Cost Issue Likely to Persist
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
4Q21 earnings miss; rise in cost to blame more than labor strike
— Hankook T&T 4Q21 earnings fell far short of the market consensus. While some believe the production setback caused by the labor strike was the main reason behind the shortcoming, we see rising costs as the bigger culprit. Cost increases should continue to hurt earnings through 1H22, as we believe ASP hikes will fail to offset the slide in OE tire demand due to reduced vehicle production.
4Q21 review: OP of KRW88.0bn short of market consensus by 44.5%
— The company posted 4Q21 OP of KRW88.0bn (-61.3% YoY, -51.3% QoQ), missing the market consensus by 44.5% and our estimate by 58.8%. Revenue (KRW1.89tn) beat the consensus by 8.1% and our estimate by 1.2%; the difference with our estimate lies largely in low-margin non-tire sales (tire sales was only 0.9% short of our estimate). The earnings shortcoming was attributable to rising costs and the labor strike despite aggressive ASP hikes.
Increase in cost exceeds revenue boost from ASP hike; strike to blame
— Revenue climbed 7.0% YoY in 4Q21 while operating expenses jumped 17.0%. With tire sales falling 9.3%, the large ASP hike failed to offset the increase in cost.
— Revenue climbed KRW193.0bn YoY (4Q21 ASP of KRW85,192/unit) thanks to a 14.4% rise in tire ASP resulting from FX effects, price hikes and brisk seasonal Europe tire sales amid a reduction in revenue proportion of low-priced tires.
— Feedstock cost per tire is estimated to have jumped 25.2% YoY to KRW31,744 per unit (based on input costs at Korean plant), while variable cost (incl. shipping costs) skyrocketed 40% YoY to KRW29,471. These factors resulted in a combined KRW186.6bn YoY increase in expenses.
— Production line disruptions also undermined OP. Tire unit sales fell 9.3% YoY because of sluggish OE tire sales (semiconductor shortage) and lowered output due to the labor strike. Tire output fell 16.8% YoY to 19.71mn units, leading to declines of ~KRW167.8bn in revenue and ~KRW62.3bn in OP (after factoring in drop in variable cost caused by reduced unit sales).
Cost issue likely to persist; chip shortage to keep OE demand down
— Costs are likely to continue rising. The 2021 surge in feedstock costs (e.g., butadiene) should continue to affect input costs through 1H22. Container freight rates are falling on low seasonality but remain above the 2021 average.
— While the labor strike has ended, the sales lost during its time could have a negative impact on 1Q22 unit sales. Also, the prolonged semiconductor shortage continues to weigh on OE tire demand, further limiting attempts to raise selling price.