[Click eStock] "Hankook Tire's Acquisition of Hanon Systems 'Synergy Unclear'... Investment Rating Downgraded"

Hana Securities on the 7th downgraded the target price to 60,000 KRW regarding Hankook Tire & Technology's acquisition of Hanon Systems, citing unclear synergy size. The investment rating was also downgraded to 'Neutral.'

Hankook Tire & Technology has decided to acquire an additional stake in Hanon Systems for 1.73 trillion KRW. Ultimately, Hankook Tire & Technology's stake will be 50.53%. The total cumulative amount invested is 2.8 trillion KRW, with a per-share price of approximately 9,325 KRW. This deal will be finalized after signing a memorandum of understanding on May 3rd, followed by 8 to 10 weeks of due diligence and obtaining relevant government approvals.

Researcher Song Seon-jae stated, "As of the end of 2023, Hankook Tire & Technology's standalone total cash assets amount to 333.1 billion KRW, so a significant portion of the 1.73 trillion KRW acquisition payment will need to rely on external funding." He added, "The standalone debt ratio is low at 20%, the total equity increased by 533.4 billion KRW in 2023, and profitability is expected to remain solid in 2024, so there should be no major difficulties in raising external funds."

Researcher Song also noted, "The additional stake acquisition occurred when Hanon Systems' stock price had significantly declined, and some cooperation in original equipment (OE) supply to automakers can be expected, which is positive." However, he assessed, "Tires and thermal management components are product groups with different raw material procurement, production, and sales characteristics, and the OE sales ratio within tires is low at 20%, so the overall synergy size is unclear. Therefore, it is difficult to view this deal as providing significant value to minority shareholders."

He further explained, "Based on the average acquisition price of 8,726 KRW, Hanon Systems is valued at about 5.2 trillion KRW, which corresponds to a deal with a return on equity (ROE) of around 4% based on Hanon Systems' net profit over the next two years." He added, "Given the substantial capital expenditure (CAPEX) required for overseas plant expansions until next year, investing large funds in mergers and acquisitions (M&A) means that resources for shareholder returns will be insufficient for the time being, which is regrettable."