Hankook Tire ( KS)

Transcription

1 June 11, 214 (16139 KS) Global top 3 for profitability BUY (MAINTAIN) Price (Jun. 1) W64,2 Target Price W78, % variance 21.5% Eric Choi (82-2) eric.choi@shinhan.com KOSPI 2,11.8p KOSDAQ p Market Cap. Par Value Outstanding Shares Free Floating Shares 52-Week High/Low 6-Day Avg. Trading Volume 6-Day. Avg. Trading T/O W7,952.8bn/ US6,976.1mn W mn 71.mn(57.3%) W66,/W49,6 342,664shrs W2,551mn Foreign Ownership 42.% Major Shareholders Worldwide and 22 others 42.7% National Pension Service (NPS) 5.76% Absolute Performance 3M 7.5% 6M 7.5% 12M 24.4% Relative performance 3M 4.5% to KOSPI 6M 6.6% 12M 19.5% High margins continue on favorable feedstock market environment 2Q14 preview: Sales down 2.2% YoY, operating profit margin of 15.6% Retain BUY for a target price of W78, High margins continue on favorable feedstock market environment Most global tire companies, excluding Japanese companies which benefited from the weaker yen, saw sales growth slowing in 1Q14. Their profits turned out strong thanks to low feedstock prices. posted operating profit margin of 15.5%, the third highest among global companies. This trend should continue in 2Q14. While demand from major markets like Europe and the U.S. is rising gradually, ASP is expected to decline slightly by 3.3% YoY in 214 on low rubber prices (natural rubber, synthetic rubber). Profits should remain at high levels (214F operating profit margin of 14.7%). 2Q14 preview: Sales down 2.2% YoY, operating profit margin of 15.6% We forecast s 2Q14 sales of W1.83tr (-2.2% YoY) and operating profit of W284.8bn (+5% YoY, operating profit margin of 15.6%). Demand from Europe has increased five months in a row (cumulative replacement tire demand up 4% YoY in April). As a result, the Hungarian subsidiary s margins should stay strong (19.7% expected in 2Q14). Replacement equipment tire demand increased 11% YoY for the year to April in China, but sales of no claim tires without warranties (15% of total market sales) accounted for a considerable portion. Operating profit margin, however, will likely come to 12.6% in 2Q14 due to strong brand awareness. Retain BUY for a target price of W78, We retain our BUY rating on for a target price of W78,. Annual sales growth is expected to slow to 1% because of declines in the won/dollar exchange rate and ASP. Maintaining the ASP level will be a priority for the company given low feedstock prices. will likely achieve qualitative growth in the long term on the back of capacity expansions in China, Indonesia and the U.S., improving brand recognition, and the rising share of high-end ultra-high performance tires (UHPT). Year to Dec. Sales OP Pre-tax NP EPS Growth BPS PER EV/EBITDA PBR ROE Net Debt (W bn) (W bn) (W bn) (W bn) (Won) (%) (Won) (X) (X) (X) (%) Ratio (%) 212 2, ,72 N/A 25, ,69.2 1, , , F 7, ,48.8 1, , , F 7, , , , , F 8, , , , ,

2 Continental ChengShin Bridgestone Pirelli Nexen Tire Cooper Tire Sumitomo Rubber Kumho Tire Yokohama Rubber Goodyear Sumitomo Rubber Yokohama Rubber Cooper Tire Bridgestone Nexen Tire Continental ChengShin Kumho Tire Pirelli Michelin Goodyear Daily News posted the third highest operating profit margin (15.5%) in 1Q14 Global tire companies sales growth slows, but profit margins improve in 1Q14 Most global tire companies, excluding Japanese companies which benefited from the weak yen, saw sales growth slowing in 1Q14. Sumitomo (+17% YoY), Yokohama (+9.4% YoY) and Bridgestone (+7.7% YoY) reported strong sales growth. Cooper enjoyed low base effect in sales (+8.2% YoY) due to a severe drop in 213. However, most companies recorded strong profitability thanks to low feedstock prices. registered the third highest operating profit margin of 15.5% among global companies. Continental had the highest operating profit margin at 19% and ChengShin the second highest at 17.1%. Most companies turned in double-digit operating profit margins. This trend should continue in 2Q14. While demand from major markets like Europe and the U.S. is rising gradually, ASP is expected to decline slightly on low rubber prices (natural rubber, synthetic rubber). Profits should remain at high levels. 1Q13 and 1Q14 tire sales growth of tire companies (%) Q14 1Q13 (1) (2) (2.2) (6.6) (12.5) (6.1) (1.6) (.3) (1.6) (2.3) (16.7) (1.) (2.4) (2.4) (8.1) (7.9) (13.3) 1Q13 and 1Q14 tire operating profit margin of tire companies (%) 19. 1Q Q

3 Feedstock prices to remain low in 3Q14 High margins continue on favorable feedstock market environment Prices of natural and synthetic rubbers have declined since the beginning of the year. The price drop was more severed because of China s economic slowdown and Thailand s military coup. Despite the farmers protests, the military government had authorized the release of rubber inventory, which was purchased to stabilize rubber prices. In addition, Vietnam has become the third largest rubber producer after expanding rubber plantation, contributing to the increase in rubber supply. The natural rubber price is unlikely to rise for some time with output expanding ahead of the 3Q peak season. The synthetic rubber price should also remain low. Thus, Hankook Tire is expected to retain high margins (214F operating profit margin of 14.7%). Operating profit margin to reach 15.6% in 2Q14 We forecast 2Q14 sales of W1.83tr (-2.2% YoY) and operating profit of W284.8bn (+5% YoY, operating profit margin of 15.6%). Demand from Europe has increased five months in a row (cumulative replacement tire demand up 4% YoY in April). As a result, the Hungarian subsidiary s margins should stay strong (19.7% expected in 2Q14). Replacement equipment tire demand increased 11% YoY for the year to April in China, but sales of no claim tires without warranties (15% of total market sales) accounted for a considerable portion. Operating profit margin, however, will likely come to 12.6% in 2Q14 due to strong brand awareness. Natural rubber and butadiene prices (USD/ton) 4,5 Natural rubber price Butadiene price 3,5 2,5 1,5 5 1/12 4/12 7/12 1/12 1/13 4/13 7/13 1/13 1/14 4/14 Source: Malaysian Rubber Board, Platts, Shinhan Investment Corp. Passenger car RE tire demand (%) Europe 3 North America China 2 1 (1) (2) 1/12 7/12 1/13 7/13 1/14 Source: Michelin, Shinhan Investment Corp. Passenger car OE tire demand (%) Europe North America China (2) 1/12 7/12 1/13 7/13 1/14 Source: Michelin, Shinhan Investment Corp. 3

4 Earnings forecast revision Before After Change (bn KRW, %) 214F 215F 214F 215F 214F 215F Sales 7,334 8,141 7,135 7,943 (2.7) (2.4) OP 1,71 1,156 1,49 1,132 (2.) (2.1) NP (.9) (1.) OPM NPM Source: Shinhan Investment Corp. Earnings trend and outlook (bn KRW, %) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14F 3Q14F 4Q14F F 215F 216F Sales 1,77 1,844 1,788 1,71 1,679 1,871 1,81 1,718 1,675 1,829 1,826 1,85 7,4 7,69 7,135 7,943 8,652 Korea 1,72 1,85 1,36 1, , , ,19 4,22 3,912 3,854 3,931 3,99 China ,884 1,969 2,4 2,223 2,419 Hungary ,23 1,254 Indonesia OP ,31 1,49 1,132 1,237 Korea China Hungary Indonesia (7) (4) (7) NP OPM Korea China Hungary Indonesia NPM Output (1, units) 21,84 22,3 21,214 22,171 21,992 23,527 22,737 24,136 23,252 24,336 23,678 25,188 87,489 92,393 96,454 14,254 11,254 Korea 11,523 11,595 1,912 11,52 11,42 11,517 1,835 11,86 11,156 11,556 1,874 11,669 45,532 45,254 45,254 45,254 45,254 China 7,181 7,698 7,265 7,473 7,147 7,573 7,58 7,834 7,448 7,72 7,792 8,257 29,617 3,62 31,2 34, 37, Hungary 3,1 3,7 3,37 3,54 3,179 3,35 3,138 3,16 3,285 3,563 3,452 3,71 12,198 12,728 14, 18, 18, Indonesia ,132 1,257 1,336 1,363 1,515 1,561 1, ,349 6, 7, 1, KRW/USD rate 1,132 1,152 1,134 1,9 1,85 1,123 1,112 1,62 1,69 1,3 1,35 1,25 1,127 1,95 1,4 1,1 1, 12-month forward PER band 12-month forward PBR band (KRW) 75, 65, 11.x 1.x 9.x (KRW) 75, 65, 1.8x 1.7x 1.6x 1.5x 55, 8.x 55, 1.3x 45, 7.x 45, 35, 1/12 4/13 1/13 4/14 35, 1/12 4/13 1/13 4/14 Source: QuantiWise, Shinhan Investment Corp. Source: QuantiWise, Shinhan Investment Corp. 4

5 Relative share performance of global peers (1/13=1) Nexen Tire Kumho Tire 22 Bridgestone Michelin Goodyear /13 4/13 7/13 1/13 1/14 4/14 Source: Bloomberg, Shinhan Investment Corp. ROE-PBR of global peer group PBR (x) 3. Cheng Shin 2.4 Pirelli 1.8 Michelin Nexen Tire 1.2 Sumitomo Kumho Tire Bridgestone.6 Yokohama ROE (%) Source: Bloomberg, Shinhan Investment Corp. Note: Based on 214 Bloomberg consensus Global peer group valuation Company (country) Sales OP NP PER PBR ROE EV/EBITDA (mn USD, %, x) 214F 215F 214F 215F 214F 215F 214F 215F 214F 215F 214F 215F 214F 215F 7,67 7,736 1,44 1, Nexen Tire 1,82 2, Kumho Tire 3,761 4, Bridgestone (Japan) 37,414 38,997 4,774 5,1 2,999 3, Michelin (France) 27,571 29,49 3,241 3,574 2,31 2, Goodyear (U.S.) 19,1 19,657 1,599 1, Pirelli (Italy) 8,42 8,946 1,152 1, Sumitomo (Japan) 8,72 8, Yokohama (Japan) 6,274 6, ChengShin (Taiwan) 4,678 5, Source: Bloomberg, Shinhan Investment Corp. Note: Earnings forecasts of global peers based on Bloomberg consensus 5

6 Balance Sheet Year to Dec. (W bn) F 215F 216F Assets 7, , , , ,91.7 Total Current Assets 3, , , , ,436.6 Cash and Cash Equivalents ,29.7 Accounts Receivables 1,52.2 1,57.2 1, , ,458.9 Inventories 1, , , , ,91.7 Non-Current Assets 3, , , , ,465.1 Tangible Assets 3, ,498. 3, , ,124.4 Intangible Assets Investment Assets Other Financial Institutions Assets..... Liabilities 3,961. 3, ,9.4 4, ,536.9 Current Liabilities 2, , ,98.3 3,374. 3,628. ST Borrowings 1, , , , ,77.5 Account Payables Current Portion of LT Debt Non-Current Liabilities Bonds LT Borrowings(incl. LT Fin. Liab.) Other Financial Institutions Liab Shareholders' Equity 3, , ,666. 5,473. 6,364.8 Capital Stock Capital Surplus 2, , , , ,993.5 Other Reserves (1.1) (1.1) (1.1) (1.1) (1.1) Accu. Other Comp. Income (53.8) (46.) (46.) (46.) (46.) Retained Earnings , , ,36.2 Owners of Parent Equity 3, , , ,473. 6,368.6 Non-Controlling Interests Equity (.) (3.8) *Total Debt 2, , , , ,983.1 *Net Debts(Cash) 2, ,416. 1, Profit and Loss Year to Dec. (W bn) F 215F 216F Sales 2, ,69.2 7, , ,652.4 Growth (%) (64.3) COGS 1, ,71.9 4,759. 5, ,814.4 Gross Profit , , ,65.4 2,838. Gross margin (%) SG&A , , , ,6.7 Operating Income ,31. 1,48.8 1, ,237.3 Growth (%) (46.6) Operating margin (%) Other Net Non-Operating Profits (15.1) (41.3) (17.) (15.) (1.) Financial Income(Expenses) (37.2) (48.4) (37.) (35.) (3.) Net Other Non-Operating Profits Net Gains in Asso., Subs., and JVs..... Pre-tax Profit from Cont. Op ,31.8 1, ,227.3 Income Taxes Profit from Continuing Op Profit from Discontinued Op Net Profit Growth (%) (35.) Net Profit margin (%) Net Profit of Parent Net Profit to Non-Controlling (.6) (2.9) (3.2) (3.4) (3.8) Total Comprehensive Income Total Comp. Income of Parent Total Comp. Income to Non-Cont. (.8) (2.8) (3.) (3.2) (3.5) EBITDA ,444. 1, ,45. 1,586.2 Growth (%) (52.8) (5.1) EBITDA Margin (%) Note: Operating profit is based on 212 K-IFRS (gross profit - SG&A costs) Cash Flow Year to Dec. (W bn) F 215F 216F Operating Cash Flow , ,11.5 Net Profit Depreciation Amortization Losses(Gains) on F/X Translation 1.4 (3.1)... Losses(Gains) on Disp. of Assets Losses(Gains) in Asso.., Subs.,JVs..... Chg. in A/L from Op. Activities (4.4) (312.3) (228.3) (25.4) (21.3) (Payments of Income Taxes) (23.6) (157.4) (24.5) (26.3) (286.) Others Investing Cash Flow (147.8) (652.6) (1,23.2) (773.7) (789.7) Incr. in Tangible Assets(CAPEX) (27.) (384.) (5.) (57.) (57.) Decr. in Tangible Assets Decr.(Incr.) in Intangible Assets (3.3) (12.3) (3.) (3.) (3.) Decr.(Incr.) in Investment Assets.3.8 (.2) (2.1) (1.8) Others 54.8 (29.5) (535.) (213.6) (229.9) Free Cash Flow Financing Cash Flow (369.3) (24.8) Incr.(Decr.) in Borrowing (368.2) (155.3) Decr.(Incr.) of Treasury Stock Dividend. (49.5) (49.5) (49.5) (49.5) Others (2.2).... Other Cash Flows.. (12.5) (12.5) (12.5) Change of Consolidated Scope..... Difference by Chg. in F/X Rates (5.6) Incr.(Decr.) in Cash (83.6) (42.5) Beginning Cash Ending Cash ,29.7 Key Ratios Year to Dec F 215F 216F EPS_C (won) 5,688 5,934 6,388 6,915 7,599 EPS_P (won) 5,72 5,957 6,414 6,943 7,629 BPS_C (won) 26,6 31,678 37,667 44,182 51,381 BPS_P (won) 25,93 31,625 37,639 44,182 51,411 DPS (won) PER_C (x) PER_P (x) PBR_C (x) PBR_P (x) EV/EBITDA (x) EV/EBIT (x) Dividend Yield (%) Profitability EBITTDA Margin (%) OP Margin (%) NP Margin (%) ROA (%) ROE (%) ROIC (%) Stability D/E Ratio (%) Net Debt to Equity (%) Cash Ratio (%) Interest Coverage (x) Activity (%) Working Capital Turnover (t) Inventory Turnover (d) Receivable Turnover (d)

7 (16139 KS) Share Price Performance (won) 7, 15 KOSPI Index = 1 6, 5, 1 4, 95 3, 9 2, 1, /13 1/13 2/14 6/14 Price (LHS) (Indexed,Jun-13=1) Relative Performance to KOSPI (RHS) Target Price & Recommendation History (won) 9, 8, 7, 6, 5, 4, 3, 2, 1, 6/12 3/13 12/13 Target Price (LHS) Recommendation (RHS) BUY Trading BUY HOLD REDUCE Price (LHS) Compliance Notice Analyst Certification: The following analysts hereby certify the information and material presented in this report are accurate expressions of their views, and that they have not received wrongful pressure to express such views: Eric Choi. As of the date of this report's publication, Shinhan Investment Corp.'s shareholdings in the company mentioned in this report () do not exceed 1% of outstanding shares of the company. As of this date, Shinhan Investment Corp. has not participated as the lead underwriter or advisor in issuance of the securities of the company during the past 1 year. Shinhan Investment Corp. confirms it has issued ELS based on the 's underlying asset. As of this date, the covering analyst does not possess any financial interest in the securities or debt instruments convertible into such shares of the company, which is required to be disclosed by law, and has not and will not receive any compensation of any kind whatsoever in exchange for expressing specific recommendations. All opinions and estimates regarding the company and its securities are accurate representations of the covering analyst's judgments as of this date, and may differ from actual results. This report is intended to provide information to assist investment decisions only and should not be used or considered an offer or the solicitation of an offer to sell or to buy any securities. Stock selection and final investment decisions should be made at the client's own discretion. This report is distributed to our clients only, and any unauthorized use, duplication, or redistribution of this report is strictly prohibited. Recommendation Target Price (won) BUY 65, BUY 59, BUY 69, BUY 83, BUY 78, SHIC Rating Classifications (As of 25 Jul. 211) Stock BUY: Expected return of over +15% in the next 6 months Trading BUY: Expected return of % ~ +15% in the next 6 months HOLD: Expected return of -15% ~ % in the next 6 months REDUCE: Expected return of below -15% in the next 6 months Sector OVERWEIGHT: Prevalence of BUY rating for stocks in our sector coverage universe based on market cap NEUTRAL: Prevalence of HOLD rating for stocks in our sector coverage universe based on market cap UNDERWEIGHT: Prevalence of REDUCE rating for stocks in our sector coverage universe based on market cap 7