[Click eStock] "Nexen Tire, Price Increase and Cost Reduction... 4Q Earnings Turnaround"

[Asia Economy Reporter Kwon Jae-hee] Hana Securities maintained its 'Buy' rating and target price of 9,500 KRW for Nexen Tire on the 29th.

Nexen Tire's Q3 performance this year is expected to show sales of 657.3 billion KRW and an operating loss of 2.1 billion KRW. Sales are expected to increase significantly due to the low base in the same period last year, price hikes, and exchange rate increases. On the cost side, rising input costs such as synthetic rubber and transportation expenses remain negative factors, but operating profit is expected to approach the break-even point (BEP) due to the leverage effect from top-line growth.

Hana Securities views the decline in Nexen Tire's operating margin so far as attributable to the sharp increase in transportation costs. The ratio of transportation costs to sales was 6.5% in 2019 and 7.7% in 2020. Since the first half of 2020, the global freight index surged, reaching 14.4% in 2021 and 21.2% in the first half of 2022. This is a 14.5 percentage point increase compared to two years ago.

However, the situation has reversed since Q3. The Shanghai Containerized Freight Index, which recorded 5,110 points in January, recently dropped to 2,072 points. Nexen Tire renegotiated freight rates on major shipping routes and signed contracts in July with reductions in the high 10% range. Since the renegotiated freight rates will be reflected sequentially in results from August onward, the transportation cost ratio in Q3 is expected to slightly decrease to 20%, and further decline to 18% in Q4, resulting in an expected quarterly profit improvement of 20 billion KRW. Additionally, considering the recent drop in spot prices of raw materials, input costs for raw materials are also expected to decrease after Q4, contributing to Nexen Tire's performance turnaround.

Song Seon-jae, a researcher at Hana Securities, analyzed, "Although there is concern that volume recovery may be sluggish due to the global economic slowdown, the price hike effects implemented since the second half of last year are taking effect, and the decline in major raw material and transportation costs from their peaks in the first half is accelerating. Therefore, from Q4, the company is expected to turn profitable and its performance will begin a full turnaround."