SEOUL, KOREA - Despite a weak outlook for 2013, signs are mounting of a potential recovery in Europe. According to Michelin market data on May 16, the European OE market returned to positive YoY growth after eight months and the RE market also turned to growth after an 18-month decline (PCR basis).
We attribute the rebound to decreasing imports from China. After the US suspended safeguard measures against Chinese tires in Sep 2012, Europe’s imports from China have fallen sharply (down an average 22% YoY per month over the past six months).
Tire inventories in China decreased 4.4% MoM in Mar, declining for the first time since the safeguards were suspended. We believe this is favorable as it signals the end of aggressive destocking efforts. As such, we believe China will recover from end-2Q13, rather than 3Q13, as inventories destock faster than anticipated.
Europe (28%) and China (17%) account for 45% of Hankook Tire’s sales. And, the operating environment is improving in Europe, the company’s biggest market, while competition in China (where Hankook Tire has the top market share) is easing. As such, we raise our 2013 EPS forecast by 2.1% and 2014 by 3.6% given the improving conditions. To reflect the change, we lift our TP from W64,000 to W68,000, applying the sector average PE of 10x to 12MF EPS.
*Source: Korea Investment & Securities Co.
