[At a Crossroads for Listed Companies] ③ NCN, Separate Financial Statements Lightened by Physical Division

NCN Advances Autonomous Driving New Business with ISP Technology
Invests Massive Funds in Autonomous Driving Technology Development
Continues New Business Investment through Rights Offering

Every year, March to April becomes a brutal period in the KOSDAQ market. This is the time when business reports and audit reports are released, and depending on the contents of these reports, listed companies may be delisted or designated as management stocks. Especially, companies that have recorded losses for several consecutive years struggle desperately to survive in the stock market by conducting large-scale fundraising or restructuring. Asia Economy aims to help investors by examining the present and past of companies with continuous losses and forecasting their prospects.

[Asia Economy Reporter Park Hyungsoo] NCN, a fabless company specializing in video security and automotive video processing chips, recorded operating losses from 2016 to 2018. Although it turned to operating profit on a separate basis after a physical division last year, it has not escaped from a deficit on a consolidated basis.

NCN, which grew based on camera image signal processing (ISP) semiconductor technology, generates its main sales in the video security market. The primary customers for video security image processing chips are companies producing video security devices such as closed-circuit (CCTV) cameras, internet protocol (IP) cameras, CCTV systems, and digital video recorder (DVR) systems.

As China has grown into the world's largest producer of video security devices, competition has intensified. With Chinese companies increasing market share by leveraging price competitiveness, NCN's growth curve has also flattened. AI technology is being integrated into the video processing chip sector, which needed new growth drivers. The company plans to develop technology, anticipating that intelligent technology will be necessary in the video processing chip sector.

NCN has also expanded its business area from the video security market to the automotive market. It supplies automotive camera image processing chips through camera manufacturers or camera module companies. Additionally, it has developed automotive black boxes. Utilizing the image processing technology held in the video processing chip sector, it launched front and rear full high-definition (FHD) black boxes in October 2015. These include features such as lane departure warning, speed camera alerts, lead car departure alerts, and night image quality enhancement. The company also developed products combining Internet of Things (IoT) GPS, enabling vehicle monitoring through communication-type services. It entered the high-function black box market by developing Wi-Fi wireless black boxes. By developing sensor control technology, it is preparing products equipped with carbon dioxide gas sensors, volatile organic compounds (VOCs), and dust sensors.

It plans to launch its own brand products in overseas markets such as the United States, Australia, Japan, and Southeast Asia. To enter overseas markets, it is developing products with segmented strategies tailored to each country's characteristics by reflecting the opinions of buyers active locally.

Although technology development has been steady, sales growth has been slow. On a consolidated basis, sales were 64.1 billion KRW in 2016, 53.4 billion KRW in 2017, and 58.8 billion KRW in 2018. While sales stagnated, investment in new business sectors increased. Selling and administrative expenses rose from 23.6 billion KRW in 2016 to 29.3 billion KRW in 2018 due to continuous R&D investment in the strategic automotive electronics business sector. Naturally, the deficit widened, recording 1.3 billion KRW in 2016, 10.9 billion KRW in 2017, and 16.5 billion KRW in 2018. On a separate basis, operating losses were recorded for three consecutive years from 2016 to 2018, raising concerns about designation as a management stock.

The company explained that overall sales and profitability have been negatively affected since 2016 due to losing price competitiveness to Chinese competitors in the CCTV and DVR image processing semiconductor business sectors.

On January 1, 2019, NCN physically split off its automotive electronics business sector. This decision was made to create a governance structure capable of swift and specialized decision-making suited to the business characteristics and to focus on core businesses. By separating the automotive electronics business sector, which requires continuous new investment, it achieved an operating profit of 4 billion KRW on a separate basis for the cumulative third quarter of last year. However, on a consolidated basis, it recorded an operating loss of 10.3 billion KRW.

Although designation as a management stock occurs when operating losses are recorded for four consecutive years on a separate financial statement basis, NCN is unlikely to be designated as such unless it records a large loss in the fourth quarter of last year.

With reduced concerns about management stock designation, NCN conducted a large-scale rights offering in the second half of last year. It allocated 0.558 new shares per existing share, raising 15.6 billion KRW. The entire raised fund is planned to be invested in the subsidiary's new business.

The company explained that the automotive electronics business sector takes at least five years from product planning to mass production due to the nature of the business. Approximately 40 billion KRW was invested by the end of 2018 before the split. Even after the split, additional investment is required for products under research and development and for certification costs after development. Until mass production begins and sales are generated in earnest, NCN has no choice but to support funds to its subsidiary.

Korea Investment & Securities, which managed the rights offering, explained that as of the first quarter of last year, among NCN's subsidiaries, Vedas and NC BIT were in a state of capital erosion, and the newly established company Nextchip was continuously recording net losses. It viewed that if the capital erosion status of major subsidiaries continues, NCN may have to continuously inject costs.

NCN accounts for R&D expenses as selling and administrative expenses. Total selling and administrative expenses increased by 24%, from approximately 23.6 billion KRW in 2016 to about 29.3 billion KRW in 2018. The proportion of ordinary R&D expenses is the highest. As of the first quarter of last year, out of a total of 8.1 billion KRW in selling and administrative expenses, 4.6 billion KRW was spent on ordinary R&D expenses.

Although it succeeded in raising funds for investment in new businesses, NCN's stock price has been fluctuating between 2,000 and 2,400 KRW. Although it has developed autonomous driving-related technology, since this technology is directly related to passenger safety, it takes a long time to go through certification procedures and secure orders.