Solbrain on the Verge of Becoming a Holding Company... Accelerating Growth in Core Businesses

[Asia Economy Reporter Jang Hyowon] As the number of confirmed cases of the novel coronavirus infection (COVID-19) worldwide surpasses 3 million, society is rapidly transitioning to a contactless (untact) culture. With the spread of untact culture, internet data traffic has surged, and demand for server DRAM has also increased. This is why semiconductor-related companies are expected to see improved performance despite concerns over a global economic recession. The semiconductor industry, a representative export item of Korea, is one of the important indicators to gauge the domestic economic recovery. We take a closer look at materials, parts, and equipment companies within the semiconductor value chain showing signs of performance improvement.

Semiconductor and display materials company Solbrain is expected to deliver stable performance this year, supported by increased semiconductor demand despite the impact of COVID-19. There are also forecasts that the growth potential of its core business divisions will become more prominent after its transition to a holding company in July.

◆Benefit from Increased NAND Demand

Solbrain is a producer of semiconductor, display, and secondary battery materials. As of last year, its sales composition was semiconductor materials (58%), display materials (31%), and secondary battery materials (11%) in that order.

Solbrain's standalone sales last year were 796.5 billion KRW, a 0.58% decrease compared to the previous year. However, operating profit increased by 13.83% to 162.1 billion KRW. This was due to successful cost management, reducing cost of sales and selling and administrative expenses by 3.47% and 6.19%, respectively.

Solbrain's profits have shown an increasing trend every year. Net profit, which was 52.1 billion KRW in 2017, rose to 89.9 billion KRW last year. Operating cash flow also increased to around 190 billion KRW. With consistent profits, retained earnings have accumulated, maintaining a low debt ratio.

As of the end of last year, Solbrain's debt ratio was 24.94%. Total borrowings stood at 82.2 billion KRW, while cash equivalents were about 292.7 billion KRW, resulting in a net debt position in the negative. This means that even if all debts were paid off with cash on hand, approximately 210 billion KRW would remain.

Solbrain is expected to maintain stable performance this year as well. Although the global economy has slowed due to COVID-19 and the display industry has contracted, the semiconductor materials segment is anticipated to grow, supported by increased demand for server memory. Additionally, the proactive establishment of high-purity hydrogen fluoride production capacity during last year's Japanese export restrictions is a positive factor.

According to financial information provider FnGuide, the market consensus for Solbrain's first-quarter operating profit is 43.6 billion KRW, expected to increase by 1.16% year-on-year.

Researcher Kim Dongwon of KB Securities said, "Increased demand for server memory has led to higher sales of semiconductor materials including etchants, offsetting the decline in display material shipments," and added, "With Samsung Electronics expected to expand NAND production capacity, Solbrain is also likely to achieve stable performance growth."

◆Increased Core Business Value through Holding Company Transition

A key variable for Solbrain going forward is its transition to a holding company. From July 1, Solbrain will undergo a 55:45 ratio spin-off into a holding company and an operating company. The existing business divisions will be transferred to the newly established company, while the surviving holding company will manage cash assets and equity stakes in affiliates. The purpose of the split is interpreted as maximizing management efficiency and strengthening the control of Chairman Jeong Jiwan and his family.

The value of the business division is expected to rise further after the corporate split because it can focus solely on its core business. Although Solbrain has shown high growth potential in its core businesses such as semiconductor and display materials, non-performing new businesses have posed risks to the company.

For example, the mask pack company Genic, in which 70 billion KRW was invested in 2015, saw its book value drop to about 8.7 billion KRW by the end of last year. This was due to impairment losses recognized after Genic posted losses of several billion KRW annually and its stock price declined. Life Semantics, in which 5 billion KRW was invested in 2016, had a book value of zero last year.

Researcher Lee Subin of Daishin Securities said, "Separating the continuously growing business divisions from the risk-bearing investment divisions is positive for corporate value," and predicted, "The operating company, expected to see profit growth, will show strength going forward."

This content was produced with the assistance of AI translation services.