IPO outlook | “Mature” Linglong Tire (601966.SH) goes south to Hong Kong stocks, and the global layout enters the deep-water zone?

Established in 1994, Linglong Tire (601966.SH), a leading domestic tire company, has now entered a “mature age”. Following its listing on the main board of the Shanghai Stock Exchange in July 2016, after a lapse of nearly 10 years, Linglong Tire, which is working to achieve global development, has finally set its sights on Hong Kong.

Recently, Linglong Tire officially submitted a listing application to the main board of the Hong Kong Stock Exchange. According to the prospectus, Linglong Tire's product portfolio includes a wide range of passenger and light truck tires, truck tires and off-road tires, and has a variety of specifications to suit different application scenarios; in terms of the brand matrix, the company's brands include Linglong, Leo, Yufeng, Atlas, Lvxing and Ruijie.

Based on global sales in 2024, Linglong Tire is already the largest OE tire (automobile manufacturer's original tire) manufacturer in the Chinese market, and is also the third largest OE tire manufacturer in the world. Furthermore, if the scope is framed in the field of new energy vehicles, Linglong Tire has been the world's largest OE tire manufacturer for five consecutive years.

The outstanding market position has also helped Linglong Tire achieve strong sales performance. From 2022 to 2024, Linglong Tire's core financial performance continued to grow. Also, it is worth mentioning that not only are they making great strides in the domestic market, but Linglong Tire's overseas performance is also gradually improving. This is probably due to the fact that the company attaches great importance to overseas markets. Previously, Linglong Tire formulated a “7+5” strategy (that is, 7 domestic factories and 5 overseas factories) to continue to promote a global layout. By the end of last year, Linglong Tire had established seven major production bases around the world, including two overseas bases in Thailand and Serbia. In the prospectus, Linglong Tire stated that through measures such as optimizing the industrial layout and increasing strategic production capacity, the pace of the company's global expansion will be further accelerated.

A leading tire company with steady growth in performance

In the last three full years, Linglong Tire's revenue continued to expand at a compound annual growth rate of 13.9%. According to the data, in 2022 to 2024, the company achieved revenue of 17.06 billion yuan, 20.065 billion yuan, and 22.058 billion yuan respectively.

Looking at the split structure, passenger and light truck tires have always been the company's largest source of revenue, and their share has continued to rise over the past few years. According to financial reports, the business's revenue increased from 9.709 billion yuan in '22 to 14.43 billion yuan in '24, accounting for an increase of 57.1% to 65.4%. Truck and bus tires are the second largest business of Linglong Tire. Revenue during the reporting period was 6.224 billion yuan, 6.728 billion yuan, and 6.688 billion yuan respectively, accounting for 36.6%, 33.4%, and 30.3% of corresponding revenue. In the same period, Linglong Tire also derived some of its revenue from off-road tires and other businesses, including material and waste sales, but they all accounted for a small share of revenue.

Looking at the overall picture, it's not hard to see that passenger and light truck tires, which account for the largest share of revenue, are also the business segments that have contributed the most to Linglong Tire's performance growth over the years. The reason why the scale of this business was able to grow in an orderly manner was due to a sharp rise in the volume and price of related products during the period. In terms of sales, there was a 28.3% increase over the previous year in '23, and an increase of about 11.2% the following year. At the same time, the average sales price remained stable in '22 and '23, and there was a slight increase in '24.

By region, the mainland China market has always been the main source of revenue for Linglong Tire, accounting for 51.1%, 52.2%, and 50.8% of revenue in 22-24, respectively. However, judging from the overall trend, overseas revenue contribution continued to rise, reaching 49.2% in '24. According to information, Linglong Tire's overseas market revenue mainly includes North America, Europe, Asia and other regions, with confirmed revenue from sales to North America accounting for the largest share.

While revenue has been steadily expanding, Linglong Tire's profitability has also improved significantly in recent years. Data show that in 22-24, Linglong Tire's gross profit was 1,871 billion yuan, 3.61 billion yuan, and 4.344 billion yuan respectively, corresponding to gross profit margins of 11%, 17.9%, and 19.7%. Among them, the company's gross margin jumped sharply in '23, mainly due to a combination of factors such as economies of scale brought about by increased production and sales, and the decline in raw material prices represented by natural rubber and synthetic rubber in this year. During the reporting period, Linglong Tire's net profit was 292 million yuan, 1,391 billion yuan, and 1,752 billion yuan respectively, which also showed the characteristics of “rising tide”.

Using “7+5” and “3+3” strategies to achieve global attacks?

As tires are in demand, global tire sales have shown a steady growth trend over the years. According to industry data, the compound annual growth rate of global tire sales from 2020 to 2024 was 3.9%. From now until 2029, the potential compound annual growth rate is expected to be about 3.6%. Among them, the potential growth rate of the Chinese market is expected to be about 4.1%, which is slightly higher than the global market.

Although the overall market appears to be relatively stable, the structural opportunities are actually quite impressive. For example, since 2020, the penetration rate of NEV tires in the global and Chinese OE tire market has risen strongly, surging from 3.2% to 17.1% in 2024. Among them, in the Chinese market alone, the penetration rate increased from 3.9% to 33.7%, and is expected to reach 60.9% by 2029.

Seizing these opportunities, Linglong Tire has continued to grow stronger and bigger over the years. Facing the future, Linglong Tire plans to firmly promote the internationalization of manufacturing around the “7+5” and “3+3” strategies. In terms of the “7+5” strategy, Linglong Tire currently has 5 production bases in Zhaoyuan, Dezhou, Liuzhou, Jingmen, and Changchun in China, and plans to build two other domestic production bases in Shaanxi and Anhui. It has 2 overseas production sites in Thailand and Serbia, and continues to inspect and build factories around the world, making full use of global resources to develop the global tire market.

Based on the “7+5” global strategic layout, Linglong Tire has also carried out “3+3” off-road tire strategic production based on strategic planning. The goal is to establish off-road tire production capacity at three domestic production bases and three overseas production bases.

In recent years, with the booming development of the global port transportation industry, the expansion of the mining industry, and the spread of mechanized automation in modern manufacturing logistics, developing countries have vigorously promoted infrastructure. At the same time, benefiting from the continuous increase in agricultural machinery and equipment and the increasing demand for agricultural replacement tires, it has strongly promoted the continued growth in demand for off-road tires. At present, off-road tires have good market prospects, and their potential in overseas regions is particularly impressive. Also, judging from the business model, the high off-road tire barrier is obviously a very attractive field for Chinese tire companies represented by Linglong Tire. In response, Linglong Tire plans to achieve the goal of producing a total of 339,900 tons of off-road tires by the end of 2030.

Amidst the historic process of “rapid advancement” of China's automobile industry, the “volume” and “voice” of the Chinese auto parts industry, represented by tires, is also expected to continue to rise in the global market. For Linglong Tire, which is already in a leading position in the domestic supporting business, the Hong Kong stock listing will undoubtedly help the company further enhance its global business layout capabilities. Looking ahead to the future market, as the company's domestic and foreign production capacity continues to be released in an orderly manner, what kind of role does Linglong Tire actually play in the global tire market is probably worth keeping track of.