[Click eStock] "Will Korea & Company Leverage the Advantages of a Holding Company?"

Q3 Earnings Beat Consensus Supported by Increase in Battery Cell Prices
Hana Financial Investment "Korea & Company Target Price Lowered from 23,000 KRW to 21,000 KRW"

[Asia Economy Reporter Gong Byung-sun] Hankook & Company posted third-quarter earnings this year that exceeded market expectations (consensus), driven by price increases and growth in non-cash gains. Attention is focused on whether Hankook & Company will pursue new investments and mergers and acquisitions as a business holding company going forward.

According to Hana Financial Investment on the 30th, Hankook & Company's third-quarter sales this year reached 243.9 billion KRW, a 10% increase compared to the same period last year, and operating profit rose 10% to 66.4 billion KRW. These figures surpassed the respective consensus estimates by 6.94% and 22.04%.

The price increase of batteries offset the decline in sales volume. Batteries account for 70% of Hankook & Company's sales, with third-quarter sales this year increasing 7% year-on-year to 172 billion KRW. Revenues related to subsidiaries, such as trademark rights and equity method investments, decreased by 3% and increased by 37%, respectively, during the same period. Service and rental sales fell by 15%.

Costs increased overall. The price of lead, a major raw material, rose 20% compared to the same period last year, narrowing the price and cost spread. As a result, the cost of goods sold ratio in the operating segment, excluding trademark rights and equity method investments, rose by 2.7 percentage points year-on-year. A lower cost of goods sold ratio is generally regarded as indicative of higher profitability. In selling and administrative expenses, transportation costs increased, causing export expenses to rise by 1.8 percentage points year-on-year. Overall, non-cash gains related to the holding company increased by 13.7 billion KRW, but operating profit increased by 6.1 billion KRW due to raw material and transportation costs.

Market interest is also focused on the direction as a holding company. As of April 1, Hankook & Company absorbed Hankook AtlasBX, which operates the battery business, transforming into a holding company with a larger proportion of its own business. Since the company had been reflected in consolidated statements even before the merger, there has been little change in the income statement aside from the effect of increased controlling shareholder net profit.

Nevertheless, Song Seon-jae, a researcher at Hana Financial Investment, said, “By becoming a single company, quick responses are possible in decision-making such as new investments, and cash flows generated from the battery business can also be used as resources for business restructuring such as mergers and acquisitions.” He added, “It is a time to pay attention to movements related to new investments and mergers and acquisitions after stabilization following the merger.”

Meanwhile, Hana Financial Investment maintained its “Buy” rating on Hankook & Company but lowered the target price from 23,000 KRW to 21,000 KRW. Researcher Song explained, “This reflects the decline in equity value of Hankook Tire & Technology and the increase in the number of shares after the subsidiary merger.” The closing price on the previous day was 15,200 KRW.