China's tire exports to Russia were 9.397 million tons and 8.449 million tons, respectively, an increase of 78% and 116% year-on-year. Russia's tire market is large, and its car ownership ranks among the top in the world, according to CEIA data, in 2021, Russia's car ownership is 57.812 million, which contains a huge tire market.

Third, China's tire exports to Brazil have increased, and there is a large potential for tire demand growth. According to Baichuan Yingfu data, from 2021 to 2023 from January to July, China's tire exports to Brazil increased rapidly, the export growth rate was 60%, 23%, 86%, 2023 from January to July, China's tire exports to Brazil reached 11.247 million tons. The automobile industry is a pillar industry in Brazil, with 2.37 million vehicles produced in Brazil in 2022, accounting for 3% of global automobile production. According to the data of the Brazilian Geographic Statistics Agency, the total population of Brazil in 2021 will be 213 million, ranking fifth in the world after China, India, the United States and Indonesia. Brazil is a developing country, at present, its per capita car ownership is low, the Brazilian auto market contains huge development potential, driving potential tire demand, and considering the high temperature in Brazil, tires are rubber products, high temperature will accelerate its aging, the future demand for tires in the Brazilian market is expected to continue to increase. China-brazil AOE officially implemented, favorable tire exports to Brazil. From January 1, 2022, the mutual recognition of "Certified Operators" (AEO) signed by the customs of China and China and Brazil will be officially implemented. The customs of China and Brazil will give each other the following facilitation measures for AEO enterprises in customs clearance of import and export goods: the application of a lower document review rate; Reduce the inspection rate of import and export goods; Give priority to goods requiring physical inspection; Designate customs liaison officers to solve problems encountered by AEO enterprises in customs clearance; Due to the interruption of international trade caused by increased security alert level, border closure, natural disasters, dangerous emergencies or other major accidents, customs clearance shall be given priority after the resumption of trade. The above customs clearance facilitation measures provide a good environment for China-Brazil trade exchanges and good for tire exports to Brazil.

The price of raw materials has fallen from the high point and is now stable on the whole. Since 2020, due to the combined impact of climate, epidemic, rising crude oil prices, and downstream demand recovery, rubber prices have begun to rise, raising the cost of tire enterprises. Since 2023, the price of synthetic rubber and natural rubber has fallen from the high point in 2021, and is currently stable as a whole. In terms of carbon black, in 2022, the Russia-Ukraine conflict led to the supply of carbon black in Europe being blocked, and domestic carbon black exports increased significantly. According to Baichuan Yingfu data, in 2022, China's carbon black export price rose, the export volume was 810,300 tons, an increase of 12.3%, and the average export price was $1,633.83 / ton, an increase of 25.9%. Carbon black prices are now down from earlier highs.

Shipping prices have fallen sharply from previous highs, and export space has reopened. At the end of 2020, international shipping prices rose rapidly, mainly due to the impact of the novel coronavirus epidemic, the reduction of overseas port workers led to the lack of port loading and unloading capacity, the decline in the container turnover rate, and the surge in international oil prices increased the shipping cost, until September 2021, the global sea freight continued to rise. Since the second half of 2021, with the improvement of the global epidemic and the coordination of ports in various countries, shipping fees have gradually dropped. In the second half of 2022, sea freight prices fell rapidly. As of August 2023, the main Baltic container freight index has fallen by more than 85% from the previous high, which is already at a historically low level. The CCFI index for major routes also fell sharply back to its historical average. Although China's tire exports mostly use FOB mode, that is, the sea freight is generally borne by customers, but tire enterprises based on business strategy, customer cooperation, market competition and other factors, generally bear a certain freight, so the high operation of the sea freight will increase the operating costs of tire enterprises. On the other hand, during the significant drop in sea freight, the port turnover accelerated, and the tire inventory of overseas traders accumulated rapidly, which suppressed tire exports for a period of time. At present, the inventory of overseas dealers is digested, the superimposed sea freight is running smoothly and low, and the export space of Chinese tires is reopened.

3.3. Favorable preliminary results & overseas base production, 23-25 years profit is expected to accelerate upwardUs Department of Commerce anti-dumping investigation on Thai passenger car and light truck tires: On June 29, 2020, the United States Department of Commerce launched an anti-dumping investigation on passenger car and light truck tires in Thailand, and Thailand Linglong and Sumitomo Tire (Thailand Company) are mandatory enterprises to respond, and the investigation period is April 1, 2019 - March 31, 2020 (a total of 12 months). The original tax rate of Thailand Linglong was 21.09%, the original tax rate of Japan's Sumitomo Tire (Thailand company) was 14.59%, and the original tax rate of other Thai tire companies exporting to the United States was 17.06%. On September 6, 2022, the US Department of Commerce launched the first round of anti-dumping administrative review investigation on Thai passenger car and light truck tires, and Mori Kirin (Thailand company) and Sumitomo Tire (Thailand company) were forced to respond to the lawsuit. The survey period is from January 6, 2021 to June 30, 2022 (a total of 18 months). Mori Kirin (Thailand company) review preliminary tax rate of 1.24%, Japan Sumitomo Tire (Thailand company) review preliminary tax rate of 6.16%, other Thai export to the United States of tire companies review preliminary tax rate of 4.52%. The review is currently in the final investigation phase and the final decision is expected to be announced in the first quarter of 2024.

The preliminary tax rate of the review has been significantly reduced, and China's tire enterprises in Thailand are expected to benefit. At present, among the listed tire companies, Linglong tires, Senkirin, GM shares have built production bases in Thailand, and the anti-dumping tax rates implemented by the company to export passenger cars and light truck tires to the United States are 21.09%, 17.06% and 17.06%, respectively. The implementation tax rate will be reduced by 16.57pct, 15.82pct and 12.54pct respectively, which provides tire companies in Thailand with more opportunities to obtain orders and improve profit margins, thereby improving the company's overall profit and global operation ability. In addition, the significant reduction in the tax rate also indicates that China's tire enterprises have a stronger ability to participate in international competition.

2023-2025 will usher in the concentrated production period of overseas bases, which is expected to improve the profits of tire enterprises. At present, the profit level of the tire industry has improved, and the gross profit margin of the tire industry in 2023Q1 has been repaired to 17.43%, but it has not been repaired to the level of 2019. 2023-2025, China's tire companies such as Senkirin, Linglong tires, General shares, Qingdao Double Star and other overseas production bases are expected to put into production, because the gross profit margin in overseas markets is usually higher than the domestic, followed by tire enterprises overseas production capacity, the profit level of the tire industry is expected to continue to improve, the industry boom.