(16139 KS) Aggressive expansion to enhance global presence Auto Results Comment October 29, 213 (Maintain) Buy Target Price (12M, W) 78, Share Price (1/28/13, W) 65,4 Expected Return 19% OP (13F, Wbn) 1,45 Consensus OP (13F, Wbn) 1,75 EPS Growth (13F, %) 244.1 Market EPS Growth (13F, %) 17.6 P/E (13F, x) 1.2 Market P/E (13F, x) 1.8 KOSPI 2,48.14 Market Cap (Wbn) 8,11 Shares Outstanding (mn) 124 Free Float (%) 57.3 Foreign Ownership (%) 39.5 Beta (12M).83 52-Week Low 39,3 52-Week High 66,6 (%) 1M 6M 12M Absolute 3.7 31.1 4. Relative 1.8 25.7 31.8 15 13 11 9 Share price KOSPI 3Q13 review: Misses consensus with OPM of 13.6% s 3Q13 consolidated earnings were weaker than market expectations, with revenue of W1.8tr and operating profit of W244bn. The main reasons for weak earnings were: 1) a fewer number of working days, 2) weaker-than expected sales of high-margin winter tires, and 3) the strong won, which led to revenue falling 3.7% QoQ. s 3Q13 OP margin declined.9%p QoQ to 13.6% due to slowing top-line growth and increased marketing expenses. OP margin at the firm s Korean operations was hit hardest due to a weak domestic market. However, the firm s overseas operations continued to see solid margins. Top-line growth to resume from 4Q13 s 4Q13 top-line growth is rebounding, and we thus anticipate OP margin to improve from the prior quarter. We forecast 4Q13 consolidated revenue and operating profit of W1.9tr and W267bn, respectively, with OP margin improving to 14.%. We believe global tire demand is slowly picking up, and an increase in winter tire shipments to Europe will contribute to margin improvement. Regarding raw materials prices, we believe input prices of raw materials will continue to fall in 4Q13, offsetting potential increases in marketing costs. Meanwhile, we anticipate a further recovery in the global RE tire market from 214, which will couple nicely with additional capacity increases at the firm s plants in Indonesia and China. We expect s OP margin to further improve in 214, as: 1) we do not anticipate a strong increase in raw materials prices ( estimates 214 raw materials prices to increase at an average of 5%), and 2) we expect a tire-price rebound in 2H14. We forecast s 214 revenue and operating profit to increase by 1% and 11%, respectively. Maintain Buy and Raise TP by 15% to W78, We maintain our Buy rating on and raise our 12-month target price by 15% to W78, (previously W68,). We revised our target price after moving our base year to 214 and applying our previous target EV/EBITDA of 6.5x. We believe will continue to maintain its competitive edge in the global tire industry as major-market demand recovers. We also believe will continue to outpace average industry growth over the mid- to long-term due to its capacity increases in Hungary, China, Indonesia, and the US. This will also help s brand image, further enhancing its standing in major markets. We forecast s global production to increase 6.5% annually until 217. 7 1/12 2/13 6/13 1/13 Daewoo Securities Co., Ltd. Auto/Auto parts/tire Michael Yun +822-768-4169 michael.yun@dwsec.com Young-ho Park +822-768-333 youngho.park@dwsec.com Sangmin Lee +822-768-417 sangmin.lee@dwsec.com FY (Dec.) 12/1 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 2,317 7,264 7,959 8,647 OP (Wbn) 39 1,45 1,158 1,261 OP Margin (%) 13.3 14.4 14.6 14.6 NP (Wbn) 232 797 871 951 EPS - 6,433 7,32 7,68 ROE (%) - 21.9 19.3 17.4 P/E (x) - 1.2 9.3 8.5 P/B (x) 1.9 2.1 1.7 1.4 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
October 29, 213 Table 1. 3Q13P earnings results (Wbn, %) 3Q12 2Q13 3Q13P Preliminary KDB Daewoo Consensus YoY QoQ Revenue 1,788 1,871 1,81 1,88 1,824.8-3.7 Operating profit 222 271 244 285 264 9.9-1. Pretax profit 229 275 247 29 259 8. -1.4 Net profit n.a. 21 n.a. 22 23 - - OP margin 12.4 14.5 13.6 15.2 14.5 Net margin - 11.2-11.7 11.1 Table 2. Quarterly earnings trend (Wbn, %) 4Q12 213 4Q13F % 1Q 2Q 3QP 4QF YoY QoQ 213F 214F Revenue 1,71 1,679 1,871 1,81 1,912 12.4 6.2 7,264 7,959 Operating profit 222 262 271 244 267 2.1 9.3 1,45 1,158 Pretax profit 26 238 275 247 275 33.7 11.5 1,35 1,144 Net profit 161 19 21 188 21 3.5 11.5 797 871 OP margin 13.1 15.6 14.5 13.6 14. 14.4 14.6 Net margin 9.4 11.3 11.2 1.4 11. 11. 1.9 Table 3. Regional sales and operating profit breakdown (Wbn, %) 212 213 4Q13F % 1Q 2Q 3Q 4Q 1Q 2Q 3QP 4QF YoY QoQ 212 213F 214F Revenue Korea 1,72 1,86 1,36 1,26 981 1,14 98 1,59 3.2 16.6 4,22 3,962 4,291 China 471 495 472 453 457 529 517 515 13.7 -.3 1,891 2,18 2,266 Hungary 225 222 25 178 212 221 25 217 21.7 5.7 83 855 928 Indonesia 21 59 72 72 -.4 224 284 Others -61 41 75 44 8 47 1 5 13.6-49.9 99 25 19 Sum 1,77 1,844 1,788 1,71 1,679 1,871 1,81 1,912 12.4 6.2 7,4 7,264 7,959 OP Korea 13 134 11 12 144 13 74 137 34.7 85.4 476 485 613 China 35 5 45 49 55 64 51 59 2.9 17. 179 229 268 Hungary 51 48 38 31 39 4 37 39 25.8 4.3 168 155 167 Indonesia -4 2 5 5-2.8 8 2 Others 15 11 29 4 28 36 77 26-34.3-65.8 95 167 91 Sum 231 243 222 222 262 271 244 267 2.1 9.3 918 1,45 1,158 OP margin Korea 12.1 12.3 1.6 9.9 14.7 12.8 8.2 13. 11.3 12.3 14.3 China 7.4 1.1 9.5 1.8 12. 12.1 9.8 11.5 9.5 11.3 11.8 Hungary 22.7 21.6 18.5 17.4 18.4 18.1 18.2 18. 2.2 18.2 18. Indonesia -18.4 2.8 7.2 7. 3.5 7. Others -24.6 26.8 38.7 9.9 361.8 76.2 77. 52.6 96. 81.5 48. Sum 13.5 13.2 12.4 13.1 15.6 14.5 13.6 14. 13. 14.4 14.6 Table 4. Earnings forecast revisions (Wbn, W, %) Previous Revised % change 213F 214F 215F 213F 214F 215F 213F 214F 215F Notes Revenue 7,352 7,943 8,276 7,264 7,959 8,647-1.2.2 4.5 - Reflected 3Q13 earnings Operating profit 1,16 1,159 1,211 1,45 1,158 1,261-5.5 -.1 4.1 - Reflected Hungarian plant Pretax profit 1,96 1,135 1,183 1,35 1,144 1,249-5.5.8 5.6 expansion (from 215) Net profit 838 86 896 797 871 951-5. 1.4 6.2 EPS 6,768 6,938 7,234 6,433 7,32 7,68-5. 1.4 6.2 OP margin 15. 14.6 14.6 14.4 14.6 14.6 Net margin 11.4 1.8 1.8 11. 1.9 11. 2
October 29, 213 Table 5. Breakdown of earnings revisions by region (Wbn, %) Previous Revised % Change 213F 214F 215F 213F 214F 215F 213F 214F 215F Revenue Korea 4,113 4,29 4,334 3,962 4,291 4,335-3.7.. China 2,6 2,211 2,346 2,18 2,266 2,5.6 2.5 6.6 Hungary 882 889 938 855 928 1,239-3.1 4.4 32.1 Indonesia 224 284 398 5.9 3.1. Others 351 553 658 25 19 176 45.9-31.7-32.4 Sum 7,352 7,943 8,276 7,264 7,959 8,647-1.2.2 4.5 OP Korea 596 628 625 485 613 625-18.6-2.4. China 244 261 276 229 268 294-6.2 2.5 6.6 Hungary 16 16 169 155 167 223-3.2 4.4 32.1 Indonesia 8 2 29 2,533.3 224.6 1.6 Others 15 11 141 167 91 9 59.3-12.6-21.7 Sum 1,16 1,159 1,211 1,45 1,158 1,261-5.5 -.1 4.1 OP margin Korea 14.5 14.6 14.4 12.3 14.3 14.4 China 12.2 11.8 11.8 11.3 11.8 11.8 Hungary 18.2 18. 18. 18.2 18. 18. Indonesia 3.5 7. 7.3 Others 29.8 2. 21.5 81.5 48. 51.1 Sum 15. 14.6 14.6 14.4 14.6 14.6 Figure 1. Global capacity growth to outpace global tire demand (mn units) 12 11 Global capacity (L) Share price (R) 8, 7, 1 9 8 7 6 5 4 3 China, Europe, Indonesia, US capacity increase 213-17F CAGR 6.5% 1 2 3 4 5 6 7 8 9 1 11 12 13F 14F 15F 16F 6, 5, 4, 3, 2, 1, Source: Company data, Figure 2. Raw material prices to steadily rise Figure 3. BD prices rebounding due to capacity cuts (US$/tonne) (US$/brl) (US$/tonne) 6, 15 4,5 BD SR 5, 212 12 4, 3,5 212 4, 213 9 3, 213 3, 2,5 2, 1, NR (L) 214 6 3 2, 1,5 1, 214? WTI (R) 5 7 8 9 1 11 12 13F 14F 4 5 6 7 8 9 1 11 12 13F 14F Source: Thomson Reuters, Source: Thomson Reuters, 3
October 29, 213 Figure 4. Global peer EBITDA comparison (x) (%) 8 EV/EBITDA 213F (L) EV/EBITDA 214F (L) 25 EBITDA % 213F (R) EBITDA % 214F (R) 2 6 4 15 1 2 5 Continental Pirelli Yokohama Sumitomo Bridgestone Goodyear Michelin Cooper Source: Thomson Reuters, Figure 5. P/E band Figure 6. P/B-ROE band 8, 7, 6, 15X 12X 9X 8, 7, 6, ROE(R) 2.6X 2.1X (%) 4 35 3 5, 4, 6X 5, 4, 1.3X 25 2 3, 2, 3, 2,.5X 15 1 1, 1, 5 99 1 3 5 7 9 11 13 F 14F 99 1 3 5 7 9 11 13F 14F Source: Thomson Reuters, Source: Thomson Reuters, 4
October 29, 213 (16139 KS/Buy/TP: W78,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 2,317 7,264 7,959 8,647 Current Assets 3,337 3,974 4,35 5,298 Cost of Sales 1,562 4,895 5,388 5,873 Cash and Cash Equivalents 486 722 653 1,846 Gross Profit 756 2,369 2,571 2,775 AR & Other Receivables 1,17 1,49 1,48 1,513 SG&A Expenses 447 1,325 1,413 1,513 Inventories 1,392 1,424 1,472 1,5 Operating Profit (Adj) 39 1,45 1,158 1,261 Other Current Assets 95 12 111 121 Operating Profit 39 1,45 1,158 1,261 Non-Current Assets 3,846 4,424 4,815 4,64 Non-Operating Profit -15-9 -14-12 Investments in Associates Net Financial Income 19 42 34 26 Property, Plant and Equipment 3,572 4,51 3,993 3,935 Net Gain from Inv in Associates Intangible Assets 117 125 124 122 Pretax Profit 294 1,35 1,144 1,249 Total Assets 7,183 8,398 8,85 9,92 Income Tax 63 24 275 3 Current Liabilities 2,991 3,128 2,662 2,729 Profit from Continuing Operations 231 795 869 95 AP & Other Payables 859 77 828 856 Profit from Discontinued Operations Short-Term Financial Liabilities 1,934 1,937 1,389 1,389 Net Profit 231 795 869 95 Other Current Liabilities 199 421 446 484 Controlling Interests 232 797 871 951 Non-Current Liabilities 97 1,193 1,27 1,22 Non-Controlling Interests -1-2 -2-2 Long-Term Financial Liabilities 884 1,9 1,19 1,19 Total Comprehensive Profit 157 95 979 1,59 Other Non-Current Liabilities 7 168 82 95 Controlling Interests 158 96 98 1,6 Total Liabilities 3,961 4,322 3,869 3,948 Non-Controlling Interests -1-1 -1-2 Controlling Interests 3,212 4,68 4,974 5,948 EBITDA 444 1,495 1,72 1,841 Capital Stock 62 62 62 62 FCF (Free Cash Flow) -1,366 343 484 1,32 Capital Surplus 2,994 2,994 2,994 2,994 EBITDA Margin (%) 19.2 2.6 21.4 21.3 Retained Earnings 212 963 1,76 2,625 Operating Profit Margin (%) 13.3 14.4 14.6 14.6 Non-Controlling Interests 9 8 7 5 Net Profit Margin (%) 1. 11. 11. 11. Stockholders' Equity 3,222 4,77 4,981 5,953 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F Cash Flows from Op Activities 457 1,126 973 1,825 P/E (x) 25.1 1.2 9.3 8.5 Net Profit 231 795 869 95 P/CF (x) 15.9 6.5 5.7 5.3 Non-Cash Income and Expense 254 741 833 892 P/B (x) 1.9 2.1 1.7 1.4 Depreciation 133 445 539 574 EV/EBITDA (x) 18. 6.7 5.7 4.6 Amortization 2 5 5 5 EPS 1,869 6,433 7,32 7,68 Others -35-31 16 31 CFPS 2,961 1,71 11,424 12,359 Chg in Working Capital -4-255 -455 283 BPS 24,997 31,842 39,166 47,36 Chg in AR & Other Receivables 12-339 -71-33 DPS 4 6 7 7 Chg in Inventories -36 2-49 -28 Payout ratio (%) 21.4 9.3 1. 9.1 Chg in AP & Other Payables 68-48 58 28 Dividend Yield (%).9.9 1.1 1.1 Income Tax Paid -24-154 -275-3 Revenue Growth (%) 213.5 9.6 8.7 Cash Flows from Inv Activities -141-778 -454-49 EBITDA Growth (%) 236.9 13.9 8.2 Chg in PP&E -2-795 -482-515 Operating Profit Growth (%) 238.5 1.9 8.9 Chg in Intangible Assets -3-6 -4-4 EPS Growth (%) 244.1 9.3 9.2 Chg in Financial Assets 55-6 Accounts Receivable Turnover (x) 2.2 6.2 5.9 6.2 Others 7 83 31 29 Inventory Turnover (x) 1.7 5.2 5.5 5.8 Cash Flows from Fin Activities -394-139 -588-142 Accounts Payable Turnover (x) 6. 18.1 18.3 18.8 Chg in Financial Liabilities -368-15 -449 ROA (%) 3.2 1.2 1.1 1.1 Chg in Equity -1 ROE (%) 7.2 21.9 19.3 17.4 Dividends Paid -5-74 -87 ROIC (%) 9.3 14.5 14.6 15.8 Others -25-63 -65-55 Liability to Equity Ratio (%) 123. 16. 77.7 66.3 Increase (Decrease) in Cash 486 236-69 1,193 Current Ratio (%) 111.6 127. 151.6 194.2 Beginning Balance 486 722 653 Net Debt to Equity Ratio (%) 66.3 46.8 3.7 5.6 Ending Balance 486 722 653 1,846 Interest Coverage Ratio (x) 12.6 16.9 17.9 23. 5
October 29, 213 APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. 1, 8, 6, 4, 2, Stock Ratings Industry Ratings Buy Relative performance of 2% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 1% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -1% and 1% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -1% * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. 1/11 4/12 1/12 4/13 1/13 6
October 29, 213 Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 15-716 Korea Two International Finance Centre Suites 25-212 8 Finance Street, Central Hong Kong 32 Park Avenue, 31st Fl. New York, NY 122 United States Tel: 82-2-768-326 Tel: 85-2-2514-134 Tel: 1-212-47-1 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Representative Office Tower 42, Level 41 25 Old Broad Street London EC2N 1HQ United Kingdom 6 Battery Road, #11-1 Singapore, 4999 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 1-5 Japan Tel: 44-2-7982-816 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office Suite 262, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Unit 13, 28 th Floor, Hang Seng Bank Tower 1 Lujiazui Ring Road Pudong New Area, Shanghai 212 China Centec Tower 72-74 Nguyen Thi Minh Khai Street Ward 6, District 3, Ho Chi Minh City Vietnam Tel: 86-1-6567-9699 Tel: 86-21-513-6392 Tel: 84-8-391-6 7