Global Automotive Stocks/EV Focus/Event Driven, SC Capital

SC Capital

SC Capital has over 20 years' experience covering the global automotive industry both on the Sell Side (UBS & Morgan Stanley) and Buy Side (Och-Ziff), along with a wealth of industry contacts. 

Current focus is on electric vehicle stocks & their supply chains. Aim is to identify the winners and losers from a long/short perspective. This includes close coverage of legacy automakers as well.  

From time to time. we cover opportunistic events with stocks in the manufacturing sector, food & beverage, healthcare and tech, where we also have coverage experience.

Global Automotive Stocks/EV Focus/Event Driven

Toyo Tire Could Be Weak on Bearish FY18 Guidance

Toyo Tire--Q4 & FY18 Guidance Much Worse Than Expected

Over 22 years covering Japanese equities on both the sell side and the buy side. 

Bottom-up Japan Equities Research

Equity Bottom-Up

Japan's tire makers all had weak Q3 results, with Yokohama and Toyo Tire undershooting consensus estimates the least, and Sumitomo Rubber and Bridgestone undershooting the most (see table-1 below). The main culprit behind these weaker than expected results was struggles with pricing in the US and Asian markets amid higher raw material prices.Yokohama Rubber had higher exposure to the recovery in the US truck &amp; bus tire market, while Toyo Tire continues to benefit from strong demand for its profitable large radial tire (LTR) products for SUVs and large pick-up trucks. Tire makers like Sumitomo Rubber and Bridgestone, with the highest exposure to regular-use replacement tires in the US and Asia, fared the worst, as competition is fierce. Table-1: Japanese Tire Makers' Q3 Results Versus Consensus<table class="table table-striped"><tbody><tr><td></td><td style="text-align: center;">Q3 Operating Profit (a)</td><td style="text-align: center;">Q3 Consensus Estimates (b)</td><td style="text-align: center;">(a/b) % Difference</td></tr><tr><td>Yokohama Rubber</td><td>                     8,031</td><td>                     8,233</td><td style="text-align: center;">-2.5%</td></tr><tr><td>Toyo Tire</td><td>                    11,514</td><td>                    12,500</td><td style="text-align: center;">-7.9%</td></tr><tr><td>Bridgestone</td><td>                    97,300</td><td>                  128,175</td><td style="text-align: center;">-24.1%</td></tr><tr><td>Sumitomo Rubber</td><td>                     8,426</td><td>                    12,200</td><td style="text-align: center;">-30.9%</td></tr></tbody></table>Source: Company data and BloombergWhile we had estimated Y14bn in Q3 OP for Toyo Tire in a recent Insight published before Q3 results (<a href="https://www.smartkarma.com/insights/toyo-tire-5105-expect-strong-q3-higher-consensus-for-fy18" target="_blank" data-smartkarma-citation="insights:14819">Toyo Tire (5105)--Expect Strong Q3 &amp; Higher Consensus for FY18</a> ), Toyo came in 18% below our estimate and 8% lower than consensus due mainly to unexpected losses at its non-tire business, which was also the main factor behind Toyo lowering its FY17 OP outlook by 6%. Most of Toyo's non-tire business is being sold by year-end. Furthermore, the remaining automotive parts portion of this division saw losses due to start-up costs in Q3. The removal of these factors next year should act as a tailwind for overall FY18 OP growth and higher OP margins. Among the four Japanese tire companies, Toyo Tire was the only one to see positive spreads between profit factors related to sales/volume/mix and the negative impact from higher raw material prices. This is due to continued strong sales of its profitable Large Radial Tire (LTR) products, which grew +20% YoY in Q3.   In Q3, Toyo Tire still had the highest operating margin in its core tire division at 14.3%, versus 11.6% at Bridgestone, 4.2% at Yokohama and 4.5% at Sumitomo (see table below). Of the four Japanese tire makers, Sumitomo Rubber has the highest hurdles in Q4 and could miss FY17 targets. It should also be noted that, among Japan's four tire makers, Toyo Tire is the only one forecasting a negative spread for Q4 (i.e. higher raw material costs will outweigh profit growth factors from sales/price/mix). This is most likely conservative forecasting on Toyo's part as it sees negatives from higher raw material costs going up QoQ in Q4, whereas all the other tire makers see a Q4 decline. In light of this, Toyo may not have needed to revise its FY17 profit outlook down just months before the year-end, but may have done so to compensate for the weakness in its non-tire business. Toyo Tire remains a compelling FY18 growth and margin-improvement story, as its unprofitable non-tire division will largely be removed and its high-margin LTR production capacity is hiked. Despite its overwhelmingly higher operating profitability, the shares still trade at an FY18 consensus PER of only 8.4x, versus 12.1x at Bridgestone, 10.8x at Yokohama and 10.1x at Sumitomo.

Japan's tire makers all had weak Q3 results, with Yokohama and Toyo Tire undershooting consensus estimates the least, and Sumitomo Rubber and Bridgestone undershooting the most (see table-1 below). The main culprit behind these weaker than expected results was struggles with pricing in the US and Asian markets amid higher raw material prices.Yokohama Rubber had higher exposure to the recovery in the US truck &amp; bus tire market, while Toyo Tire continues to benefit from strong demand for its profitable large radial tire (LTR) products for SUVs and large pick-up trucks. Tire makers like Sumitomo Rubber and Bridgestone, with the highest exposure to regular-use replacement tires in the US and Asia, fared the worst, as competition is fierce. Table-1: Japanese Tire Makers' Q3 Results Versus ConsensusQ3 Operating Profit (a)Q3 Consensus Estimates (b)(a/b) % DifferenceYokohama Rubber                     8,031                     8,233-2.5%Toyo Tire                    11,514                    12,500-7.9%Bridgestone                    97,300                  128,175-24.1%Sumitomo Rubber                     8,426                    12,200-30.9%Source: Company data and BloombergWhile we had estimated Y14bn in Q3 OP for Toyo Tire in a recent Insight published before Q3 results (Toyo Tire (5105)--Expect Strong Q3 &amp; Higher Consensus for FY18 ), Toyo came in 18% below our estimate and 8% lower than consensus due mainly to unexpected losses at its non-tire business, which was also the main factor behind Toyo lowering its FY17 OP outlook by 6%. Most of Toyo's non-tire business is being sold by year-end. Furthermore, the remaining automotive parts portion of this division saw losses due to start-up costs in Q3. The removal of these factors next year should act as a tailwind for overall FY18 OP growth and higher OP margins. Among the four Japanese tire companies, Toyo Tire was the only one to see positive spreads between profit factors related to sales/volume/mix and the negative impact from higher raw material prices. This is due to continued strong sales of its profitable Large Radial Tire (LTR) products, which grew +20% YoY in Q3.   In Q3, Toyo Tire still had the highest operating margin in its core tire division at 14.3%, versus 11.6% at Bridgestone, 4.2% at Yokohama and 4.5% at Sumitomo (see table below). Of the four Japanese tire makers, Sumitomo Rubber has the highest hurdles in Q4 and could miss FY17 targets. It should also be noted that, among Japan's four tire makers, Toyo Tire is the only one forecasting a negative spread for Q4 (i.e. higher raw material costs will outweigh profit growth factors from sales/price/mix). This is most likely conservative forecasting on Toyo's part as it sees negatives from higher raw material costs going up QoQ in Q4, whereas all the other tire makers see a Q4 decline. In light of this, Toyo may not have needed to revise its FY17 profit outlook down just months before the year-end, but may have done so to compensate for the weakness in its non-tire business. Toyo Tire remains a compelling FY18 growth and margin-improvement story, as its unprofitable non-tire division will largely be removed and its high-margin LTR production capacity is hiked. Despite its overwhelmingly higher operating profitability, the shares still trade at an FY18 consensus PER of only 8.4x, versus 12.1x at Bridgestone, 10.8x at Yokohama and 10.1x at Sumitomo.  

Bad Q3 for Japanese Tire Makers; Toyo Tire Still Best in Class; Bridgestone & Sumitomo Struggling

Toyo Tire Corporation

Bad Q3 for Japanese Tire Makers; Toyo Tire Still Best in Class; Bridgestone & Sumitomo Struggling