Da Nang Rubber's Radial Tire Capacity Jumps 67%
Da Nang Rubber Joint Stock Company (stock ticker DRC - HoSE) officially commenced operations of Phase 3 of its Radial Tire Plant with a designed capacity of 400,000 tires/year in December 2023.
As a result, total Radial tire manufacturing capacity of Da Nang Rubber has expanded by 67%, increasing from 600,000 tires/year to 1,000,000 tires/year. Notably, this operational commissioning took place well ahead of prior forecasts by several financial institutions.
Remarkably, the capital expenditure intensity for Phase 3 was 50% lower than the first two phases, providing substantial gross profit margin expansion once the facility operates at maximum utilization. The entire Radial facility is expected to reach full commercial run-rate from Q2, according to Vietcombank Securities (VCBS).
VCBS expects the early completion of the Radial plant expansion to provide significant upside to Da Nang Rubber's 2024 earnings. Supported by the structural domestic market shift from bias tires to all-steel radial tires, alongside resilient demand across key export markets, Da Nang Rubber is not expected to face demand bottlenecks in absorbing its expanded radial capacity.
According to VCBS, global tire demand has exhibited constructive turnaround signals since the second half of 2023. Cox Automotive, the world's largest automotive services organization, projects US new vehicle output in 2024 to return to pre-pandemic levels of approximately 3 million vehicles - three times higher than the depths of the 2020-2022 automotive semiconductor shortage.
Furthermore, industrial production indices for the trucking sector and heavy truck retail volumes in the US recorded positive quarter-on-quarter growth over the two most recent quarters, indicating robust supply and demand momentum across US freight logistics.
These drivers are accelerating tire replacement demand. The United States currently represents Da Nang Rubber's second-largest radial export market. Crucially, DRC's monthly export volume to the US has expanded substantially in recent quarters, rising from 10,000 units in January 2023 to 16,000 units by October 2023.
VCBS projects DRC's total radial tire production in 2024 to reach 920,000 units, up 28% year-on-year, with the majority of incremental output absorbed by the US market.
Potential to Gain US Market Share, 2024 Net Profit Could Surge Nearly 44%
Additionally, Da Nang Rubber's market share expansion in the US could be accelerated by potential US anti-dumping duties on Thai tire manufacturers.
Specifically, in October 2023, the US Department of Commerce initiated an anti-dumping duty investigation on truck and bus radial (TBR) tires imported from Thailand with an alleged dumping margin of 48%. Thailand is currently the largest TBR exporter to the US, commanding a market share of approximately 40%.
TBR exports from Thailand to the US surged fivefold during 2016-2022 after Chinese suppliers shifted production lines to ASEAN nations - predominantly Thailand - to circumvent US countervailing duties on Chinese-origin TBR tires.
A final determination is scheduled from the US Department of Commerce around June 24, 2024. If the investigation yields affirmative findings, Vietnam in general and Da Nang Rubber in particular stand as direct beneficiaries.
Vietnam is currently the 4th largest TBR exporter to the US with an 11% market share (in 2022), with Da Nang Rubber accounting for the primary export turnover. Currently, Vietnamese TBR products face zero punitive anti-dumping tariffs upon entry into the US market.
From discussions with Da Nang Rubber management, VCBS evaluates that positive outcomes will reflect in DRC's operational earnings starting in Q3-2024, as US buyers build inventory of Thai TBR tires in the near term to lock in lower import costs.
VCBS currently estimates Da Nang Rubber's FY2023 net profit after tax at VND 225 billion (down 27% YoY), but forecasts a strong rebound of 43.8% in FY2024 to VND 323 billion.
