[At a Crossroads] Sonokong② Secondary Battery Boosted Stock Price... Who Is Responsible for the Company's Losses?

Stock Prices Fluctuate Amid Rose-Colored Prospects for Secondary Batteries
Management Avoids Loss Responsibility, Appeals to Shareholders for Support

(Right) Choi Wonsik, CEO of Sonogong Materials.

Sonokong, a toy distribution company, has withdrawn from its secondary battery business, which it had launched as a new venture, after just over a year. During this period, the stock price fluctuated wildly, but Sonokong actually incurred significant losses. As a result, the market is criticizing the management for not taking responsibility for the business failure and instead asking shareholders for support.

According to the Financial Supervisory Service's electronic disclosure system on the 10th, Sonokong announced on the 30th of last month that it would dispose of its subsidiary, Sonokong Materials, for 1.289 billion KRW. This means it suffered a loss of over 1.7 billion KRW within just over a year since its establishment. As of the end of the third quarter last year, there was also a loan of 400 million KRW outstanding, but it is unknown whether it will be recovered.

Sonokong Materials was established in January last year as a corporation funded with 3 billion KRW by Sonokong to pursue the secondary battery new business. The goal was to overcome the sluggish toy business through the secondary battery venture.

The management planning the secondary battery business at Sonokong were figures from H2 Partners, which became Sonokong's largest shareholder at the end of 2023. In October 2023, H2 Partners acquired existing shares of Sonokong from former CEO Kim Jong-wan and others, securing a 24.17% stake through paid-in capital increases. Additionally, a convertible bond (CB) worth 9.6 billion KRW was issued in January last year.

After acquiring Sonokong, H2 Partners appointed Lim Sung-jin, CEO of H2 Partners, as chairman, and Lim Beom-jin, CEO of H2, as CEO. Furthermore, Choi Won-sik was appointed as co-CEO. Choi also served as the CEO of Sonokong Materials. Vice Presidents Lee Seung-jin and Seo Jin-wook led the business at Sonokong Materials.

From the establishment of Sonokong Materials, Sonokong continuously disclosed positive news related to the secondary battery business to the market. In February last year, Sonokong Materials announced that it had signed a Memorandum of Agreement (MOA) with China’s Yongjeong Lithium for lithium direct extraction (DLE) and magnetic component adsorption brine lithium refining technology and facility investment.

In March last year, it announced a long-term supply contract for industrial lithium carbonate with Bolivia Lithium Corporation (YLB). The contract stipulated that YLB would first supply 3,000 tons of lithium carbonate produced at the Uyuni plant in Potosi, Bolivia, to Sonokong Materials.

Following these announcements, Sonokong’s stock price surged. The stock, which had been trading in the 2,000 KRW range on average in 2023, rose to the 4,000 KRW range. Sonokong continued to announce news related to the secondary battery business, such as contracts in Nigeria and meetings with the Mexican government, causing the stock price to fluctuate each time.

When Sonokong announced a large-scale shareholder allocation paid-in capital increase on the 20th of last month, Sonokong Materials also announced positive news. On the next trading day, the 23rd, Sonokong Materials declared plans to invest 163 billion KRW to establish a lithium carbonate production base in the Gochang New Vitality Industrial Complex in Jeonbuk. This was a bold investment plan despite having no sales and only depleting capital.

Typically, shareholder allocation paid-in capital increases are considered negative news. Accordingly, Sonokong’s stock price plunged 23% intraday after the announcement. However, it recovered up to -13% following the positive announcement of the 163 billion KRW investment.

Ultimately, Sonokong only delivered rosy news about the secondary battery business for a year but failed to produce any actual results. As of the end of the third quarter last year, Sonokong Materials recorded zero sales and a net loss of 1.7 billion KRW. Consequently, the stock price fell to the 1,000 KRW range, lower than before.

In this situation, Sonokong is conducting a shareholder allocation paid-in capital increase, which is raising dissatisfaction among shareholders. Sonokong plans to use 9.6 billion KRW of the capital increase funds to repay borrowings such as convertible bonds. Since the stock price is lower than the conversion price of the CB, repayment is necessary. This structure is seen as shareholders bearing the burden of the management’s business failure.

Regarding this, Sonokong stated in its securities registration statement, “We reviewed several overseas locations to discover competitively priced lithium, but time and cost issues arose. Meanwhile, due to the downturn in the upstream industry and Sonokong’s difficulty in securing additional funds, we decided to discontinue the secondary battery business.”