Nexen leading Korean bloc 1Q results

Although it is the smallest of the three Korean tyre makers, Nexen has surprised some observers by being the only company in the country to increase both sales and operating profits in the first quarter of 2014. Of course the figures also show that both Kumho and especially Hankook remain significantly bigger than Nexen in terms of both measures, but the news caps a strong quarter for Nexen, which also announced the opening of a European factory and a number of awards and OE deals in the period.

Looking at the Korean bloc as a whole, we can see that the combined revenue of Hankook Tire, Kumho Tire and Nexen Tire was 0.14 per cent lower than the previous year, but their combined operating profit increased 4.7 percent year-on-year to reach 399.4 billion won (US$390 million), suggesting that either the companies are getting better prices for their products, costs have dropped or they are selling with better product mix than before (or of course some combination of those factors).

When you compare the performance of the three companies with that of the bloc you can see that some are growing much faster than others. For example, although Hankook saw its operating profit decrease 0.7 per cent year-on-year, Kumho and Nexen filled the void by posting a 19 per cent and 12.8 per cent year-on-year increase, respectively. Or in other words, growth at the number one placed Hankook (which was double the size of its nearest competitor in the quarter) is slowing and the smaller competitors are taking up the slack. For Kumho this means restoring fortunes and making up for time lost in the challenging circumstances it has found itself in over the last few years and for Nexen that means an acceleration of expansion in line with the company’s

Analysts: Nexen “the surprise performer”

With this in mind you can see why some analysts descried Nexen as “the surprise performer” in the first quarter. Indeed one local newspaper put it like this: “Korea’s smallest tyre manufacturer showed its best quarterly performance.”

“Compared to the fourth quarter, the company was able to make improvements in products and retail price, increase the operation rate of its factories and reduce inventories and manufacturing costs,” said Chae Hee-keun, a researcher at Hyundai Securities. “Increasing supplies of original equipment tires and material cost reductions are likely to lead to a solid performance even after the second quarter, although the strong Korean currency could affect its profitability.”

For its part Nexen said OE tyre supply deals with global automakers in recent years have helped increase sales. For example Nexen signed a deal with Japan’s Mitsubishi in 2012 and also inked contracts with Fiat, Chrysler, Dodge, Volkswagen and Skoda last year. As a result, Nexen’s sales from OE tyres to global automakers accounted for 18 per cent of total sales, up 10 percentage points from a year earlier.

However product mix clearly made a difference too. Revenues from UHP tyres increased 13.5 per cent year-on-year to reach 176.7 billion won, accounting for 37.6 per cent of total sales, up 2.2 percentage points from a year ago. There were also noticeable quarter-on-quarter improvements in sales mix and average selling price as well as rises in utilization rate and inventory depletion.

Moving forward it looks like the increase in shipments of high-margin, overseas OE volume at new factories (namely the full launch of shipments to Volkswagen, Chrysler). With the company having only recently announced plans for an Eastern European factory virtually on Hyundai’s doorstep in the Czech Republic, it looks likely that this strategy will continue in the medium term.

Another positive factor that will have played into all three manufacturers hands was that the price of natural rubber has dropped over 30 per cent from early in the year, due to sluggish tyre demand in China and structural supply expansion. According to the financial analysts the price is likely “to keep stabilizing down for some time”.

As for Kumho, analysts said that this could be the beginning of its “turnaround” year. Such optimism was largely due to better profitability – operating profit was 4.4 per cent above the market consensus,” according to Kim Jin-woo, an analyst at Korea Investment and Securities.

Hankook may have been the only Korean tyremaker to report a decrease in both sales and operating profit in the first quarter. However it is also the biggest and when you consider that the firm’s first quarter operating profit margin was still high at 15.5 per cent, executives are unlikely to be worried.

“Hankook’s first-quarter performance met the market consensus,” said Shin Jung-kwan, an analyst at KB Investment and Securities. “Amid a retail price drop followed by a material price drop and the strong Korean currency, global production capacity increased 5.7 per cent year-on-year to 23.25 million.”

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