Cinda: The tire industry enters into the 2.0 era of going global. Establishing factories overseas is challenging, but global demand for tires is expected to continue growing.

Cinda released a research report stating that the main DRIVE for China's tire industry to go global is the regional imbalance of the global tire supply and demand structure under trade barriers. Concerning oversupply, in terms of supply, it is difficult to build factories overseas, and it takes a long time from construction to production to ramp-up; in terms of demand, global tire demand is expected to continue growing, and Chinese companies still have a broad space to increase their market share. Therefore, Cinda believes that the market's concerns about the excess capacity of tire production going global are one-sided. More importantly, in the era of going global 2.0, the competition of Chinese tire companies overseas is no longer from 0 to 1, but from 60 to 90 or even 100. The main DRIVE for China's tire industry to go global is the regional imbalance of the global tire supply and demand structure under trade barriers. The overall trend of global tire market consumption volume remains on a long-term upward growth trajectory. In 2023, the consumption volumes of semi-steel tires and all-steel tires totaled 1.786 billion units, with Europe and America accounting for more than 50% of demand, China's demand being 327 million units, accounting for approximately 18%. Cinda estimates that China's capacity for semi-steel tires and all-steel tires is over 1 billion units, leading to oversupply in the Chinese tire industry, making exports particularly important. Against the backdrop of anti-dumping tariffs on Chinese tire exports to Europe and America, establishing factories overseas is a way for companies to circumvent trade barriers, making overseas factories the main source of profitability for companies. Cinda believes that the Chinese tire companies' global expansion in the past 10 years from 2012 to 2021 can be defined as the era of going global 1.0. During this period, Chinese tire companies achieved the transformation of overseas production capacity from non-existent to existent, and through overseas capacity, took on some orders lost in Europe and America due to trade sanctions. Consequently, within these 10 years, there was significant differentiation between companies with overseas factories and those without. In the era of going global 2.0 since 2022, especially since the second half of 2023, the pace of Chinese tire companies going global has accelerated, with an increase in the number of projects announcing plans to establish factories overseas, leading to market concerns about excess overseas tire production capacity. In terms of supply, it is difficult to build factories overseas, and it takes a long time from construction to production to ramp-up. Cinda provided detailed analysis of the capacity and production pace of overseas factories. According to Cinda's statistics, in 2023, Chinese companies overseas had established semi-steel tire capacity of 83.5 million units and all-steel tire capacity of 24.39 million units. Excluding expansion projects on existing factories, Cinda's statistics show that there are currently 12 Chinese tire companies with overseas factories, with 9 companies planning or constructing overseas factories. In terms of the number of factories, there are 15 overseas factories that have been completed and put into operation, while there are 6 planned or under construction as second factories and above, along with 10 overseas factories entering foreign markets for the first time. Taking into account the construction pace, production pace, failed cases of overseas factories in the past, as well as the funds, experience, and difficulty of construction in different regions required for establishing factories overseas, Cinda believes that establishing factories overseas is not an easy task. In successful projects, the average time from the announcement of the project to production for 12 overseas (first-phase) factories is 33 months (approximately 3 years), and the average time from production to reaching capacity is 3 years. Additionally, some overseas projects have been terminated or have a low likelihood of production, such as the Triangle Tyre USA factory project (the company announced the termination of the project), the Otani Tire Indonesia factory project (the company went bankrupt), and the Haohua Tire Sri Lankan factory project (due to local issues, there is great uncertainty in production). In terms of demand, global tire demand is expected to continue growing, and Chinese companies still have a broad space to increase their market share. The consumption volume of tires in global markets, especially in Europe and America, is mainly driven by replacement demand, which increases with the growth of the vehicle population. At the same time, there is a trend of decreasing market share for first-tier companies and increasing market share for second and third-tier companies in the global tire industry; the total amount of Chinese tire exports to the United States is still lower than the peak in 2014, indicating room for growth in exports to the US. The market share of individual Chinese tire brands is still relatively low, indicating significant room for growth. Overseas factories help in avoiding trade barriers in Europe and America, while also meeting the demand in other regions. Overall, Cinda believes that the market's concerns about excess tire production capacity going global are one-sided. From the perspective of supply and demand balance, although there is indeed a large amount of planned capacity in the future, Cinda believes that the probability of excess capacity appearing before 2027 is low based on the actual production pace. Considering the market size in Europe and America and the stable and increasing demand for high cost-effective tires, there is no perceived risk of excess capacity in the total demand for Chinese tires in European and American markets. Finally, more importantly, Cinda emphasizes that in the era of going global 2.0, the competition of Chinese tire companies overseas is no longer from 0 to 1, but from 60 to 90 or even 100. What matters is which company selects the right location, enabling faster production, more stable operations, better control of production costs, and better performance and reliability of the brand in the eyes of European and American consumers. Only by taking the second route can the global market share of a single Chinese tire brand increase from around 2% in 2023 to 5% or even higher, paving the way for the long-term growth of Chinese tires. Investment recommendation: Cinda still advises investors to focus on tire companies actively expanding overseas production and to focus on companies actively improving their brand value. Investors are recommended to pay attention to Sailun Group (601058, SH) and Jiangsu General Science Technology (601500, SH). Risk factors: Significant decline in downstream demand; sharp increase in raw material prices; new rounds of anti-dumping measures against Southeast Asian tires by Europe and America or unfavorable changes in domestic and foreign trade policies