The author is an analyst of Shinhan Investment Corp. He can be reached at email@example.com. -- Ed.
4Q19 OP of KRW116.2bn (-4.0% YoY) misses consensus by 16.9%
Hankook Tire & Technology posted operating profit of KRW116.2bn (-4.0% YoY) on sales of KRW1.68tr (-2.7% YoY) for 4Q19, missing market expectations (KRW139.9bn) by 16.9%. Sales were weighed down by YoY declines in shipments (-4.6%), ASP (-0.2%), and others (-0.1%). The USD/KRW exchange rate went up 2.2% YoY.
The burden of inventories and fixed costs increased, caused by weak demand for RE (replacement equipment) tires in markets excluding China and the absence of winter tire demand in Eastern Europe this warm winter. Inventories are estimated to have piled up by 600,000 units YoY as of end-2019 (total output of 92.88mn in 2019).
Buy at the bottom and hold
Efforts have been made to boost earnings such as seeking new distribution channels and M&As, but any improvement has been hampered by a prolonged period of low demand and intense competition. We recommend buying the shares at the bottom and holding them, instead of waiting for an upturn in demand or easing competition to turn tire market conditions favorable. Earnings are unlikely to fall further from current levels, given: 1) downward stabilization of raw material prices (-4% YoY in 1Q20F); and 2) recovery of OE (original equipment) tire sales led by the tiremaker’s market share gains at domestic automakers.
Retain BUY for a target price of KRW38,000
We retain our BUY rating on Hankook Tire & Technology for a target price of KRW38,000. The tiremaker continues to make strenuous efforts, including adjustment of brand royalties, expansion of distribution channels, and small-scale M&A deals. Earnings are forecast to improve despite unfavorable overseas market conditions. Touching bottom in 2019, the tiremaker is expected to stage its first turnaround in three years in 2020 (operating profit +6.9% YoY).