Upside risk to FY21 guidance: we stand 10-20% above consensus

We stay positive on tires as we see upside risk to FY21 guidance driven by: (1) better volume: current passenger car replacement market is growing 2-3x faster than company outlooks; and (2) more positive pricing trends should help offset higher input costs: our channel checks suggest low distribution inventories and high acceptance levels for the announced price hikes due to strong end demand. Also, tire makers have limited exposure to chip shortages. Overall, we stand 10-20% above consensus; Michelin and Conti are our most preferred names (see our company reports: link; link).

Premium tire makers not losing pressure at the expense of Chinese/budget

One major investor pushback we often get is the deteriorating competitive landscape due to Chinese/budget players. To address this issue, we leverage several proprietary tools, including UBS New Analytic Approaches and, more specifically, statistical analysis on price elasticity, the UBS Evidence Lab Price Tracker (> Access Dataset) which gathers >30 million observations over five years across Europe and the US, and a 7,000+ strong consumer survey on tire purchasing factors, which we have conducted for the fourth time. We conclude: (1) premium tire makers have pricing power; (2) there is no evidence premium players have been losing market over the past five years (even in smaller tires); and (3) the ASP of 19'' and 20'' are c.3x more expensive than 15'' and, in high value, the (stable) market share of the Chinese is "only" c5%.