Silicon2 Slows in 3Q; How Can It Break Away from Traditional Distribution? [Click e-Stock]

3Q Revenue to Rise, but Profit Expected to Fall Short of Expectations
Sharp Drop in Won-Dollar Exchange Rate and European Heat Wave Take Their Toll
Inventory Sell-Through and Securing New Sales Channels Are Key

Even amid the K-beauty boom, Silicon2 is expected to report third-quarter results this year that fall somewhat short of market expectations. It is selling more products, but a sharp drop in the won-dollar exchange rate is squeezing profits, while unexpectedly extreme heat has delayed shipments. Analysts say the company needs to move beyond the risks of handling inventory directly, develop new sales channels, and shed the traditional distributor mindset.

On October 22, Samsung Securities cut its target price for Silicon2 by 14.5% to KRW 47,000. The previous day's closing price was KRW 32,300. The brokerage nevertheless maintained its "Buy" rating.

The main reason for the target-price cut is the company's third-quarter performance. Samsung Securities expects Silicon2 to post revenue of KRW 420.5 billion and operating profit of KRW 76.5 billion in the third quarter of this year. That would represent increases of 40.5% and 21.3%, respectively, from the same period last year. While growth remains solid, operating profit is expected to come in 12.9% below the market consensus. This is attributed to disruptions to shipments to Europe and inventory risks.

Silicon2 buys cosmetics from domestic brands and sells them overseas. It develops overseas sales channels and handles logistics on behalf of the brands. A sharp fall in the won-dollar exchange rate can reduce revenue in won terms even when the same amount is sold. The exchange rate fell by an average of around 5.6% during the third quarter, the peak season for inventory accumulation, which analysts say affected the company's results.

Weather in Europe also proved a setback. Samsung Securities noted that the heat wave in August caused some disruptions to transportation operations. It expects third-quarter revenue in Europe to reach KRW 175.2 billion, up 71.9% from a year earlier, but with quarter-on-quarter growth limited to 1%.

Growth, however, remains strong in other regions. In North America, the company is expected to generate revenue of KRW 92 billion, supported by demand from local retailers such as Ulta Beauty. That would be a 26.7% increase from the same period last year. In Latin America, revenue is forecast to rise 128.5% year over year to KRW 34.9 billion, driven by its Mexican subsidiary.

Silicon2's own inventory management has also become increasingly important. Given its model of purchasing customers' products directly, securing inventory in anticipation of growth is necessary, but capital remains tied up in inventory until the products are sold. Along with reports of expansion into more overseas markets, investors will need to assess how smoothly the accumulated inventory is being sold.

"Despite its strong foothold in Europe and Latin America and its focus on Korean indie-brand cosmetics, the market continues to view the company through the lens of a traditional distribution business," said Jeong Dong-hee, an analyst at Samsung Securities. "It needs to reduce its inventory turnover period, which stood at 150 days in the second quarter, and consistently grow operating profit by more than 30% annually by expanding new channels, such as switching to direct transactions with Douglas in Europe and launching operations at its Brazilian subsidiary."

This content was produced with the assistance of AI translation services.