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Major beneficiary of multi-vendor supply chain model

1Q24 preview: Lowering OP estimate by 9%

For 1Q24, we expect SoluM to report revenue of W378.2bn (-35% YoY) and operating profit of W24.1bn (-52% YoY), missing the consensus by 1% and 15%, respectively. We slightly lowered our estimate of the mix of high-margin electronic shelf label (ESL) revenue and adjusted our earnings estimates accordingly. That said, we revised up our 2Q24 earnings estimates, as some revenue deferred from 1Q24 should be recognized.

For 2024, we look for revenue of W2.12tr (+8.6% YoY) and operating profit of W188.3bn (+22% YoY). By division, we expect revenue to grow 12% YoY for ICT and 5.9% YoY for electronic components. ESL business margins should expand due to the growing share of larger-sized products and the introduction of a four-color product lineup, while the electronic components division should also see margin improvements amid a growing mix of high-value-added power modules.

Multi-vendor arrangements are positive, given limited number of ESL suppliers

We believe SoluM will be a major beneficiary of the emerging multi-vendor supply chain model. As the scale of orders increases, customers are increasingly opting for dual sourcing (rather than relying on a single vendor) and then adjusting the supplier mix based on the quality of delivered products. In the past, SoluM mostly secured small-sized orders due to its limited track record in large-scale procurement deals compared to competitors. However, the company is now expanding its market share, leveraging its top-tier communication technologies..

We expect large-scale deals to increase going forward. ESL penetration in global retail channels is estimated at less than 10%, and ESL adoption is steadily growing across industries (in addition to the retail sector) amid efforts to reduce labor costs. We believe SoluM is continuing to supply ESLs to hospitals and factories and reviewing potential supply to global sporting goods brands. Going forward, we expect both ASP and volume to steadily increase, supported by four-color ESLs and larger-sized products.

Cut TP to W38,000, but maintain Buy rating

We cut our target price on SoluM to W38,000 (from W43,000). That said, the stock looks undervalued, with its P/B currently 18% below its two-year average and 42% below the global peer average. While the delayed announcement of large-scale bid results is weighing on valuation, we see positive momentum ahead. The result of a blockbuster-size bid is set to be announced soon (testing period estimated at six months), and the firm has strong competitiveness in terms of data transmission speeds and the ability to respond to changing customer needs.