The author is a KB Securities analyst. He can be contacted at [email protected] – Ed.
Disappointing OP in 3Q21 but improving
– 3Q21 OP missed market consensus, but market conditions should remain conducive to further increases in ASP in 4Q21, mainly supported by demand for RE tires. In the future, a flexible ASP policy that effectively increases capacity utilization should ease the burden of fixed costs.
3Q21 PO of KRW 180.8 billion; 7.0% below consensus on low sales volume and high fixed costs
– Hankook T&T announced a 3Q21 OP of KRW 180.8 billion (-19.5% yoy), missing the consensus of 7.0% (or KRW 13.6 billion) and our estimate of 21.7 % (or KRW 50.1 billion). There was a sharp increase in commodity prices, but increases in tire ASP more than offset the negative effects. That said, sharp declines in sales volume and factory usage pushed up costs, leading to lower PO.
– The shortfall was largely due to the disappointing volume of tire sales. The no. of tires sold in 3Q21 fell 10.2% year-on-year, eroding revenue by KRW 189.6 billion. Even reflecting lower fixed costs in line with the contraction in sales volume, we calculate that the PO would have fallen by KRW 61.6 billion year-on-year, or KRW 56.9 billion below our estimate. Production declines at automakers amid the semiconductor shortage weighed heavily on OE tire sales, causing unit tire sales to slow.
– Despite lower sales volume, fixed costs appear to have increased by KRW 35.2 billion year-on-year in 3Q21. Even assuming labor costs are at 2Q21 levels, we estimate fixed costs increased by KRW 43.2 billion year-on-year. Considering the tight labor market in the United States, however, labor costs do not appear to have declined in QoT, although tire production fell 3.5% QoQ. Depreciation charges fell by KRW 8.1 billion year-on-year. Fixed costs per tire taking into account the year-over-year decline in sales volume are estimated to have climbed 21.0% year-on-year.
– The increases in the unit cost of raw materials and ASP in 3Q21 are in line with our expectations. We believe that the deterioration in earnings due to higher fixed costs was more than offset by increases in ASP. It should be noted that costs have increased due to factors such as a 33.5% year-over-year increase in raw material cost per unit at domestic factories. This was largely offset by an 8% year-over-year increase in ASP, according to our estimates. Meanwhile, unfavorable exchange rates pushed revenue down 1.0% year-on-year (KRW30.0 billion less than our expectations) while positively affecting the PO.
OP can improve through flexible ASP policy
– Despite the outlook for a sustained uptrend in commodity costs, we are still seeing positive earnings growth.
– First, Hankook T&T can adjust its ASP policy. Global usage of the company’s plant is estimated at 83.2% in 3Q21, down sharply from 91.3% in 1Q21 and 88.8% in 2Q21. Despite a strong increase in ASP (+ 8.0% year-on-year), reduced capacity utilization due to lower sales volume added to the fixed cost burden. The company may need to increase ASP, in line with the upward trend in commodity prices in 4Q21. However, it could flexibly adjust the increases based on capacity usage.
– Second, the demand for RE tires remains robust. As such, global tire manufacturers are likely to aggressively pursue the ASP increases of RE tires. This environment can allow Hankook T&T to manage both ASP increases and usage improvement simultaneously.