[Click eStock] "Solus Advanced Materials, Cost Burden Intensifies Due to Electricity Price Increase"... Target Price Down

[Asia Economy Reporter Lee Jung-yoon] Hana Securities lowered the target price of Solus Advanced Materials from the previous 103,000 KRW to 55,000 KRW on the 21st, citing deteriorating profitability and a downward revision of the target multiple. However, the buy rating was maintained.

Solus Advanced Materials' preliminary results for the second quarter of this year showed sales of 125.4 billion KRW, a 36% increase compared to the previous year, and an operating loss of 7 billion KRW, falling short of consensus estimates. Kim Hyun-soo, a researcher at Hana Securities, explained, "In the battery copper foil segment, sales to major customers increased and the exchange rate effect led to a 7% increase compared to the previous quarter and a 374% increase compared to the previous year," adding, "Sales in the copper foil segment, which has 5G network equipment as its front-end demand, decreased by 1% to 51 billion KRW compared to both the same quarter last year and the previous quarter due to inventory adjustments by customers."

He continued, "Sales in the OLED materials segment for smartphones and TVs increased by 28% year-on-year amid front-end market growth, but decreased by 5% compared to the previous quarter due to a slowdown in set demand."

Solus Advanced Materials is expected to continue operating losses in the third quarter as well. Third-quarter sales are projected to rise 25% year-on-year to 130.2 billion KRW, with an operating loss of 700 million KRW, marking the fourth consecutive quarter of operating losses. The expansion of geopolitical risks in Europe and rising electricity costs are evaluated to have a negative impact on both sales and profitability across all business segments. In particular, electricity costs have sharply increased since the beginning of the year, accounting for 7% of total costs, making it difficult to expect profitability improvement in the near term. Researcher Kim stated, "Regarding the profitability of the battery copper foil segment, considering the additional risk of electricity cost increases during the winter from the fourth quarter of this year through the first quarter of 2023, a return to profitability is expected in the second quarter of 2023."

Considering the already secured order backlog and related investment plans, it is analyzed that sales in the battery copper foil segment could exceed 800 billion KRW in 2024. However, due to greenflation caused by rising eco-friendly energy prices and the increase in electricity costs amid expanding geopolitical risks, profitability is expected to be adversely affected. As a result, the forecasted operating profit margin for the battery copper foil segment in 2024 has been revised downward from 13% to 8%.

Researcher Kim said, "Even assuming the worst-case scenarios for both profitability and multiple assumptions, there is still more than 20% upside potential at the current stock price," and recommended, "From a trading perspective, it is advisable to wait until the recovery of the European electric vehicle market and stabilization of energy prices are confirmed in July."

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