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Global Research
14 January 2020
Demystifying tire pricing UBS Evidence Lab inside: Q4 – Mixed data, staying cautious
Takeaway #1: Chinese most competitive; Takeaway #2: healthy US market We remain cautious on the tire space and reduce our earnings estimates by c5-10% on a combination of (1) mixed Q4 (retail) pricing data, (2) further downside risk on volume growth this year as the current warm winter is likely to weigh on inventory levels for the upcoming season, and (3) higher raw material prices that could put pressure on profitability margins from H2 20 onwards. In terms of tire prices, we continue to see Chinese players as the most competitive (a clear change in trend that we started to evidence from Q319). This is partially offset by broadly flat retail prices in Continental Europe. In the US, the market continues to stabilise at high levels as we saw a small uptick in Q4 retail prices (vs Q3 19). Michelin and Linglong Tyre are our most preferred tire makers. We downgrade Pirelli to Neutral and Nokian to Sell. Conti stays Neutral. What is most relevant in Q4 for each stock under coverage? Michelin (+): the UBS Evidence Lab price tracker shows (1) retail prices experienced a small increase in Q4 showing recently announced price hikes are coming all the way through the retail channels, and (2) its price premium vs peers for high value continues to expand further. Conti (+): many investors appear to be worried about Conti"s pricing behaviour but the price tacker shows Conti stays very disciplined. Pirelli (=): the price tracker suggests some support to product mix. Nokian (-): there has been a clear change in pricing trends with retail prices declining by 8-10% compared to a year ago. It has been most pronounced in high value where the discount vs Tier 1 peers has more than doubled. Connecting our key findings with stocks: Michelin, Linglong most preferred Michelin (Buy, €125) has scope to expand further its profitability margin (solid price premium vs peers and restructuring benefits). We see a path towards a FCF of >€2bn around 2022 with limited downside risk, all this for a PE of c9.5x. Linglong Tyre (Buy, RMB27.15) should increase further its exposure to foreign OEMs (VW, in particular). Pirelli (downgrade to Neutral, €5.5): we think the price-mix story is losing steam and delays our expectations for NCF potential. We do not see the upcoming investor day as a material catalyst. Nokian (downgrade to Sell, €22): we expect further downside risk to profitability margin this year, which should stay below 20% for longer. ROIC should deteriorate further as investments remain elevated. On that basis, the valuation premium is unjustified in our view.
David Lesne
Analyst
david.lesne@ubs.com
+44-20-7567 5815 Patrick Hummel, CFA
Analyst
patrick.hummel@ubs.com
+41-44-239 79 23 Sonal Gupta
Analyst
sonal.gupta@ubs.com
+91-22-6155 6063 Nora Min Analyst
S1460518050001
nora.min@ubssecurities.com
+86-213-866 8905 Kohei Takahashi
Analyst
kohei.takahashi@ubs.com
+81-3-5208 6172 Eugene Jung
Analyst
eugene.jung@ubs.com
+82 2 3702 8801 Benedikt Baumann
Associate Analyst benedikt.baumann@ubs.com
+41-44-239 1398 Sabrina Reeh
Analyst
sabrina.reeh@ubs.com
+49-69-1369 8267
Figure 1: Global tire preference (from most to least preferred)
Rating
Price target
Share Upside/
Underlying EPS (lcl)
Implied
PE (x)
Old
New Old
New price (lcl)
downside
2020E
2021E
2020E
2021E
Most Michelin
Buy
Buy
120
125
110
13%
11.2
11.7
9.9x
9.4x
Linglong Tyre
Buy
Buy
27.15
27.15
24
15%
1.5
1.8
15.6x
13.0x
Pirelli
Buy
Neutral
6.2
5.5
5.2
5%
0.46
0.52
11.4x
9.9x
Apollo Tyres
Buy
Buy
218
218
171
28%
14.0
16.6
12.2x
10.3x
Continental
Neutral
Neutral
130
120
116
4%
12.4
14.2
9.3x
8.1x
Least
Nokian
Neutral
Sell
25
22
26
-16%
1.64
1.78
16.0x
14.7x
Average Median
12.4x 11.8x 10.9x 10.1x Source: UBS estimates; Note: Data as of 13 January 2020
www.ubs.com/investmentresearch
This report has been prepared by UBS Securities France S.A. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 18. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be Automobiles Global Equities
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
UBS Research THESIS MAP MOST FAVORED LEAST FAVORED
Michelin, Linglong Nokian
PIVOTAL QUESTIONS Q: Are recent pricing trends boding well for tire makers" near-term profitability? Q4 retail pricing data is quite mixed. Retail pricing is stable sequentially (vs Q3 19) in Continental Europe. However, the Chinese segment continues to be most competitive (trend started in Q3 19). The US market is stabilising at high levels and remains very healthy. Finally, high value (defined as 19"") continues to be the segment in which prices are declining the most. MORE
Q: Is the competition from Chinese/Budget brands intensifying? Yes. For the first time since the inception of the database, we have evidence that Chinese players have become the most aggressive segment across rim sizes (15"", 17"" and 19"") and seasons with a yearly decline (vs Q4 18) of up to 2% (stable vs Q3 19). We continue to see less competition from Budget/ Chinese brands as we shift towards high value: larger rim-sizes. MORE
Q: Do consumers care about tire brands? Mixed. The main surprise from the consumer survey a year ago was that price is no longer the key purchasing factor. The findings overall are highly supportive of (1) product mix, and (2) the premiumisation strategy of most Tier-1 producers. First, the level of brand awareness is improving with high income consumers. Second, product quality (safety and longevity) is increasingly seen as a way to differentiate. However, we note that Brand reputation seems to matter much less than in the past. MORE
WHAT"S PRICED IN? Trading at a c10% discount to five-year PE average. The valuation discount reflects investor concerns on the pricing outlook and China competition, in our view. We think the segment is more defensive (limited exposure to China, trade tensions, CO2 targets, etc) than OEMs/suppliers. In the long run, Tires should benefit from electric cars (heavier, stronger torque and larger chassis) and shared mobility/robotaxis (higher utilisation rate, TCO in focus).
UBS VIEW Near term, we are cautious on the segment due to mixed pricing data and weaker volume growth. Medium term, cash conversion should improve since capex peaked about three years ago. Michelin remains our most preferred tire maker, followed by Pirelli. Nokian is our least preferred tire maker. See our heatmap below for more details.
EVIDENCE A UBS Evidence Lab survey of 11,000 consumers across five markets gives us some unique insight. In addition, UBS Evidence Lab has built one of the most comprehensive databases tracking weekly retail prices of six online tire retailers in Europe and the US and has gathered close to >22m data points since November 2016. We have also built an interactive model available on UBS Neo, using the following link, which enables investors to gauge the impact on profitability from higher input costs.
Connecting key UBS Evidence Lab findings with stocks – UBS heatmap
Most preferred … … Least preferred
Michelin Pirelli Conti Nokian Rating - new Buy Neutral Neutral Sell Rating - old Buy Buy Neutral Neutral PT (€) - new 125 5.5 120 22 PT (€) - old 120 6.2 130 25 Overall recent pricing trends: Risk from budget competition: All-season tire opportunity: High value opportunity:
Average
Source: UBS Research
OUR THESIS IN PICTURES return UBS tire retail pricing heatmap in Q419 (vs Q418)
All tires Winter tires Summer tires
Cont. Europe
US
Cont. Europe
US
Cont. Europe
US PREMIUM INTERMEDIATE BUDGET
CHINESE
NA
NA
NA
APOLLO-VREDESTEIN BRIDGESTONE CONTINENTAL COOPER GOODYEAR HANKOOK MICHELIN
NEXEN NOKIAN PIRELLI
SUMITOMO
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Retail price change for all tires for Continental Europe
Retail prices in Continental Europe have decreased by c1% yoy in Q4. On a sequential basis (vs Q319), prices have stayed broadly stable. US retail prices are increasing by c2% yoy and improving vs Q3 19 (legend: the greener, the higher the price increase versus peers)
2% 1%
1%
1%
0%
-1%
-1%
-2%
-2%
-3%
-2%
Takeaway #1: In Q4, the biggest change in trend was coming from the Chinese players. On a yoy basis, the Chinese remain the most competitive segment. We also note a small yoy increase for the premium segment PREMIUM
INTERMEDIATE
BUDGET CHINESE Q419 vs. Q418 Q419 vs Q319 All tires retail prices quarterly in the US ($)
180 175 170 165 160 155 150 145 140
2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019
Takeaway #2: US retail prices are returning to slight growth both on a sequential and yoy basis. The market remains extremely healthy and our concerns about a peak being reached in Q3 were overdone Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 All tires retail prices change in Continental Europe by tire maker in Q419 (vs Q319)
APOLLO-VREDESTEIN OTHER PIRELLI MICHELIN GOODYEAR CONTINENTAL NOKIAN KUMHO NEXEN BRIDGESTONE HANKOOK TOYO -2%
2%
On a sequential basis, the picture is fairly supportive with most premium players delivering positive growth -2% -2% -1% -1% 0% 1% 1% 2% 2% 3% 0%
0%
0%
0%
0%
-1%
174 1% 1% 1% 0% 0% 0% 0% 0% 0% 0%
All tires retail prices change in Continental Europe by tire maker in Q419 (vs Q418) (19"" ONLY) As in previous quarters, the prices of most players in KUMHO OTHER
APOLLO-VREDESTEIN
CONTINENTAL
NEXEN TOYO
MICHELIN PIRELLI GOODYEAR
BRIDGESTONE HANKOOK
NOKIAN -12% 1% high value (defined as 19"") are declining. We see two 1% key reasons: (1) the strong volume growth of this segment remains highly margin accretive at the group level, and (2) the weight of mass market vehicles within high value is increasing. On a yoy basis, Nokian"s retail prices continue to decline the...
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