Hankook Results Counter ‘Lacklustre’ Analyst Expectations

Hankook recent record second quarter results contradict the negative predictions of some financial analysts that when Hankook Tire kicks off the second quarter earnings season for auto/auto part makers on 20 July, it will set the tone for a “lacklustre” set of results from the likes of Hankook, Kumho and Nexen. In an investor’s note dated 1 July 2010, Deutsche Bank research analyst Sanjeev Rana had commented: “We expect tyre makers such as Hankook and Nexen Tire to report in line or slightly below consensus results due to the burden of higher rubber prices.” It appears these reports failed to take into account the huge profit jumps of 501 per cent and 43 per cent in the first quarter 2010 from Hankook and Nexen respectively and an 18 per cent increase in sales from Kumho – all of which surprised analysts at the time.

“Hankook reported strong first quarter 2010 results that exceeded consensus estimates by 40 per cent,” Rana said in an earlier investor’s note published in April. Then the main reasons behind the better than expected results were the same higher sales in the profitable domestic market, the company has since reported in the second quarter plus better sales mix and 100 per cent plant utilization globally. Not much has changed during the second quarter, so we can likely expected a further surprised report from the analysts.

Closer to Hankook’s home town, Korea Investment and Securities Ltd earlier reported that “although the price rises [Hankook are implementing during 2010] are not enough to offset the recent strength in raw material prices, a double-digit operating profit margin is likely through to the forth quarter 2010.” In addition, in the April they pointed out that the company would benefit from Kumho Tire and Toyota’s “unprecedented” woes, noting that Kumho is a key rival in the domestic and Chinese tyre markets and that Hyundai and Kia account for 15 per cent of Hankook’s sales.

As a result Korea Investment and Securities Ltd’s analysts predicted Hankook’s full year operating profit margin is sustainable throughout the year and therefore should only drop to 11.4 per cent full year 2010 results down from 12.4 per cent in 2009 due to “the [then] anticipated 9 per cent selling price rise and 2 per cent product mix improvement.

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