"Performance Recovery" Tire Stocks, Run!

Stock Recovery for Korea and Kumho Tire... Bright Outlook Ahead

[Asia Economy Reporter Ji-hwan Park] Tire companies, which experienced fluctuations such as a sharp drop in demand due to the impact of the novel coronavirus disease (COVID-19) pandemic in the first half of this year, have recently shown a rapid recovery in performance. The securities industry forecasts that as a full-scale demand recovery is materializing in the second half of the year, there is significant potential for stock price increases.

According to the Korea Exchange on the 3rd, Hankook Tire & Technology closed the previous day at 32,950 KRW, up 1,300 KRW (4.11%). This is an 11.7% increase compared to 29,500 KRW at the end of August, two months ago. The recent stock price rise is interpreted as being driven by positive outlooks on performance.

Hankook Tire's sales in the third quarter of this year were 1.9 trillion KRW, and operating profit was 224.7 billion KRW, up 2.8% and 24.6% respectively compared to the third quarter of last year. The operating profit significantly exceeded the consensus (the average of earnings estimates from three or more securities firms) of 150.3 billion KRW by 49.5%. Jeong Yong-jin, a researcher at Shinhan Financial Investment, explained, "The cause of this strong performance is the recovery in replacement tire (RE) demand in high-margin regions such as the United States and the European Union (EU), as well as the use of low-cost raw materials."

Similarly, Kumho Tire has shown a clear recent stock price recovery. The stock price, which had fallen to 3,330 KRW two weeks ago, rose nearly 10% to close at 3,625 KRW yesterday. Kumho Tire's performance has also been on the rise. Its operating profit for the third quarter is expected to turn positive at 25 billion KRW. The company had posted losses of 18.4 billion KRW and 35.4 billion KRW in the first and second quarters, respectively.

In the case of Nexen Tire, it is also expected to turn from a 22 billion KRW loss in the second quarter to a profit of around 13 billion KRW. Overall, the outlook for the tire industry is positive according to the securities industry.

It is analyzed that the recovery in tire demand volume and cost reduction effects due to the decline in raw material prices such as rubber are expected until the end of the year. According to Statistics Korea, domestic tire exports (based on passenger car tires) have shown a recovery trend since hitting a low of minus 66.5% year-on-year in April. Exports, which recorded minus 20.4% in July, showed a strong recovery by recording 19.5% in September. Tire exports to the United States in September increased by 8.1% year-on-year, and exports to the Netherlands (+141%), the United Kingdom (+154%), Germany (+144%), and France (+95%) also showed a significant increasing trend.

Lee Jae-il, a researcher at Eugene Investment & Securities, forecasted, "The recovery in new car tire (OE) and replacement tire volumes will continue until the end of the year," adding, "The cost reduction effect due to the decline in raw material prices is also expected to gradually appear."