[After CB Issuance] ① EDGC, Thanks to COVID-19, Conversion Request at Redemption Threshold

Issued 20 Billion Won Convertible Bonds in July Last Year... Small Gap Between Stock Price and Conversion Price Until February
Stock Price Surges on Affiliate's COVID-19 Test Kit Export News
Expectations for Shareholder Value Enhancement Due to Improved Performance

As the domestic stock market successfully achieved a 'V'-shaped rebound, listed companies that issued convertible bonds (CB) last year have breathed a sigh of relief. In March, due to the impact of the novel coronavirus disease (COVID-19), stock prices plummeted, and many listed companies traded below the conversion price. As the risk-averse sentiment spread and fundraising became difficult, listed companies were anxious about facing a 'liquidity crisis' if bondholders demanded early redemption. Fortunately, with the stock market rebound surpassing the conversion price, many CB investors have entered a phase where they can expect high returns. Asia Economy reviews the financial status of listed companies that issued CBs last year, whether profitability improved after fundraising, and the returns for CB investors.

[Asia Economy Reporter Park Hyungsoo] As COVID-19 spread worldwide, demand for diagnostic kits surged. This is why domestic diagnostic kit companies have increased export performance this year. EDGC has continued a sharp rise in stock price this year, buoyed by news that its affiliate Solgent developed and began exporting COVID-19 diagnostic kits. Investors who invested in EDGC convertible bonds (CB) last year can request conversion to common stock starting from the 1st of this month. Until three months ago, conversion was uncertain, but since the current stock price is about 120% higher than the conversion price, most investors are expected to request conversion. Despite a recent increase in new COVID-19 cases, EDGC’s stock price has shown sluggishness due to concerns over overhang (large pending sell orders).

◆ Early redemption replaced by conversion request within 3 months = In July last year, EDGC issued convertible bonds worth 20 billion KRW to raise operating funds. FocusN4 Superrich Pacific Specialized Private Equity Fund No.1, A-One B-type Value-up Specialized Private Equity Fund, and Very Good Growth Support Fund invested in the convertible bonds. The convertible bonds have no coupon interest or maturity interest. Investors gave up interest income, hoping to gain capital gains by converting to common stock as EDGC’s stock price rose. The initial conversion price was 6,699 KRW, with a condition allowing adjustment if the stock price fell, but it could not be lowered below 75% of the initial conversion price.

From early July last year to the end of February this year, EDGC’s stock price moved within a box range of 4,000 to 6,000 KRW. Convertible bond investors, having given up interest, hoped the stock price would rise above the conversion price, but until three months before the start of conversion requests, the stock price movement was ambiguous for conversion.

In March, EDGC’s stock price began to surge. Earlier, on the 27th of last month, EDGC announced that its affiliate Solgent’s COVID-19 diagnostic kits would be exported to China, Vietnam, the Middle East, and other regions. They exported kits for 25,000 tests to major hospitals in Beijing and Shenzhen, China. Last month, Solgent also received Emergency Use Authorization (EUA) from the U.S. Food and Drug Administration (FDA) for its COVID-19 diagnostic kit product (DiaPlexQ™). This diagnostic kit uses real-time polymerase chain reaction (RT-PCR) to detect COVID-19 infection. Solgent is the first domestic diagnostic equipment company to be registered as a procurement supplier for the U.S. Federal Emergency Management Agency (FEMA) stockpile strategic materials.

EDGC’s subsidiary, EDGC Healthcare, is the largest shareholder of Solgent. EDGC is pursuing a merger with EDGC Healthcare. Upon completion of the merger, EDGC will become the largest shareholder of Solgent. As the unlisted Solgent’s performance improves due to COVID-19 diagnostic kit exports, more investors want to invest in the listed company EDGC’s stock, and the stock price rose to an intraday high of 23,850 KRW on March 31.

Researcher Yoon Juho of Meritz Securities explained, "In March-April this year, Solgent could produce 1 million test kits per month, but by the end of May, production expanded to 5 million tests. Transitioning from small-scale to mass production is expected to reduce costs."

EDGC has maintained the 11,000 KRW level, supported by Solgent’s effect. The conversion price of the convertible bonds was lowered to 5,389 KRW after two rounds of repricing. Considering that conversion requests can be made from the 1st of next month, convertible bond holders are expected to hurry to convert. The expected return rate reaches 100%.

◆ Profitability improvement needed to offset shareholder value dilution = Not only convertible bond investors but also EDGC has profit opportunities through convertible bonds. At issuance, EDGC secured the right to exercise a put option to sell up to 30% of the issued volume. To guarantee the exercise of the put option by EDGC, convertible bond holders are prohibited from converting 30% of the bonds until June 1 next year. In other words, only up to 70% of the holdings can be converted.

The likelihood of the volume for which EDGC secured the put option being circulated on the market is low. Through two rounds of repricing, the convertible shares increased from 2,985,520 shares to 3,711,263 shares. There are concerns about stock price shocks due to large-scale conversion followed by market sales. Therefore, EDGC is expected to reduce the shock by either canceling or converting and holding the 30% volume depending on market conditions.

To increase diluted shareholder value due to the increased number of issued shares, EDGC’s performance must improve. If the 20 billion KRW raised last year was invested to increase corporate value, the investment effect may gradually appear. Last year, EDGC recorded sales of 56.7 billion KRW, operating loss of 8.6 billion KRW, and net loss of 8.6 billion KRW. Although sales increased by more than 160% compared to the previous year, losses also expanded. The company explained that the sales increase was due to higher sales of in vitro diagnostic equipment and reagents by subsidiaries. The reasons for the expanded losses included ▲ increased research and development (R&D) investment to advance genome services ▲ expanded investment to secure ultra-precise genome data.

This content was produced with the assistance of AI translation services.