[This Week's Industry Insight] Silicon2 Emerges as the Savior of K-Beauty Exports

Indie Brand Lays Foundation for Global Expansion... Rapid Growth in the US
Margin Increase through Advanced Logistics... Product Expansion as a K-Brand

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Global cosmetics distribution company Silicon2 was recognized as the stock with the highest price increase in the first half of this year. Silicon2's stock price surged over 500%, rising from 7,800 KRW at the beginning of the year to 47,000 KRW at the end of last month. This is attributed to the soaring popularity of K-beauty indie brands in the U.S. market, where Silicon2 firmly controls distribution channels and is benefiting from this trend. Silicon2 is expected to accelerate growth based on its accumulated global logistics and marketing capabilities.

Direct Beneficiary of Rising Popularity of K-Beauty in the U.S. Market

Silicon2 sells K-beauty brand products to approximately 160 countries worldwide through its own platform, Stylekorean. It mainly acts as an intermediary distributor supplying domestic brand products to overseas wholesalers who want to sell Korean cosmetics.

Breaking down sales by client as of the end of Q1 this year: small and medium-sized distributors (B2B) such as overseas e-commerce and general distributors account for 83.8%, direct sales through the Stylekorean website (B2C) 3.2%, and large overseas distribution platforms like Amazon and Costco 12.9%. By country, the U.S. holds the largest share at 22.7%, followed by the Netherlands (including Europe) at 9.6%, Korea (domestic to India exports) at 8.3%, Indonesia at 7.2%, and Malaysia at 4.7%.

Silicon2's performance has surged in recent years. On a consolidated basis, Silicon2 recorded sales of 342.9 billion KRW and operating profit of 47.8 billion KRW last year, up 107% and 237% respectively from the previous year. In Q1 this year, sales reached 149.9 billion KRW and operating profit 29.4 billion KRW, achieving over 60% of last year's operating profit in just one quarter.

The increase in Silicon2's performance is largely thanks to the U.S. market. According to the Ministry of SMEs and Startups, the export value of cosmetics by small and medium enterprises in Q1 this year rose 30% year-on-year to 1.55 billion USD (approximately 2.14 trillion KRW). Cosmetics ranked first among major export items for SMEs. The U.S. is the region showing strong cosmetics export growth, with exports to the U.S. increasing by more than 60%, driving overall export growth.

Interest in Korean culture has risen in the U.S. since COVID-19. Influencers frequently showcase K-beauty, boosting the popularity of Korean cosmetics online. Amidst soaring prices in the U.S., Korean indie brands are increasingly recognized as offering good quality and reasonable prices, or "cost-effective" products, leading to increased sales.

Silicon2 established a branch in the U.S. early on in 2015 and began building its distribution network. Eunjeong Park, a researcher at Hana Securities, said, "Although many distributors exist in Korea, Silicon2 is the only one that has established branches in major overseas regions and invested in building sales networks and hub logistics systems. Thanks to this preparation, it is fully benefiting from the global expansion of K-beauty demand."

Strength in Logistics Robot System... Possesses Multiple Brands

Silicon2 records high profit margins. Its operating profit margin is around 14%, about 9 percentage points higher than YesAsia, a company engaged in similar business. The secret to the high margin lies in low logistics and transportation costs. Silicon2's main logistics center is located domestically, resulting in lower transportation costs for Korean cosmetics, whereas global company YesAsia's logistics center is in Hong Kong, so products are shipped via Hong Kong regardless of the final delivery location.

Also, while YesAsia uses partner logistics centers in each region, Silicon2 directly manages logistics by establishing logistics centers in sales regions. In fact, Silicon2 recently decided to invest about 75 billion KRW to build large-scale logistics infrastructure in the U.S., where demand is increasing. The goal is to increase inventory levels in the U.S. distribution by 3 to 4 times the current amount.

Furthermore, Silicon2 was the first domestic distribution company to introduce an AGV (Automated Guided Vehicle) logistics robot system, achieving both labor cost reduction and work efficiency. Youngsoo Han, a researcher at Samsung Securities, analyzed, "Silicon2's logistics and transportation costs relative to sales are one-seventh of YesAsia's. Thanks to logistics internalization, it can actively manage risks related to logistics disruptions or transportation cost fluctuations compared to competitors."

Another strength of Silicon2 is its global marketing capabilities and possession of numerous brands. Silicon2 operates social media channels such as YouTube, Instagram, and TikTok to connect with end consumers while conducting local marketing with overseas buyers. It has accumulated over 4 million subscribers. Additionally, it collaborates with more than 25,000 influencers in 68 countries worldwide to plan content and conduct viral marketing.

Thanks to these strengths, over 430 domestic indie brands are working with Silicon2. Brands showing the highest growth currently include Joseon Beauty, Anua, COSRX, and Round Lab. Indie brands increasingly seek Silicon2 as it saves time and costs for overseas expansion.

Silicon2's performance outlook for this year is also positive. According to financial information provider FnGuide, the consensus for Silicon2's performance this year is sales of 714.9 billion KRW and operating profit of 137.1 billion KRW, expected to increase by 108.5% and 186.8% respectively from the previous year. The operating profit margin is expected to reach 19.2%.

Silicon2 is also investing directly in domestic indie brands for future growth engines. It has invested about 2.5 billion KRW in companies such as One&d, Benton, Pyeonggang Korean Medicine Skin Science Institute, Hello Skin, Picton, and Aid Korea Company. These companies' total sales jumped from 9.2 billion KRW in 2018 to 83 billion KRW last year. Silicon2 also plans to distribute all products that can utilize the Stylekorean platform, including not only K-beauty but also food and beverages, health functional foods, fashion, and K-pop.

Valuation Pressure Due to Stock Price Rise... Major Shareholders Also Selling

Silicon2's financials are solid. As of the end of Q1 this year, its debt ratio stands at 92.7%. Although it rose from 59% at the end of last year due to increased borrowings for the U.S. logistics center investment, it remains at a manageable level. The recently borrowed 50 billion KRW is from first-tier financial institutions with interest rates between 3.8% and 3.95%. It also holds 78.4 billion KRW in cash equivalents, resulting in net borrowings of 37.6 billion KRW.

However, given the recent significant stock price rise, some analysts see valuation pressure. As of the closing price on the 1st, Silicon2's price-to-earnings ratio (PER) was 45.6 times. Considering the cosmetics industry's average PER is around 20 times, this is somewhat overvalued. The price-to-book ratio (PBR) is also high at 16.2 times. However, applying this year's earnings forecast, the PER is estimated to be around 25 to 30 times. Researcher Eunjeong Park said, "When demand surged in China from 2014 to 2016, the cosmetics industry traded at an average PER of 25 times. Considering this, we set Silicon2's target price at 49,000 KRW."

Additionally, the recent stock sales by Silicon2's management and major shareholders are expected to negatively affect investor sentiment. On May 20, when Silicon2's stock price exceeded 30,000 KRW, the spouse of CEO Sungwoon Kim began selling shares on the market. Over about ten days, 740,079 shares (1.23%) were sold at prices between 30,000 and 38,000 KRW, estimated to have cashed out over 23 billion KRW.

CEO Kim's cousin also sold shares at similar price levels, and key executives such as Inho Son, Director of Business Strategy, and Jinho Choi, Director of Sales, sold shares in the 20,000 to 50,000 KRW range.