● Disappointing results

2Q16 review: Soulbrain delivered 2Q16 consolidated revenue of W177.0bn (+21.9% YoY, +2.7% QoQ) and operating profit of W27.6bn (+22.0% YoY, -12.3% QoQ). Revenue beat the consensus, but operating profit missed expectations. Highmargin semiconductor materials revenue fell modestly, while low-margin display materials revenue increased. Margins were weaker than expected due to 1) changes in sales mix, 2) higher one-off R&D expenses, and 3) a marginal rise in raw material costs. However, overall revenue remained stable. Net profit came in at W25.5bn (+22.3% YoY, +11.5% QoQ), beating the consensus due to the partial reversal of provisions for idle facilities.

3Q16 preview: In 3Q16, we forecast revenue at W184.7bn (+10.9% YoY, +4.4% QoQ) and operating profit at W31.0bn (+15.0% YoY, +12.2% QoQ). Display materials revenue should increase marginally due to supply to new customers. Along with volume growth, semiconductor materials revenue should gradually improve beginning in 3Q16, and is expected to begin full-fledged growth in late 3Q16. In 3Q16, we are upbeat about a QoQ rise in earnings, and believe earnings will fluctuate on an upward trend through 2017.

● Momentum from semiconductor/display materials and electrolytes

The display materials business should see additional growth, as the plant in China completed in late 2015 is due to come fully online in 2H. The growth of the semiconductor materials business should pick up speed from 2017, thanks to its customers` aggressive investment. Of note, as 3D V-NAND requires advanced materials, this should lead to revenue growth (both quantitative and qualitative). Meanwhile, utilization for electrolytes should gradually rise from late 2H; while the business should have a minimal impact on earnings in the near term, it should become a new growth driver in the medium to long term.

● Reiterate Buy and Raise TP to W81,000

We keep our Buy call on Soulbrain, and raise our target price to W81,000, which is equivalent to 2.0x P/B (the average level over the past five years, when shares made headway). Despite sluggish 2Q16 results, we revised up our target price based on expectations for 1) rising demand for materials as a result of customer process migration (3D NAND) and 2) additional growth from the full-fledged operation of the Chinese display materials plant. Shares may come under pressure due to weaker-than-expected 2Q16 results. However, given the start of 3D NAND momentum, we think the stock still looks attractively priced, trading at a 12-month forward P/B of 1.65x and P/E of 10.0x.

By Ryu Young, Analyst at Mirae Asset Daewoo Securities

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