Sinolink: The trend of rising in the east and falling in the west still exists, and domestic tire companies are beginning to differentiate.

Sinolink released a research report stating that the overall demand in the tire industry still has support, and enterprises with incremental production capacity are expected to continue to see improved revenue. In terms of shipping, it is gradually returning to normal levels from the high levels previously experienced, and the negative impact on corporate revenue and profit from before will be significantly alleviated. While rising prices of raw materials such as rubber bring cost pressures, considering that companies have gradually started issuing price increase notices in October and November, if these price increases are successfully transmitted, corporate profits will also see some degree of recovery. In the long term, although risks such as intensified competition, anti-dumping tariffs, and rising raw material prices still exist in the industry, the logic of domestic tire companies increasing market share will continue to play out, with optimism towards domestically produced tire companies that have taken the lead in going global and have a relatively complete overseas layout. Sinolink's main points are as follows: The overall demand in the tire industry is stable and profitability is under pressure due to the impact of shipping and raw materials. In the first three quarters of this year, the global replacement market has declined while the growth market has increased for both all-steel tires and semi-steel tires. The monthly production differentiation between semi-steel and all-steel tires in China is evident, with the monthly production rate of semi-steel tires maintaining close to 80% since March, while the monthly production rate of all-steel tires fluctuated below 60% from May to October. Looking at exports, in the first three quarters of this year, China's monthly export volume of new pneumatic tires was 508 million units, a 10% increase year-on-year. In the third quarter, the quarterly export volume was 180 million units, an 8% increase year-on-year. In terms of profitability, the increase in shipping costs since May this year, which only began to decline in August, negatively impacted tire companies' export orders in the third quarter; rubber prices have shown an overall upward trend this year, exacerbated by a rapid increase in rubber prices in Southeast Asia due to flooding caused by typhoons in September. Therefore, under multiple pressures, the profitability of the tire sector in the third quarter was somewhat under pressure. Revenue in the tire sector is steadily growing, with a slight decrease in profitability. In the first three quarters of 2024, the tire sector achieved a total operating revenue of 78 billion yuan, a 14% year-on-year increase, with a net profit attributable to shareholders of 8.8 billion yuan, a 45% year-on-year increase. The overall gross profit margin was 23.6%, a 2.4 percentage point increase year-on-year, and the net profit margin was 11.4%, a 2.4 percentage point increase year-on-year. In the third quarter of 2024, the sector achieved a total operating revenue of 27.5 billion yuan, an 8.1% year-on-year increase and a 5.5% increase quarter-on-quarter, with a net profit attributable to shareholders of 3 billion yuan, a 10.6% year-on-year increase and basically flat quarter-on-quarter; the gross profit margin was 23.6%, lower slightly quarter-on-quarter, and the net profit margin was 11.2%, a 0.1 percentage point increase year-on-year and a 0.6 percentage point decrease quarter-on-quarter. The trend of enterprises moving eastward and westward is still unfolding, and the market share of domestic leading tire companies is expected to continue to increase. Against the backdrop of consumption downgrading, overseas leading companies have seen weak revenue growth in the first three quarters of this year. Michelin and Goodyear saw a 5.3% and 3.8% year-on-year decline in sales volume, respectively, and a 4.6% and 6.8% year-on-year decline in revenue. In the third quarter, Michelin, Goodyear, and Bridgestone saw a 7.1%, 6.2%, and 4.2% decline in sales volume, respectively, and a 6.2% and 0.3% decline in revenue. The performance of domestic tire companies has also shown differentiation, with leading tire companies with overseas bases demonstrating stronger operational resilience. In the first three quarters of this year, Sailun Group, Qingdao Sentury Tire, Shandong Linglong Tyre, and Jiangsu General Science Technology all saw year-on-year growth in revenue and profits, with revenue growing by 24%, 10%, 10%, and 36% respectively, and net profits growing by 60%, 74%, 78%, and 139% respectively. Considering that the second round of overseas expansion by domestic tire companies is still ongoing, after completing their global presence, they will not only enhance their resistance to risks but also usher in a new round of growth. Investment recommendations and valuation However, from an industry trend perspective, on the one hand, the tire market with high cost performance still has growth potential amid consumption downgrading, and in the long run, the ceiling of market space that domestic tires can capture will be higher than before; on the other hand, some overseas tire companies are experiencing weak performance and are beginning to plan to eliminate some production capacity. Meanwhile, domestic leading tire companies have begun their second round of overseas expansion, consolidating their cost-performance advantages while continuing to enhance their ability to resist risks. Therefore, the logic of domestic tire companies increasing market share will continue to play out, with optimism towards domestically produced tire companies that have taken the lead in going global and have a relatively complete overseas layout. It is recommended to focus on Sailun Group (601058.SH), Qingdao Sentury Tire (002984.SZ), Shandong Linglong Tyre (601966.SH), and Jiangsu General Science Technology (601500.SH). Risk warning: significant fluctuations in raw material prices, international trade frictions, significant fluctuations in shipping costs, significant fluctuations in exchange rates, intense competition resulting from domestic companies building factories overseas.