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China's tire consumption and production structures differ significantly from those in developed countries and the global average. The share of heavy-duty truck tires, especially those used in large vehicles, is much higher compared to passenger car tires. This structural imbalance reflects the unique demands of China's transportation and logistics sectors.
China's heavy-duty trucks, particularly those equipped with all-steel radial tires, are known for their high quality and performance, placing them among the best in the world. All-steel radial tires have become a major profit driver for leading domestic tire manufacturers. From 2009 to 2011, the sales growth of the all-steel tire industry was 3.66%, 13.25%, and 15.58% respectively. In 2009, the total sales of all-steel tires reached approximately 57 million units. The breakdown of sales in the heavy-duty tire sector includes 1.5% for domestic original equipment, 5.5% for replacement, and 3% for exports. The order of profitability contribution is primarily driven by replacement, followed by export, and then domestic matching.
Currently, the industry's production capacity exceeds the projected 2009 sales figures by nearly 20%. However, this excess capacity is seen as a strategic reserve for future development. We expect that the actual new production capacity added in 2009 and 2010 will remain relatively limited.
Although large enterprises continue to expand, we anticipate that new production lines will not be the primary focus. Instead, more efforts will be directed toward establishing new production bases through mergers and acquisitions.
Looking ahead, the gross profit margin for all-steel tires is expected to remain around 17% in the second half of 2009, slightly lower than the 15% recorded in 2010. Despite fluctuations in natural rubber prices affecting the industry’s profitability, there remains uncertainty regarding long-term control over these factors. However, under the "outside cold and internal heat" economic conditions, the tire industry is expected to maintain steady growth in 2009 and 2010, with supply and demand gradually balancing out. Cost increases are expected to be limited, and the overall trend remains positive. As a result, the profit levels are likely to stay at a high level, and the industry outlook is not as bleak as many investors currently believe. Therefore, we assign an "overweight" rating to the sector.
Previously, the market had overly pessimistic expectations about the industry, which led to a significant discount in the valuation of tire companies compared to other automotive parts firms. However, based on our analysis, the industry's outlook for the next two years is not as negative as commonly perceived. Thus, we believe that current valuations of tire companies are undervalued. Investors should pay attention to companies such as Fengshen Co., Ltd., Qingdao Double Star, and other tire manufacturers. Among these, Qingdao Double Star appears particularly attractive due to its strong performance elasticity and reasonable valuation. It is forecasted that Qingdao Double Star will report EPS of 0.54 yuan in 2009 and 0.41 yuan in 2010, corresponding to P/E ratios of 11.6 times and 15.1 times respectively. The company’s performance improvement is notable and deserves close attention.
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