[At a Crossroads: Listed Companies]⑤ Jaeyeong Solutec, Excelling in the Nano-Optics Business But...

Major Shareholder Stake Plummets Amid KIKO Crisis
China Business Worsens Due to THAAD Deployment Decision
Finding New Opportunities with Increased Smartphone Camera Integration

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 targets. 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 Hyungsoo Park] Jaeyoung Solutec produces autofocus (AF) modules for mobile phones by combining mold technology with IT technology. The sales proportion of AF modules increased from 54% in 2017 to 70% in 2018, and 75% in the first half of 2019.

Jaeyoung Solutec established and has been operating the Plastic Application Technology Research Institute since 1995. In 2005, it established the JDH Research Center. The demand for camera modules is increasing not only for mobile phones but also for vehicles and drones. The lens focusing actuator was developed to reduce the number of magnets, which are core components of the camera module autofocus actuator, while implementing equivalent characteristics. This reduces manufacturing costs, simplifies and lightens the actuator, and decreases magnetic influence, thereby enhancing the stability of surrounding devices. The company also developed technology for a 'wide-angle lens system for vehicle cameras' used to monitor the front and rear of vehicles.

◆Improved Performance through Technology Development Efforts= With technology development efforts aligned with global IT trends, Jaeyoung Solutec's sales steadily increased. On a consolidated basis, sales rose from 119.1 billion KRW in 2017 to 128.6 billion KRW in 2018. As of the third quarter of last year, cumulative sales reached 104.3 billion KRW.

The Nano-Optics Division of Jaeyoung Solutec is responsible for manufacturing camera modules. The cumulative sales for the third quarter of 2019 were 77.2 billion KRW, accounting for 74% of total sales. Samsung Electronics, a major customer for smartphone cameras, is strengthening its strategy for mid-to-low-end smartphone models, increasing the adoption of multi-camera setups. Premium smartphone models also prefer triple cameras over dual cameras, leading to continuous growth in Jaeyoung Solutec's camera module sales. According to market research firm IHS, the global shipment volume of smartphones equipped with dual cameras increased from approximately 570 million units in 2018 to 720 million units last year. It is expected to rise to 860 million units this year. Shipments of smartphones with triple cameras are also projected to increase from 30 million units in 2018 to 210 million units this year.

The camera modules produced by Jaeyoung Solutec are supplied to Powerlogics, which manufactures compact camera modules (CCM). Powerlogics combines lenses and printed circuit boards (PCBs) with the camera modules and supplies them to Samsung Electronics.

◆Crisis at Chinese Local Subsidiary Due to THAAD Incident= Although the business division grew steadily, external variables hindered Jaeyoung Solutec's growth. To secure manufacturing bases, the company established and operated local subsidiaries in China and Kaesong. However, political and economic factors caused the loss of manufacturing bases, resulting in significant financial losses. Increased outsourcing costs due to the relocation of production facilities from the Kaesong Industrial Complex in 2016 and poor business performance of the overseas subsidiary in Haeju, China, overlapped. On a consolidated basis, operating losses reached 15.2 billion KRW and net losses 36.3 billion KRW in 2017. In 2018, operating losses were 3.4 billion KRW and net losses 7.4 billion KRW, reducing the deficit. After recording large losses, funds for acquiring tangible assets such as buildings and machinery were raised through bank loans and issuance of convertible bonds and convertible preferred shares. The debt ratio soared to 832.2% at the end of 2017. Although it decreased to 280.19% the following year, the financial condition cannot be considered solid.

The suspension of the Kaesong Industrial Complex operations and China's economic retaliation measures following the THAAD deployment decision caused massive damage. Due to financial deterioration from impairment of bonds of the Chinese subsidiary, the company was designated as an investment caution stock. It was removed from this designation as operating performance improved last year.

In 2018, Samil Accounting Corporation, which conducted the external audit, stated that current liabilities exceeded current assets by 30.482 billion KRW, indicating significant uncertainties that raise substantial doubt about the company's ability to continue as a going concern. The continuation as a going concern depends on the success of the next fundraising plan and financial and management improvement plans to achieve stable operating profits.

Despite the heavy financial burden, Jaeyoung Solutec could not delay mass production of high-resolution modules amid fierce smartphone competition. Urgently, it raised 18.6 billion KRW through a rights offering at the end of 2018, using the funds for operating and facility expenses. The company planned to establish automated manufacturing processes for newly developed ultra-high-resolution modules over 48 million pixels and bidirectional actuators.

At the end of last year, it issued bonds with warrants (BW) through a rights offering to raise 25 billion KRW. Of the raised funds, 10 billion KRW was planned for debt repayment, 10 billion KRW for facility investment, and the remaining 5 billion KRW for material purchases and outsourcing processing costs.

◆Concerns Over Low Major Shareholder Ownership= As funds were raised consecutively, the major shareholder's ownership ratio decreased. CEO Hakkwon Kim, the largest shareholder, holds 7% of Jaeyoung Solutec's shares. Including related parties, the ownership is only 12.5%. CEO Kim founded the personal business Jaeyoung Mold Precision in 1976 and has served as CEO since its incorporation in December 1984. He has over 40 years of experience. Based on his technical knowledge, CEO Kim has served as chairman of the Korea Mold Industry Cooperative Federation, technical expert for the Ministry of Science and Technology, president of the Kaesong Industrial Complex Enterprise Association, and director of the Root Industry Promotion Institute.

Although CEO Kim has devoted himself to establishing and nurturing Jaeyoung Solutec for decades, his ownership ratio has continuously declined due to losses from the foreign exchange derivative product 'KIKO.' At the end of 2009, the major shareholder's ownership was 49.57%, but it dropped to 17.92% by the end of 2010.

During the workout caused by the KIKO incident, the main creditor banks converted debt to equity under the Corporate Restructuring Promotion Act and acquired new shares. The main creditor banks sold all their shares from February to April 2018. The ownership ratio further declined at the end of 2018 due to dilution from the conversion of convertible bonds and redeemable convertible preferred shares issued to raise funds for facility investment. Since then, the ownership ratio has continued to decrease, with CEO Kim and related parties holding 12.52%.

Jaeyoung Solutec recognizes that the major shareholder's ownership ratio is insufficient for absolute defense of management rights. CEO Kim is exploring various ways to increase his ownership ratio to stabilize management rights.