[Click eStock] "Kumho Tire's Sales to Drop 9% Due to Gwangju Plant Fire"

Production Disruption of 12 Million Units Out of 65 Million Annually
3% of Total Sales for the Three Major Domestic Tire Companies
Actual Benefit for Competitors Hankook and Nexen Expected to Be Limited

On May 19, Daishin Securities projected that Kumho Tire's annual sales would decrease by approximately 9% this year due to a fire that broke out on May 17, which completely destroyed the company's Gwangju Plant 2.

Kumho Tire has an annual production capacity (CAPA) of 65 million units across its domestic plants in Gwangju, Gokseong, and Pyeongtaek, as well as its overseas plants in China, the United States, and Vietnam. Of the domestic capacity of 27 million units, the Gwangju plant accounts for 12 million units, or 44%. As Gwangju Plant 2 was virtually destroyed by the recent fire and production at the Gwangju plant has been completely halted, short-term disruptions in production and sales are considered inevitable.

Prior to the fire, Daishin Securities had forecast Kumho Tire's annual results for this year at 5.0 trillion won in sales and 676.7 billion won in operating profit, up 10% and 15%, respectively, compared to the same period last year. Analyst Kim Guyun stated, "Assuming Plant 2's production capacity is about half of the entire Gwangju plant, there will be a 9% annual production disruption," adding, "A more specific assessment of the impact on earnings will be possible after the fire investigation clarifies the extent of inventory and raw material losses."

The Kumho Tire Gwangju plant, completed in 1974, had become outdated after 51 years of operation and was already preparing for relocation. Kumho Tire and LH had previously signed a land purchase agreement for a new 500,000-square-meter site in Hampyeong, Jeonnam. If the relocation continues as planned, a medium- to long-term recovery in production volume is possible. However, the company faces a burden from 2 trillion won in outstanding borrowings.

Daishin Securities predicted that, in the short term, Kumho Tire's stock price would decline, but the actual benefit to domestic competitors such as Hankook Tire and Nexen Tire would be limited. Hankook Tire has an annual production capacity of 100 million units, and Nexen Tire has a capacity of 52 million units. Kim explained, "Given Hankook Tire's estimated tire sales of 10 trillion won (1.0 trillion won in Korea) and Nexen Tire's estimated sales of 3 trillion won (474.7 billion won in Korea), Kumho Tire Plant 2's estimated sales of 449.4 billion won this year represent 3% of their total sales and 30% of domestic sales." He added, "While other companies may see some short-term benefit in meeting domestic automaker supply needs due to the fire, considering the structure in which domestic production is used to meet global demand, the actual benefit is expected to be limited."