Solus Advanced Materials
The author is an analyst of Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
1Q23 review: Operating loss comes in at KRW19bn (RR YoY, QoQ)
Solus Advanced Materials posted an operating loss of KRW19bn (continued loss YoY, QoQ) on sales of KRW112.8bn (-9% YoY, +3% QoQ) for 1Q23, faring worse than market expectations for a KRW14.5bn loss. A sharp drop in earnings from cash cow electronic materials business added to the predicted weakness in copper foil and battery copper foil earnings, resulting in a steeper operating loss than initially expected.
Battery copper foil sales increased to KRW40.2bn (+34% YoY, +81% QoQ) in 1Q23, gradually recovering from the impact of electricity cost hikes in Hungary. Operating loss from the business was in the high-KRW10bn range, marking slight improvement from previous year levels. We expect to see notable earnings recovery from 2Q23-3Q23 as the effect of electricity cost declines starts to kicks in in earnest.
Electronic materials sales dropped to KRW27.4bn (-12% YoY, -19% QoQ), leading to the sharp decline in 1Q23 operating profit. In our view, a decline in shipment volume was inevitable, with the impact of weak seasonality adding to the downturn of the main client industry (display). Going forward, the directionality of the electronic materials business will likely hinge on improvement in display market conditions and expansion of product portfolio for both light-emitting and non-light-emitting materials.
Outlook brighter for overseas battery foil business in 2H23
Preemptive overseas expansion of the battery copper foil business helped Solus Advanced Materials secure new clients, but took a toll on near-term profits. From 2H23, however, the overseas battery foil business should start to see a return on preemptive investments alongside the stabilization of cost variables in Europe. In Hungary, the effect of capacity expansion will likely be felt in full from 4Q23 with the Ph2 plant (23,000 tons) to ramp-up operations from 2Q23. All in all, we expect earnings from battery foil to improve from sales of KRW112.6bn and operating loss of KRW82.9bn in 2022 to sales of KRW251.9bn and operating loss of KRW35.1bn in 2023, with the business to break even on a quarterly basis from 4Q23.
Retain BUY and target price of KRW46,000
We retain BUY on Solus Advanced Materials and keep our target price unchanged at KRW46,000. The company’s preemptive overseas investments should bear fruit in Hungary from 2024 and in Canada from 2025. While earnings may continue to improve at a slow pace in the near term, we believe the company stands to see longer-term benefits from increasing efforts to form a supply-chain bloc for secondary batteries.