15_hankook tire - expansion plans riding on demand cycle

Rating Up from Neutral BuyTarget price Increased from 65,000 KRW 74,000

Closing price 26 March 2014 KRW 59,700

Potential upside +24%

Anchor themesWe are positive on European and Chinese tire replacement demand, while remain cautious on the US competition.

Nomura vs consensusOur 2014/15F EPS are higher than consensus by 2%/7% as we are less cautious about tire ASP.

Research analysts

South Korea Autos & Auto Parts

Angela Hong - NFIK [email protected] +82 2 3783 2360

Key company data: See page 2 for company data and detailed price/index chart

Hankook Tire 161390.KS 161390 KS

EQUITY: AUTOS & AUTO PARTS

Expansion plans riding on demand cycle

Europe and China demand should lead to LT growth

Action: Upgrade to Buy on RE demand recovery in Europe and China We turn positive on Hankook Tire as we think it will be a key beneficiary of European and Chinese tire demand recovery given its expansion in Hungary and market-dominant position in China. HKT’s combined European and Chinese revenues accounted for 44% of total revenues in 2013, placing it in a relatively better position than Japanese tire makers which have revenues that are heavily dependent on Japan and the competitive US markets.

Catalyst: Hungary expansion bodes well with EU demand recovery Europe already accounts for the largest share of HKT’s revenues (26%); we expect its brand value to continue to rise to compete against top-tier European makers. HKT plans to expand the Hungary capacity by 50% until 2015, and this is timely, in our view, as we believe European tire demand will finally bottom in 2014F, as is signalled by Michelin’s Jan-Feb demand data. On the supply side, global tire makers’ expansions are concentrated in America and China while European capacity additions seem limited in 2014-15F.

1Q14F to meet consensus estimates: OPM to remain solid at 15% level We forecast 1Q14F OPM of 15.2% (vs. 15.6% in 1Q13 and 14.9% in 4Q13), assuming flat raw material input cost q-q and global ASP recovering 3% q-q. Of note, on a y-y basis, we estimate raw material input cost to fall 8% to USD2,260/ton, supporting 1Q14F operating margin at around a solid 15%.

Valuation: TP at KRW74,000, implying 2014F 11x P/E (EPS: KRW6,453) We up our TP to KRW74,000 by applying a target P/B of 1.8x average 2014-15F BVPS of KRW41,060, assuming 2014-15F ROE of 18-19%. Our new 2014F earnings are in line, and 2015F earnings are 7% ahead of consensus, as we are more aggressive ASP assumption driven by Europe/China demand.

31 Dec FY12 FY13F FY14F FY15F

Currency (KRW) Actual Old New Old New Old New

Revenue (bn) 7,029 7,060 7,069 7,468 7,419 8,153 8,131

Reported net profit (bn) 702 783 738 797 799 875 899

Normalised net profit (bn) 702 783 738 797 799 875 899

FD normalised EPS 5,663.80 6,322.98 5,956.98 6,436.04 6,453.10 7,061.31 7,260.80

FD norm. EPS growth (%) 142.7 11.6 5.2 1.8 8.3 9.7 12.5

FD normalised P/E (x) 10.5 N/A 10.0 N/A 9.3 N/A 8.2

EV/EBITDA (x) 7.1 N/A 6.4 N/A 5.3 N/A 4.3

Price/book (x) 2.3 N/A 1.9 N/A 1.6 N/A 1.3

Dividend yield (%) 0.8 N/A 0.7 N/A 0.7 N/A 0.8

ROE (%) 21.9 21.6 20.7 18.1 18.6 17.0 17.7

Net debt/equity (%) 64.5 23.5 46.7 12.0 18.3 0.8 net cash

Source: Company data, Nomura estimates

Global Markets Research 27 March 2014

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Hankook Tire 27 March 2014

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Key data on Hankook Tire Income statement (KRWbn) Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FRevenue 6,489 7,029 7,069 7,419 8,131Cost of goods sold -4,814 -4,873 -4,711 -4,940 -5,447Gross profit 1,675 2,156 2,358 2,479 2,685SG&A -1,108 -1,243 -1,327 -1,414 -1,518Employee share expense

Operating profit 567 913 1,031 1,065 1,167

EBITDA 928 1,335 1,443 1,554 1,650Depreciation -361 -422 -412 -489 -483Amortisation

EBIT 567 913 1,031 1,065 1,167Net interest expense -51 -67 -45 -37 -11Associates & JCEs 16 9 0 0 0Other income -53 24 4 38 38Earnings before tax 480 879 990 1,066 1,194Income tax -124 -178 -255 -271 -298Net profit after tax 355 701 735 795 895Minority interests 0 0 3 4 4Other items

Preferred dividends

Normalised NPAT 355 702 738 799 899Extraordinary items

Reported NPAT 355 702 738 799 899Dividends -51 -58 -50 -50 -56Transfer to reserves 304 644 688 750 844

Valuation and ratio analysis

Reported P/E (x) 24.4 10.5 10.0 9.3 8.2Normalised P/E (x) 24.4 10.5 10.0 9.3 8.2FD normalised P/E (x) 25.6 10.5 10.0 9.3 8.2FD normalised P/E at price target (x) 31.7 13.1 12.4 11.5 10.2Dividend yield (%) 0.6 0.8 0.7 0.7 0.8Price/cashflow (x) 55.7 16.8 7.1 4.7 4.2Price/book (x) 2.7 2.3 1.9 1.6 1.3EV/EBITDA (x) 10.1 7.1 6.4 5.3 4.3EV/EBIT (x) 16.4 10.3 9.0 7.7 6.1Gross margin (%) 25.8 30.7 33.4 33.4 33.0EBITDA margin (%) 14.3 19.0 20.4 21.0 20.3EBIT margin (%) 8.7 13.0 14.6 14.4 14.3Net margin (%) 5.5 10.0 10.4 10.8 11.1Effective tax rate (%) 25.9 20.2 25.7 25.4 25.0Dividend payout (%) 14.3 8.3 6.7 6.2 6.2Capex to sales (%) 9.3 12.5 5.2 5.2 5.2Capex to depreciation (x) 1.7 2.1 0.9 0.8 0.9ROE (%) 11.6 21.9 20.7 18.6 17.7ROA (pretax %) 9.4 13.6 15.0 15.3 16.6

Growth (%)

Revenue 19.7 8.3 0.6 4.9 9.6EBITDA -1.6 43.9 8.1 7.7 6.1EBIT -9.0 60.9 12.9 3.3 9.5Normalised EPS -19.5 131.5 5.2 8.3 12.5Normalised FDEPS -19.7 142.7 5.2 8.3 12.5

Per share

Reported EPS (KRW) 2,446.60 5,663.80 5,956.98 6,453.10 7,260.80Norm EPS (KRW) 2,446.60 5,663.80 5,956.98 6,453.10 7,260.80Fully diluted norm EPS (KRW) 2,334.06 5,663.80 5,956.98 6,453.10 7,260.80Book value per share (KRW) 22,077.73 25,929.73 31,624.68 37,645.47 44,473.89DPS (KRW) 349.93 468.82 399.85 399.92 449.46Source: Company data, Nomura estimates

Relative performance chart (one year)

Source: ThomsonReuters, Nomura research

(%) 1M 3M 12M

Absolute (KRW) -2.6 -2.9 20.4

Absolute (USD) -3.5 -4.3 24.0

Relative to MSCI Korea 0.0 1.9 22.7

Market cap (USDmn) 6,880.3

Estimated free float (%) 54.8

52-week range (KRW) 66600/44450

3-mth avg daily turnover (USDmn)

16.22

Major shareholders (%)

Chairman Cho and family 35.2

Source: Thomson Reuters, Nomura research

Notes


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Cashflow (KRWbn) Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FEBITDA 928 1,335 1,443 1,554 1,650Change in working capital -662 286 -303 321 226Other operating cashflow -103 -1,182 -93 -285 -120Cashflow from operations 163 439 1,048 1,590 1,756Capital expenditure -602 -880 -369 -388 -425Free cashflow -439 -441 679 1,202 1,331Reduction in investments 106 199 -310 -29 -30Net acquisitions

Reduction in other LT assets -42 46 -89 70 -5Addition in other LT liabilities -11 16 -26 12 14Adjustments -402 471 141 -232 -159Cashflow after investing acts -789 291 395 1,022 1,150Cash dividends -51 -58 -50 -50 -56Equity issue 11 323 0 0 0Debt issue 747 -183 -211 -383 -322Convertible debt issue

Others 4 0 55 0 0Cashflow from financial acts 712 81 -205 -433 -377Net cashflow -77 373 190 590 772Beginning cash 1,662 635 558 747 1,337Ending cash 1,585 1,008 748 1,337 2,109Ending net debt 2,162 2,072 1,831 855 -246Source: Company data, Nomura estimates

Balance sheet (KRWbn) As at 31 Dec FY11 FY12 FY13F FY14F FY15FCash & equivalents 635 558 747 1,337 2,109Marketable securities 297 194 482 507 532Accounts receivable 1,416 1,184 1,191 1,250 1,370Inventories 1,329 1,392 1,472 1,187 1,301Other current assets 98 9 59 62 68Total current assets 3,777 3,337 3,952 4,342 5,380LT investments 96 0 23 28 33Fixed assets 3,333 3,800 3,498 3,635 3,577Goodwill

Other intangible assets 94 89 125 131 138Other LT assets 136 90 179 109 114Total assets 7,436 7,316 7,777 8,245 9,242Short-term debt 2,345 1,841 1,756 1,534 1,304Accounts payable 489 594 925 719 846Other current liabilities 837 758 262 565 904Total current liabilities 3,670 3,193 2,942 2,818 3,054Long-term debt 453 789 823 658 559Convertible debt

Other LT liabilities 97 113 87 99 113Total liabilities 4,220 4,095 3,853 3,575 3,727Minority interest 11 9 7 7 7Preferred stock 0 0 0 0 0Common stock 76 62 62 62 62Retained earnings 2,834 212 909 1,655 2,501Proposed dividends

Other equity and reserves 296 2,939 2,946 2,946 2,946Total shareholders' equity 3,205 3,212 3,918 4,663 5,509Total equity & liabilities 7,436 7,317 7,777 8,245 9,242

Liquidity (x)

Current ratio 1.03 1.05 1.34 1.54 1.76Interest cover 11.1 13.7 23.0 28.6 110.3

Leverage

Net debt/EBITDA (x) 2.33 1.55 1.27 0.55 net cashNet debt/equity (%) 67.5 64.5 46.7 18.3 net cash

Activity (days)

Days receivable 66.4 67.7 61.3 60.0 58.8Days inventory 86.0 102.2 111.0 98.3 83.4Days payable 36.8 40.7 58.8 60.7 52.4Cash cycle 115.5 129.2 113.4 97.6 89.7Source: Company data, Nomura estimates

Notes

Notes


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What has changed to move the stock up?

Hankook Tire’s share price has moved sideways since its peak in October 2013 due to pricing competition putting pressure on global tire makers’ top line. Meanwhile, European and the US tire makers’ stocks did well (Michelin +22%, Continental +9% and Goodyear +24%) during the recent three months, driven by their own domestic demand recovery and companies’ restructuring efforts. We turn positive on Hankook Tire, as we think its aggressive European expansion should ride on demand recovery in the region and Chinese demand growth is likely to benefit HKT, which has enjoyed a market-dominant position.

HKT’s combined European and Chinese revenues accounted for 44% of revenues in 2013, placing it in a relatively better position than Japanese tire makers which have revenues that are heavily dependent on Japan and the competitive US markets. European tire makers would naturally benefit from their home market recovery, while we remain cautious over the US competitive environment and about companies which are dependent on the US market.

Fig. 1: Revenue composition: 44% of HKT’s revenue came from Europe and China (2013)

Source: Company data, Nomura research

Fig. 2: Global tire makers’ three-month share performance

Source: Bloomberg, Company data, Nomura research

Fig. 3: Global tire makers’ one-year share performance

Source: Bloomberg, Company data, Nomura research

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Yokohama Rubber

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Global tire demand outlook: Positive about Europe and China, but keeping an eye on the US competition

In 2014F, we estimate European and Chinese replacement demand will pick up, whereas the impact of a mild recovery in the US demand is likely to be offset by Chinese imports and tire makers’ US capacity expansion. Hankook Tire does not see a meaningful change in replacement demand globally YTD, whereas January-February data from Michelin show a positive signal of European and Chinese demand (Fig 4).

Given Europe is still by far the largest tire market, we are positive about the YTD demand recovery (5% for OE [Original Equipment], 4% for RE [Replacement Equipment]) and estimate 2014F demand to grow by 3% (both OE/RE). For China, although it is premature to be excited about January-February data (YTD +11% for OE, +13% for RE) given the Chinese New Year impact, we think 2009-2012 new vehicle sales CAGR of 25% will lead to a steady replacement demand and estimate 2014F replacement demand to increase by 8%, similar to 2013’s level of 8%.

The aggressive price war in the mid-range segment led tire makers to cut ASP in 2013. According to our channel survey, price competition in the US is still continuing, especially in the mid to low-end market, and the US inventory is slightly higher than the normal level for low-end tires. Although Bridgestone expects better demand in North America and estimates 6-10% total volume growth for passenger and light truck tires, the company projects its own volume growth at +3% against competition from Chinese imports. Fig. 4: Europe replacement demand trends

Source: Michelin, Nomura research

Fig. 5: US replacement demand trends


Fig. 6: Global tire demand forecasts

Note: * US includes light vehicle of PV and LT.


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US RE y-y(%)(Mn Units)

(000' Units) 2010 2011 2012 2013 2014F 2015F

*US 265,979 262,914 263,281 275,327 289,093 302,540

y-y(%) 8.8% -1.2% 0.1% 4.6% 5.0% 4.7%

OE 36,718 39,920 44,290 48,008 50,408 51,921

y-y(%) 34.1% 8.7% 10.9% 8.4% 5.0% 3.0%

RE 229,261 222,994 218,991 227,319 238,685 250,619

y-y(%) 5.6% -2.7% -1.8% 3.8% 5.0% 5.0%

EUROPE 411,500 435,100 406,334 404,073 416,195 436,067

OE 90,500 96,900 90,117 91,018 93,749 97,499

y-y(%) 12.6% 7.1% -7.0% 1.0% 3.0% 4.0%

RE 321,000 338,200 316,217 313,055 322,446 338,569

y-y(%) 8.0% 5.4% -6.5% -1.0% 3.0% 5.0%

KOREA

RE 15,376 14,814 15,464 16,700 17,368 17,715

y-y(%) 25.1% -3.7% 4.4% 8.0% 4.0% 2.0%


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Hungary expansion bodes well with EU demand recovery

Europe is the single-largest market for tire makers. We expect Hankook’s aggressive expansion strategy in Hungary to strengthen its brand and market share in Europe. The Hungary plant currently represents 14% of HKT’s global production, following plants in Korea (49%) and China (33%), while the company plans to expand the capacity by 50% until 2015. Given Hankook’s brand competitiveness in Europe is exceptionally strong compared to other regions, we think the growth strategy will fit well into the recovering European market. Over the past five years, Hankook’s European market share has surged from 5.2% (2008) to 7.9% (2013) and, of note, the company emerged as the second-largest tire brand in Germany, following Continental.

On the supply side, we note that most of the global tire makers’ expansions are concentrated in America and China in the next couple of years, while European capacity addition seems limited in 2014-15F. Michelin has continuously closed down plants in Europe, while Continental seems to be more aggressive on US expansion at the South Carolina plant. We think the combination of a mild demand recovery and Hankook’s Hungary expansion will help further increase the company’s positioning.

Fig. 7: Hankook Tire’s global production estimates

Source: Company data, Nomura estimates

Fig. 8: Hungary plants’ revenues and OPM trends (2010~13)


(mn units) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016FKorea 38 39 40 42 39 45 47 45 45 45 46 46China 20 24 26 28 28 28 29 30 30 31 32 35Hungary 2 5 5 6 10 12 13 14 18 18Indonesia 0 0 0 0 4 6 7 11US Tenessee 5Total 58 63 68 75 72 79 86 87 92 96 103 115 y-y growth 13% 8% 7% 10% -4% 10% 9% 1% 6% 4% 7% 12%

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Raw material cost to rise towards 2H but at a mild rate

Most of global tire makers are looking at a rise in raw material (RM) cost in 2H (HKT, Nexen, Bridgestone and Michelin), while we estimate the rise to be rather mild than sharp. Also, given lower-than-expected YTD price of natural rubber and stable butadiene price, we estimate the average input cost to stay flat in 2014F.

• Natural rubber input cost to fall 14% in 2014F: We estimate the average input cost for natural rubber at USD2,450/ton, or a 15% decline from 2013. Rising natural rubber inventory and sluggish tire demand have led to weaker-than-expected raw material prices in 2013 and YTD 2014. Despite the drought in Southeast Asia, natural rubber prices fell 16% YTD to USD1,929/ton, which is 17%/24% lower than 4Q13/2013 average levels.

• Butadiene price to gradually recover towards 2H due to feedstock: According to IHS, butadiene price would recover gradually from 2H14, driven by potential supply shortage of C4 and the feedstock for butadiene. C4 supply has not been sufficient to meet the market demand in North America due to ethlene cracker (production) upsets which led to relatively expensive imported price of C4. IHS forecasts the supply shortage will continue due to Asian producers’ underutilized capacity and limited supply from the US and Europe which could maintain an expensive price trend.

• Comments about raw material cost by tire makers

– Hankook Tire estimates RM input cost to rise by 4% in 2014 due to tire demand recovery.

– Bridgestone estimates NR (Natural Rubber) to rise in 2H14 due to global volume recovery, assuming USD2,320/ton (vs. USD1,929 currently).

– Michelin does not think NR and butadiene will stay at the current depressed levels.

Fig. 9: Hankook Tire’s OPM trend vs. average RM input cost (2008-2014F)


Fig. 10: Butadiene and Natural rubber cost trends


Plant efficiency well above global peers

We believe one key driver for HKT’s higher margins vs. global peers is its efficient management of global capacity and this is likely to continue to help HKT have a competitive edge against global peers. HKT globally operates seven plants and its average capacity is higher than that of Michelin and Continental (109% higher than Michelin and 56% higher than Continental). We believe HKT can maintain its higher margin due to larger average capacity and plant efficiency.

Other global tire makers are trying to trim the number of plants and increase economic subscale but we think it would take some time for this effort to translate into a similar level of margin as HKT. For Michelin, over the next four years, Michelin management is targeting: 1) plants with an average size 35% bigger (or 105 tons); 2) a reduction of 20% of the number of plants (or the closure of nine plants).

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NR: 2013 Average 2,514

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Fig. 11: Major tire makers’ OPM as of 2013


Fig. 12: Global tire makers’ plant economies of scale


1Q14F results to meet consensus estimates

We forecast 1Q14F OPM at 15.2% (vs. 15.6% in 1Q13 and 14.7% in 4Q13), assuming nearly flat raw material input cost q-q and HKT’s ASP recovering 3% q-q. Regarding RM input cost, natural rubber input cost is likely to fall further on weak price in January, while this must have been largely offset by the increase in synthetic rubber price. On a y-y basis, we estimate RM input cost to fall 8% y-y to USD2,260/ton, supporting 1Q14 operating margin at around a solid 15% level. According to the company, there is not much change in the competitive environment globally, and inventory levels remain similar q-q at mid-60 days.

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Number of plants Annual production Production per plant Average size per plant

Continental 22 1,710K tons 78K tons 9m per pass tire plant

1m per truck tire plant

Michelin 49 3,827K tons 78K tons 6.7m per pass tire plant

1.3m per truck tire plant

Pirelli 19 1,060K tons 56K tons 6m per pass tire plant


Bridgestone 48 1,820K tons 37K tons

Yokohama 12 66mn units 5.5mn units 7.1mn per pass tire plant

0.5mn per truck tire plant

Sumitomo 9 96mn units 10.7mn units

Hankook 7 96mn units 13mn units 14m per pass tire plant


Nexen 3 35.7mn units 12mn units 10m per pass tire plant

Kumho 7 65mn units 9.2mn units 10m per pass tire plant

1.5m per truck tire plant

Cheng Shin 8 47mn units 5.5mn units 6.6mn per pass tire plant

(PCR/TBR plants) 2.1mn per truck tire plant


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Fig. 13: Hankook Tire: 1Q14 preview

Source: Company data, Bloomberg, Nomura estimates

Valuation: New TP at KRW74,000, implying 2014F 11x P/E (EPS: KRW6,453)

As we revise our estimates, we raise our TP to KRW74,000. We derive our new TP of KRW74,000 by applying a target P/B 1.8x average 2014-15F BVPS of 41,060, assuming 2014-15F ROE of 18-19%. Our new 2014F earnings are in line and our 2015F earnings are 7% ahead of Bloomberg consensus (28 days), as we are more aggressive ASP assumption driven by Europe/China demand. The stock currently trades at 9x 2014F P/E (EPS: KRW6,453), lower than the European peer average of 13x and at a premium to Japanese peers at 7x.

Hankook Tire has maintained a high ROE of 21-22% in 2012-13, whereas we think the company would need to consider higher dividend in order to maintain such a high ROE level. As of 2013, HKT’s payout ratio is merely 7%, compared with Bridgestone 22% and Michelin 41%. A key downside risk to our TP is severe competition putting further pressure on tire ASP.

Fig. 14: Global tire makers’ peer comparison

Source: Bloomberg, Nomura estimates. Bloomberg consensus for NR stocks. Pricing as on 26 March 2014.

Nomura Consensus y-y q-q(KRWbn) 1Q14F 1Q14F 1Q13 (%) 4Q13 (%)Sales 1,740 1,732 0.5 1,679 3.6 1,718 1.3 Operating profit 264 248 6.5 262 0.8 253 4.3 Net profit 198 206 (3.9) 189 4.8 142 39.4 Margin(%)OPM 15.2 14.3 15.6 14.7NPM 11.4 11.3 8.3

Nomura vs. Consensus(%)

Company Code M/Caps Rating

(USD mn) FY14F FY15F FY14F FY15F FY14F FY15F FY14F FY15F FY14F FY15F FY14F FY15F

Hankook Tire 161390 KS 6,785 BUY 9.3 8.5 1.8 9.7 1.6 1.3 18.6 17.0 14.4 14.3 10.7 11.0

Nexen Tire 002350 KS 1,240 Neutral 8.4 n.a 16.7 n.a 1.4 n.a 17.9 n.a 11.3 n.a 7.8 n.a

Kumho Tire 073240 KS 1,165 NR 9.3 8.7 45.6 6.7 1.6 1.3 17.0 15.2 10.4 10.0 5.1 5.2

Korea av erage 8.8 8.5 9.2 9.7 1.5 1.3 18.0 17.0 12.7 14.0 9.2 10.7

Yokohama Rubber 5101 JP 3,139 Neutral 8.5 8.1 6.5 n.a 1.0 n.a 14.7 14.1 10.5 n.a 6.4 n.a

Bridgestone 5108 JP 27,918 Neutral 8.6 8.0 6.2 6.8 1.2 1.1 15.8 14.9 12.7 13.1 8.1 8.3

Toyo 5105 JP 1,731 NR 6.5 5.8 57.0 11.5 1.1 0.9 18.2 16.6 10.7 11.1 6.8 7.1

Japan av erage 7.9 7.4 6.7 9.5 1.0 0.9 14.7 14.1 11.1 11.8 6.8 7.3

Continental CON GR 46,925 NR 12.0 11.2 13.1 6.7 2.6 2.2 24.2 23.0 11.7 11.6 7.4 7.5

Michelin ML FP 23,075 NR 10.2 9.4 11.5 8.4 1.5 1.3 15.0 15.1 12.2 12.3 7.7 7.9

Pirell i PC IM 7,255 NR 12.0 10.3 25.7 17.2 1.9 1.7 14.2 15.7 13.2 13.9 6.9 7.7

Europe av erage 11.4 10.3 16.8 10.8 2.0 1.8 17.8 17.9 12.3 12.6 7.4 7.7

Goodyear Tire GT US 8,770 NR 7.7 6.9 13.7 11.5 2.3 1.8 34.5 32.0 8.9 9.0 4.6 5.0

Cooper Tire CTB US 2,138 NR 10.1 n.a 8.9 n.a n.a n.a 13.1 12.8 7.6 n.a 3.9 n.a

US av erage 8.9 6.9 11.3 11.5 2.3 1.8 23.8 22.4 8.3 9.0 4.3 5.0

Cheng Shin Rubber 2105 TT 8,273 Neutral 13.3 12.0 3.9 11.4 3.3 2.8 27.0 25.7 15.4 16.5 13.0 13.1

ROE (%) OP margin (%) NP margin (%)PER (x) EPS growth (%) PBR (x)


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Fig. 15: Hankook Tire: P/E band

Source: Company data, Quantiwise, Nomura research

Fig. 16: Hankook Tire: P/B band

Source: Company data, Quantiwise, Nomura research

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1.6x

1.4x

1.2x

1.8x


11

Appendix A-1

Analyst Certification

I, Angela Hong, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Nexen Tire 002350 KS KRW 13,900 26-Mar-2014 Neutral N/A Hankook Tire 161390 KS KRW 59,700 26-Mar-2014 Buy N/A

Hankook Tire (161390 KS) KRW 59,700 (26-Mar-2014) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 02-Sep-13 65,000.00 60,200.00 16-Oct-12 Neutral 47,900.00 16-Oct-12 54,000.00 47,900.00

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our fair value of KRW74,000 is based on applying 1.8x to average of 2014F-2015F BVPS of KRW41,060, based on the normalized ROE assumption of 18.6%.The benchmark index for this stock is MSCI Korea. Risks that may impede the achievement of the target price The key downside risk is intensifying competition in the US due to the expiry of tire safeguard measures against Chinese imports.


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Nexen Tire (002350 KS) KRW 13,900 (26-Mar-2014) Rating and target price chart (three year history)

Neutral (Sector rating: N/A)

Date Rating Target price Closing price 14-Jan-13 Neutral 13,650.00 14-Jan-13 15,000.00 13,650.00 09-Aug-12 27,000.00 20,600.00 27-Jun-12 28,000.00 20,700.00 03-Oct-11 Buy 19,300.00 03-Oct-11 22,500.00 19,300.00

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of KRW15,000 is derived by applying 1.8x FY13F P/B, assuming 18% sustainable ROE and fully-diluted BVPS of KRW8,607.The benchmark index for this stock is MSCI Korea. Risks that may impede the achievement of the target price Key downside risks are a weaker demand and aggressive price cut by Japanese peers on the back of weak Yen.

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STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. 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15_hankook tire - expansion plans riding on demand cycle

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