[This Week's Industry Insight] SoluM, an Electronic Components Specialist, Reduces Samsung Dependence and Begins Full-Scale Growth

Manufacturing Electronic Price Display Devices... Double-Digit Annual Sales Growth
Global No. 2 Business with Communication Technology... Accelerating New Business Expansion through Overseas Investment

Editor's NoteDear individual investors dreaming of successful investments. How well do you know the stocks you invest in with your own money? In the unrefined and chaotic online environment filled with all kinds of information, Asia Economy aims to be your hands and feet, eyes and ears, delivering accurate information about companies. Each week, we focus on companies that rank high in stock inquiries on the financial information provider FnGuide, delivering everything from basic information to analyses of related companies such as partners, customers, and investors. We will explain the financial status, performance, and future value of companies in an easy-to-understand manner. We meet you every week under the name of "This Week's Watchlist," highlighting stocks of interest. This week, we analyzed SoluM, an electronic device company that spun off from Samsung Electro-Mechanics and is rapidly growing.

SoluM is an electronic components manufacturing company established in 2015 as a spin-off from the Digital Module (DM) division of Samsung Electro-Mechanics. It produces various products such as power modules, Electronic Shelf Labels (ESL), and 3in1 boards. Initially, it mainly focused on producing power modules. Recently, the ESL segment, which has seen a surge in demand from distributors, has grown rapidly and driven performance improvements.

SoluM Major Business Divisions

Sales Tripled in 5 Years

SoluM's growth rate is steep, with sales tripling in just three years. Sales, which were slightly over 500 billion KRW in 2017, expanded to 1.69 trillion KRW last year. The consensus among securities firms for this year's sales exceeds 2 trillion KRW. This means the company has maintained an average annual sales growth rate of 20-30%. Last year, it recorded an impressive 47% sales growth rate.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which excludes bad debt expenses, improved from a 300 million KRW loss in 2017 to a profit of 112.6 billion KRW last year. Operating profit also turned from a 18.6 billion KRW loss to a 75.6 billion KRW profit during the same period. As sales rapidly increased, profitability excluding costs steadily improved.

The strong performance trend continued into the first quarter of this year. First-quarter sales and operating profit were 579 billion KRW and 50.2 billion KRW, respectively, up 39% and 234% year-over-year. Analyst Eun-ae Cho from Ebest Investment & Securities stated, "As of the end of last year, the order backlog stood at 1.6 trillion KRW," adding, "Sales recognition from this solid order backlog is expected to accelerate in the second quarter as well."

Rapid Growth in ESL Segment

The ESL segment, the company's core product, is driving growth. ESLs are devices that display information such as product names, prices, and barcodes on electronic panels (displays) in real-time via wireless communication networks. They can show desired information instantly, improving efficiency in retail and inventory management processes as well as manufacturing production lines. Recently, global retailers like Walmart and Tesco have increased investments in logistics and retail management, rapidly boosting ESL demand.

With only about 10% global market penetration, ESL is expected to experience rapid growth. SES IMAGOTAG, the global No.1 player in the ESL segment, forecasts high annual growth rates by region through 2027: Europe (18%), North America (55%), and other regions (43%). Specialized research firms such as QY Research Korea, MarketsandMarkets, and Mordor Intelligence also predict double-digit annual growth in the ESL market over the next 5-6 years.

SoluM anticipates that ESL will expand beyond traditional electronic shelf labeling to all display areas requiring communication. The company notes that usage is expanding not only among global retailers with increasing demand but also in factories and logistics centers of companies like General Motors (GM) and Volkswagen, patient management in hospitals, and real-time updates of key information in offices. It was even provided as a smart solution to SpaceX's production plant operated by Elon Musk.

Rising to Global No. 2 Player

Amid market expansion, SoluM has increased its ESL market share, rising from the global third place to second place since last year. While the No.1 player, SES IMAGOTAG, holds a dominant 58% share, SoluM raised its share from the high teens in 2021 to 24% last year. The third-place player, Pricer, saw its share drop from 24% to 19% within a year due to SoluM's strong performance. SoluM's market share is expected to exceed 30% this year.

The high growth in the ESL business is attributed to the competitiveness of the new product "Newton." SoluM adopted a wireless radio frequency (RF) broadband communication method for ESL, ensuring stable and fast data transmission and reception. Its battery life is also evaluated as longer compared to competitors' products. Unlike SES IMAGOTAG, which outsources production, SoluM vertically integrates all supply chains from design to manufacturing and distribution, providing cost advantages and quick responses to customer customization demands.

Researcher Ko Eui-young from Hi Investment & Securities said, "Global retailers are aggressively increasing ESL investments to reduce labor costs and implement omnichannel strategies," adding, "With ESL's global market penetration around 10%, growth is expected to accelerate." He forecasted that SoluM's ESL sales would increase from 355 billion KRW last year to 760 billion KRW this year.

Growth Opportunities in Power Modules and 3in1 Boards

Alongside the rapid growth of ESL, SoluM is exploring growth opportunities while maintaining stable cash flow in the power module and 3in1 board businesses. SoluM's power module business generates stable profits through contracts with major domestic and international clients such as Samsung Electronics and LG Electronics. These semiconductor components perform power conversion and control functions for servers and monitors, with market demand expected to steadily increase. They are applied in TVs, mobile phones, computers, laptops, lighting, servers, and electric vehicle chargers.

SoluM has recently been actively pioneering new markets in the power module segment. It signed a memorandum of understanding (MOU) with Wonik P&E for the electric vehicle charger power module business. It also participated in national projects related to renewable energy in cooperation with a Vietnamese state-owned enterprise.

The 3in1 board integrates three key TV components?the power board, video board, and tuner?into one product. Combining these three parts reduces costs and simplifies assembly processes. It is supplied to clients such as Samsung Electronics and LG Electronics, recording stable sales. With the growth of the LED lighting market, demand for control 3in1 boards is increasing, raising expectations for market growth.

However, competition is intensifying as Samsung Electronics pursues supplier diversification, with Dongyang ENP developing the same product and establishing production facilities. Analyst Cha Yoon-seok from IBK Investment & Securities noted, "Due to sluggish TV and server markets, sales and profitability of 3in1 boards and power modules were weak in the first quarter," adding, "From the second quarter, as the upstream market recovers and new demand emerges, performance is expected to improve, albeit modestly."

SoluM continues to increase overseas investments. In February, it decided on a 38.8 billion KRW paid-in capital increase by rights offering to its subsidiary SoluM USA Inc. to establish its own factory in Mexico. The factory is planned to be completed by the second half of this year and start full-scale operations next year. Once completed, the new Mexico plant will begin new businesses such as electric vehicle chargers and lighting.

Low Major Shareholder Ownership

SoluM is evaluated to have weakened governance stability due to relatively low major shareholder ownership. As of the end of the first quarter this year, the largest shareholder is the founder, CEO Jeon Seong-ho, and 19 others holding 15.62%. The National Pension Service is the second-largest shareholder with a 5% stake. The company holds 2.34% of treasury shares. Samsung Electro-Mechanics, the former second-largest shareholder, sold its entire 9.30% stake through a block deal, completely severing equity ties with Samsung.

An investment banking (IB) industry insider commented, "With Samsung Electro-Mechanics selling all its shares, the friendly major shareholder ratio has decreased, weakening governance stability," adding, "Although shares are dispersed among small shareholders and governance is not immediately at risk, improvements are needed to establish a stable management system."