Tyre makers worldwide are cutting back significantly on their tyres production along with the automakers’ plans to slash production. Management observed a 15-20% decline in the NaturalRubber (NR) division’s Dec-Jan contracts. The division’s revenue is driven by the replacementtyre market and it accounts for 36% of group revenue.

Data released by Michelin in Dec’08 shows the supposedly more resilient passenger car tyrereplacement market in Europe and N. America down 10.3% and 20.2%, respectively in Nov. Themarket has projected a 27% decline in Michelin’s FY08 operating income.

We have reduced our FY09F revenue and earnings estimates by 8.8% and 16.6% on lowerbillable days assumptions. Synthetic Rubber (SR) division registered growth but the outlook hasalso turned challenging. A silver lining in this business slowdown is the expected decline inlogistics and handling expenses due to lower fuel and cleaning costs.

Facing a credit crunch and new orders flows’ uncertainty, management may re-evaluate itsexpansion pace. We assume the IBC fleet target of 2.5m will be achieved by end-2012, insteadof 2011 as previously guided. As its warrants may expire out-of-the-money, a debt-fundedexpansion could push net gearing beyond 0.5x in FY09F and increase interest burden.Strong business model remains intact despite short-term challenges. Maintain HOLD.GPACK is trading a slight premium to the STI despite having fallen 60% since Dec’07, but is stillat a slight discount to peers on a PER basis. The strength of its business model in the long termis still intact, although mounting short term challenges may dampen performance. We maintainour HOLD recommendation with a new DCF target price of $1.04.