Ecomister Continues Deficit After Listing... Can the Underwriter's Forecast Be Trusted?

[Asia Economy Reporter Yoo Hyun-seok] Eco Meister, which was listed on the KOSDAQ market in 2018, has fallen into a situation where it is delinquent on some of its borrowings from financial institutions due to liquidity shortages. Its stock price has hit the lowest level since its listing. Some in the financial investment industry are increasingly concerned about the special listing due to the large gap between the performance forecasts presented at the time of listing and the actual results.

According to the financial investment industry on the 26th, Korea Ratings downgraded Eco Meister's 3rd unsecured convertible bonds credit rating to CCC on the 25th and registered it as a Negative Review subject. Korea Ratings explained, "It is understood that liquidity risk has materialized recently, as some of Eco Meister's borrowings from financial institutions have become delinquent," adding, "We plan to monitor the collection of receivables, the progress of liquidity response measures underway, whether delinquencies are resolved through these measures, and responses to borrowings maturing."

Eco Meister entered the KOSDAQ market in March 2018. Although it invested the funds raised through its initial public offering (IPO) in facility investment and research and development, its performance was poor. On a consolidated basis, sales decreased from 23.7 billion KRW in 2017 to 14.6 billion KRW in 2018. It recorded an operating loss of 800 million KRW in 2018, turning to a deficit. Although cumulative sales for the third quarter of last year increased by 32.44% year-on-year to 14.5 billion KRW, it continued to post an operating loss of 1.8 billion KRW.

Its financial structure also deteriorated after listing. The debt ratio on a standalone basis, which was 94.70% in 2017, rose to 375.30% in 2018. As of the third quarter of last year, it soared to 396.20%. During the same period, short-term borrowing dependence increased from 32.10% to 43.90%, and borrowing dependence also rose from 41.70% to 55.90%. Deficit increased from 37.1 billion KRW in 2018 to 40 billion KRW as of the third quarter of last year. Cash equivalents were only 255.93 million KRW as of the third quarter of last year.

Ultimately, Eco Meister became delinquent on some borrowings from KDB Industrial Bank. Eco Meister said that the plan to collect accounts receivable was delayed but expected to be resolved soon. A company official said, "We were scheduled to collect accounts receivable last week, but the schedule was delayed," adding, "We plan to collect and repay this week."

Founded in 1976, Eco Meister manufactures railway vehicle inspection equipment and recycles steel and non-ferrous metal slag, which are industrial wastes generated in metal manufacturing processes. It was listed on the KOSDAQ market through a technology special listing. However, as poor performance continued, there was a significant difference from the outlook presented by the underwriters at the time of listing. Reviewing the investment prospectus from March 2018, the underwriters, Daishin Securities and Hanwha Investment & Securities, evaluated that most of Eco Meister's railway business division's products were supplied to the Korea Railroad Corporation and the Korea Rail Network Authority, and that the impact of economic fluctuations was not significant. They also explained that sales occurred depending on new openings, the establishment of railway vehicle depots, and the replacement timing of previously supplied equipment.

In particular, when calculating Eco Meister's public offering price, the underwriters projected sales of 39.8 billion KRW and 53.9 billion KRW in 2018 and 2019, respectively. Operating profits were expected to reach 7.1 billion KRW and 12.4 billion KRW, respectively. The gap rate between actual sales and forecast for 2018 reached 63%. Eco Meister predicted last year's sales by comparing the full-year forecast and the annualized figure for the current period (January to December of last year), expecting sales of 20.1 billion KRW. The gap rate reached 72.94%. This has led to criticism that the underwriters may have set high performance forecasts to justify a high public offering price.

In its third-quarter report last year, Eco Meister explained, "The reasons for the large gap rate and ongoing losses are that, unlike expected at the time of listing, uncertainties in the upstream market were not anticipated, and new orders for SAP (Slag Atomizing Plant) equipment in the environmental business division occurred for the first time in August last year after listing, not as much as expected," adding, "In the railway business division, sales decreased due to unforeseen variables such as the replacement demand timing for aging CNC wheel truing machines and CNC wheel lathes introduced at each railway vehicle depot being delayed more than expected."