[Click eStock] "Hankook Tire, This Year's Performance Beyond Expectations VS Growth Stagnation Next Year"

Expected Premium 2Q Earnings... Bright Industry Outlook Amid Used Car Boom
Concerns Over Used Car Market Contraction from Next Year... Raw Material Price Increases Also a Burden

Korea Tire & Technology Headquarters Exterior View

[Asia Economy Reporter Minwoo Lee] Hankook Tire & Technology (hereinafter Hankook Tire) posted results in the second quarter that exceeded market consensus. It is expected to achieve overall performance this year that surpasses expectations. However, concerns remain that growth will slow next year due to rising raw material prices following economic normalization and a slowdown in used car demand.

On the 5th, Meritz Securities maintained its investment opinion on Hankook Tire as 'Neutral (HOLD)' based on this background. The target stock price was raised by 21.7% to 56,000 KRW. The closing price the previous day was 49,600 KRW.

The second quarter results this year were excellent. On a consolidated basis, sales reached 1.8063 trillion KRW and operating profit was 187.2 billion KRW, surging 32.39% and 166.99% respectively compared to the same period last year. These figures also exceeded market consensus by 3.37% and 5.97%, respectively, showing solid performance. Junseong Kim, a researcher at Meritz Securities, explained, "Despite an unfavorable exchange rate, the scale grew significantly through increased sales volume and price hikes. Although rising raw material prices (+17%) and the impact of US tariffs (cost of sales +1 percentage point) had a negative effect, profitability was high due to improved strategies in the replacement tire (RE) product segment, which has higher profit margins."

Amid this trend, it is expected that results this year will exceed expectations. Meritz Securities raised its earnings per share (EPS) estimate for Hankook Tire by 9% this year. Due to the ongoing semiconductor supply shortage, it is difficult for original equipment (OE) tire growth to be prominent before the fourth quarter, but RE demand is explosive. Tire replacement demand that was delayed last year due to strengthened movement restrictions from COVID-19 is expected to be reflected. Already, RE sales in the first half of this year have surpassed the levels of the first half of 2019. Additionally, used car demand has risen as an alternative to new car purchases. Buyers of used cars, whose parts replacement cycles are approaching, are also contributing to the expansion of RE demand.

However, the EPS growth forecast for 2022 was maintained at 2%. Although sales are expected to grow about 7% due to economic normalization and the resolution of semiconductor supply shortages by automakers, profitability is judged to decline. Researcher Kim analyzed, "While the normalization of new car deliveries drives OE growth, RE will experience a base effect of growth slowdown due to the reflection of delayed demand and the exceptional increase in used car demand in 2021. The gradual rise in raw material prices following economic normalization also burdens profitability."