The authors are analysts of Shinhan Investment Corp. They can be reached at [email protected] and [email protected], respectively, — Ed.
Domestic leader in purchasing & supply management solutions
EMRO posted standalone sales of KRW30.7bn (+11.0% YoY) and operating profit of KRW4bn (+42.2% YoY) for 3Q21. Cumulative number of clients using the company’s cloud-based SCM (supply chain management) solutions rose from 34 in 2020 to 71 in 3Q21. Licensing and technical support operations continued on a steep growth track thanks to new client additions.
Supply chain disruptions caused by the COVID-19 pandemic have highlighted the importance of efficient SCM solutions. EMRO provides comprehensive B2B solutions for all steps of the SCM process, from the development of purchasing strategies up to the implementation of complete SCM systems. The company’s business model boasts strong lock-in effect, with customers unlikely to switch to a different provider upon adoption of its SCM solution. Nearing 320 in total, EMRO’s clients are mostly large-sized enterprises.
Steady growth in subscription fee revenue on customer lock-in effect
Backed by strong customer lock-in effect, EMRO has seen only one contract termination (caused by closure of the client’s business) since its establishment. We thus recommend focusing on growth in subscription fee revenue from cloud usage and technical support operations, which offer high operating leverage. Combined sales have continued steadily upwards from KRW7.1bn in 2018 to KRW7.7bn in 2019 and to KRW8.5bn in 2020. With digital transformation efforts leading to a rapid increase in number of new customers adopting cloud-based SCM solutions, we estimate combined sales from cloud usage and technical support operations at KRW11.7bn for 2021.
Complete business automation offered through AI solutions
Key investment points for 2022 are: 1) progress made by the new AI solution business; and 2) increase in number of customers for cloud-based SCM solutions. While SCM solutions focus on purchasing management and automation of existing operations, EMRO’s new AI solutions offer demand forecasting, price simulation and risk management based on data classification and estimation. We expect to see rapid adoption of the new AI solutions by existing clients looking to take a step further on automation.
We estimate full-year 2021 sales at KRW47.8bn (+6.6% YoY) and operating profit at KRW7.8bn (+21.1% YoY). Operating margin likely increased from 14.4% in 2020 to 16.4% in 2021, and should continue upward to 18.4% in 2022 on growth in earnings from technical support and cloud usage.
