Silicon2’s Performance Remains Solid on Customer Diversification; Target Price Set at KRW 65,000

Myung-joo Kim, an analyst at Korea Investment & Securities, said in an analysis on the 4th, “Silicon2’s performance is expected to remain solid in the second half of the year, thanks to its steadily expanding customer base.”

In the second quarter of this year, the United States accounted for 19.2% of Silicon2’s total sales, up 2.6 percentage points from the previous quarter. Its gross profit margin (GPM) also improved by 2 percentage points quarter on quarter.

Kim estimated that more than 1 percentage point of the increase in the gross profit margin resulted from the stronger dollar and the higher proportion of sales from the United States. Customer diversification and reduced discounts on product sales were also estimated to have contributed about 0.5 percentage points.

However, with the won-dollar exchange rate down 12.9% from its previous peak, Kim expected the gross profit margin in the third quarter to have difficulty exceeding the second-quarter level. As retailers’ contribution to sales increases, the margin is expected to remain improved compared with the first quarter.

The change in Silicon2’s customer mix was also viewed positively. Last year, wholesale customers accounted for a large share of sales, causing the gross profit margin to fall 2.6 percentage points from the previous year despite the stronger dollar.

By contrast, Boots, a major retailer in the United Kingdom, became Silicon2’s largest customer in the second quarter of this year. Sales through Boots are expected to increase in the second half of the year as demand for Korean cosmetics grows in the United Kingdom, while sales through iHerb are also expected to show a recent recovery.

In the European market, Korean cosmetics have begun entering offline channels in earnest this year. Silicon2 was assessed as having a strong possibility of securing distribution channels such as Douglas, owned by global private-equity firm CVC Capital Partners, as new customers.

Kim said, “Although the cosmetics sector may undergo a healthy correction in September, Silicon2’s valuation is attractive, so we expect it to be a relatively safe investment option within the sector.”

Korea Investment & Securities forecast Silicon2’s sales this year at KRW 1.652 trillion and operating profit at KRW 309 billion. The target price was calculated by applying a price-to-earnings ratio (PER) of 16.4 times to projected 12-month forward net income of KRW 275 billion. Compared with the closing price of KRW 48,500 on the 3rd, this represents 34.0% upside.”

However, the firm identified the possibility of a sustained strengthening of the won as a risk factor that could negatively affect earnings.