2H21 Market Conditions Unfavorable
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Robust 2Q21 OP positive for stock but unfavorable 2H21 market conditions of concern
— 2Q21 OP exceeded the market consensus with estimate-beating tire unit sales. While the robust earnings should bolster the stock, market conditions may deteriorate in 2H21, so investors should exercise caution.
2Q21 OP misses our estimate on higher-than-expected raw material costs
— 2Q21 OP reached KRW187.2bn (+167.1% YoY), which is KRW10.5bn (6.0%) above the market consensus but KRW20.5bn (9.9%) below our estimate.
— We attribute the shortcoming to: (1) raw material costs coming in higher than expected (unit sales and ASP exceeded estimates), (2) fixed costs meeting expectations and (3) U.S. anti-dumping tariffs coming in smaller than anticipated. Accordingly, variable costs appear to have higher than expected (largely due to raw material costs).
— Tire unit sales surged 29.9% YoY (8.6% above our estimate), lifting revenue by KRW403.8bn (2Q20 tire revenue of KRW1.35tn x tire unit sales growth of 29.9%). Even when factoring in the increase in variable costs (+KRW272.2bn = 2Q20 raw material cost of KRW545.4bn x 29.9% + 2Q20 variable cost of KRW365.0bn x 29.9%), we calculate OP increasing KRW131.5bn YoY, or KRW42.7bn higher than our estimate.
— We estimate 2Q21 KRW-based tire ASP climbed 2.1% YoY, bolstering OP by KRW86.4bn YoY, or KRW45.5bn higher than our estimate.
— Depreciation and amortization appear to be in line with our estimate (increase of KRW1.1bn), and there were no significant factors that lifted labor costs. In addition, U.S. anti-dumping tariffs were KRW9.0bn below our estimate (KRW27.1bn).
— Overall, we believe OP missed our estimate because of higher-than-expected variable costs. 2Q21 raw material costs jumped 17.2% YoY (based on Korean factories); we attribute this to the sustained uptrend in major raw material prices (e.g., natural rubber, butadiene).
Earnings performance to bolster stock and raise market consensus
— The robust earnings performance should bolster the stock. We see the increase in tire sales to be the reason behind earnings beating the market consensus; 2Q21 revenue of KRW1.8tn (+32.4% YoY) exceeded the consensus by KRW58.8bn (3.4%). We believe the consensus will be raised to reflect the increase in tire unit sales and decrease in U.S. anti-dumping tariffs.
Market conditions to erode HoH on rising raw material prices and slowing sales
— We see market conditions deteriorating in 2H21. Increasing natural rubber/butadiene prices should result in higher raw material costs. In contrast, the recovery in tire demand should slow. As such, it should become increasingly difficult to fully pass through rising raw material costs, placing pressure on margins going forward.