OP May Improve via Flexible ASP Policy
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
OP disappointing in 3Q21 but to improve
— 3Q21 OP missed the market consensus, but market conditions should remain conducive to additional ASP hikes in 4Q21, mainly backed by RE tire demand. Going forward, a flexible ASP policy that effectively lifts capacity utilization should ease the fixed cost burden.
3Q21 OP of KRW180.8bn; 7.0% below consensus on weak sales volume and high fixed costs
— Hankook T&T reported 3Q21 OP of KRW180.8bn (-19.5% YoY), missing the consensus by 7.0% (or KRW13.6bn) and our estimate by 21.7% (or KRW50.1bn). There was a sharp increase in raw material prices, but tire ASP hikes mostly offset negatives. That said, steep declines in sales volume and factory utilization pushed up costs, dragging down OP.
— The earnings miss was largely due to disappointing tire sales volume. The no. of tires sold in 3Q21 slid 10.2% YoY, eroding revenue by KRW189.6bn. Even when reflecting lower fixed costs in line with sales volume contraction, we calculate OP would have dropped KRW61.6bn YoY, or KRW56.9bn below our estimate. Production setbacks at carmakers amid the semiconductor shortage sharply depressed OE tire sales, leading to slower tire unit sales.
— Despite weaker sales volume, fixed costs appear to have expanded KRW35.2bn YoY in 3Q21. Even assuming labor costs at 2Q21 levels, we estimate fixed costs rose KRW43.2bn YoY. Given the tight job market in the U.S., however, labor costs do not appear to have decreased QoQ, though tire production slid 3.5% QoQ. Depreciation and amortization costs dipped KRW8.1bn YoY. Per-tire fixed costs factoring in the YoY sales volume decline are estimated to have soared 21.0% YoY.
— The increases in raw material cost per unit and ASP in 3Q21 were in line with our expectations. We believe earnings deterioration from higher fixed costs was significantly offset by ASP hikes. Of note, costs expanded on factors such as a 33.5% YoY rise in raw material cost per unit at domestic factories. This was largely canceled out by an 8% YoY increase in ASP, based on our estimates. Meanwhile, unfavorable FX rates dragged down revenue by 1.0% YoY (KRW30.0bn lower than our expectation) while positively affecting OP.
OP may improve via flexible ASP policy
— Despite the outlook for a sustained uptrend in raw material costs, we still see positive earnings growth.
— First, Hankook T&T may adjust its ASP policy. The company’s global factory utilization is estimated at 83.2% in 3Q21, down sharply from 91.3% in 1Q21 and 88.8% in 2Q21. Despite a steep ASP hike (+8.0% YoY), reduced capacity utilization due to weaker sales volume added to the fixed cost burden. The company may need to raise ASP, in line with price uptrends for raw materials in 4Q21. However, it could flexibly adjust the hikes based on capacity utilization.
— Second, demand for RE tires remains robust. As such, global tire makers are likely to aggressively pursue RE tire ASP hikes. This environment may allow Hankook T&T to concurrently address ASP hikes and utilization improvement.