The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. — Ed.
In the early hours of Mar 13, a fire at Hankook T&T’s Daejeon plant shut down production lines. For the time being, the company can sustain shipments by tapping into inventory. The impact of the fire will depend on how many lines are taken offline and for how long.
Damaged plant accounts for 16.4% of revenue; lost tire stock only ~0.4% of annual output
On Mar 13, Yonhap News reported that the fire erupted at the curing section in the middle of the Daejeon plant before spreading to the logistics section of No. 2 plant and the feedstock section. About 86,769 square meters of No. 2 plant were damaged, as well as 400,000 tires.
Hankook T&T announced that the plant accounted for 16.4% of 2021 revenue. The company has plants in Korea (i.e., Daejeon, Geumsan), China (i.e., Jiaxing, Jiangsu, Chongqing), Hungary, Indonesia and the U.S. (Tennessee), with three plants located in Daejeon. The 400,000 damaged tires account for only ~0.4% of Hankook T&T’s combined annual output of 80-90mn units.
In a separate announcement, the company stated that the plant is insured for KRW1.7tn and total claims will be reached after assessment by its insurer.
We note that in 2014 the Daejeon plant suffered a logistics warehouse fire that caused KRW6.6bn in damages (180,000 tires).
Minimal impact if production resumes within three months; scope of coverage unknown
Sales impact: End-2022 inventory levels suggest that the shutdown will not have an immediate impact on sales. Hankook T&T’s year-end inventory to annual revenue ratio has improved from 25.1% in 2019 to 24.2% in 2020, 26.6% in 2021 and 29.2% in 2022; an increase in inventory period stemming from the pandemic-induced logistics network shutdown was behind the sharp increase. With logistics issues now easing, tires drifting into the network are being freed up for sale. Assuming network normalization, a 4-5% decline in ratio should not significantly hurt sales.
Production impact: If production normalizes within three months, the fire should not have a significant impact on sales. A 3Q22 report stated that the capacity utilization rate of domestic plants stood at 94.9% for the quarter, topping the overall rate of 92.4%. That said, revenue proportion of the damaged plant may be higher than 16.4% (domestic/overall utilization rate at 86.8%/86.7%) but should remain under 17%. Thus, if the Daejeon plant goes back online within three months, the inventory-to-revenue ratio should remain in the low 4% range, limiting the impact on production to a minimum.
Damage claims: In general, insurance should cover any equipment and third-party damage caused by the fire. However, this is merely a blanket statement. Hankook T&T’s policy may not provide full coverage, and it may not cover loss in sales if production is suspended for an extended period of time.
