[Asia Economy Reporter Yoo Hyun-seok] Cherrybro, a chicken specialty company, is issuing bonds with warrants (BW) through a public offering to raise funds for debt repayment and feed purchases. The financial structure has deteriorated due to increased borrowings caused by a decline in broiler prices. However, since broiler prices have not rebounded significantly, there is a high possibility that this will only be a temporary fix. A rebound in the price of broilers, the company's main product, is urgently needed to improve the financial structure and performance.
According to the Financial Supervisory Service on the 18th, Cherrybro will issue 15 billion KRW worth of detachable BWs through a public offering. The yield to maturity (YTM) and yield to put (YTP) are 4.0% per annum compounded quarterly. Each warrant grants the right to purchase one common share at 2,530 KRW. The exercise period is from next month 24th to May 24, 2023. The general public subscription period is from the 21st to the 22nd.
◆ Concerns over BW exercise price = Cherrybro plans to use 8 billion KRW of the raised funds for debt repayment. The total borrowings of Cherrybro, which were 111.879 billion KRW in 2017, increased to 151.695 billion KRW in the first half of this year. Of this, short-term borrowings amount to 108.08 billion KRW and long-term borrowings 43.687 billion KRW. Cherrybro increased its loans secured by promissory notes (Yusans) last year by purchasing raw materials in advance to increase production volume. The initial purchase funds for raw materials increased, leading to higher debt.
The debt ratio, which was 133.6% in 2017, soared to 289.7% in the first half of this year, and the borrowing dependency rose from 43.9% to 53.9%. Additionally, the interest coverage ratio dropped from 4.9 times to -7.6 times. It has recorded below 1 for three consecutive years since 2018. The interest coverage ratio is the operating profit divided by interest expenses. A value below 1 means operating profit is less than interest expenses, indicating an inability to cover interest payments.
After issuing the BW and repaying borrowings, Cherrybro's current ratio is expected to increase by 7.0 percentage points from 48.3% in the first half of this year to 55.3%, and the proportion of short-term borrowings related to Yusans is expected to decrease by 8.3 percentage points from 76.1% to 67.8%. On the other hand, the debt ratio and borrowing dependency are expected to be 299.2% and 55.0%, respectively, as BWs are recognized as liabilities on the financial statements. However, if investors exercise the warrants, they will be classified as equity, which could lead to capital expansion in the future.
The remaining 6.7 billion KRW will be used to purchase feed raw materials for poultry farming and breeding. Fund disbursement is planned from this month through December.
From the investors' perspective, there may be concerns about subscribing to Cherrybro's BW because the new share issuance price is higher than the current stock price. The exercise price of Cherrybro's BW was set at 2,530 KRW on the 17th, while the stock price at 1:56 PM that day was 2,430 KRW. The warrants can be exercised starting from the 24th. If the stock price falls, the exercise price can be adjusted, with the minimum adjustment price for this BW being 1,803 KRW.
Although there is no immediate price advantage, there seems to be no problem raising funds. This is because the underwriter, KB Securities, will fully subscribe to any unsubscribed portion. However, general investors will bear the price burden due to the underwriter's full subscription. According to the prospectus, "An amount equivalent to 9.0% of the actual subscription amount will be paid as a forfeiture fee," and "This results in the underwriter's purchase price for forfeited shares being about 9.0% lower than that of general subscribers, which may negatively affect bond prices."
◆ Worsening financial situation... The only hope is a rebound in broiler prices = Cherrybro, famous for 'Cheogajip Yangnyeom Chicken,' was established in 1991 and listed on the KOSDAQ market on December 4, 2017. It is a KOSDAQ-listed company that has vertically integrated breeding, hatching, feed, slaughtering, processing, and distribution by utilizing its chicken-related subsidiaries. Its main product is chicken, holding a joint 4th place market share alongside Chamfre, following Harim, Olpum, and Dongwoo as of last year.
Cherrybro's performance sharply deteriorated starting in 2018. Sales, which were 361.3 billion KRW in 2017, decreased to 293.8 billion KRW in 2018. It recorded an operating loss of 500 million KRW in 2018. Last year, sales were 301.5 billion KRW with an operating loss of 14.5 billion KRW, and in the first half of this year, sales were 144.2 billion KRW with an operating loss of 18.5 billion KRW.
The decline in broiler prices has worsened performance. According to the Korea Rural Economic Institute, the average broiler farm price was 1,648 KRW in 2017 but dropped to 1,475 KRW in 2018. Especially last year, it fell to around 1,259 KRW. The first half of this year was about 1,028 KRW.
In the third quarter, July and August prices rose to 1,215 KRW and 1,230 KRW, respectively, but still below 2017 levels. Broilers accounted for 73.05% of Cherrybro's sales by product in the first half of this year, with feed at 16.25%. Other products and chicks accounted for 5.36% and 3.39%, respectively, and hatching eggs 1.30%. Therefore, the high sales proportion of broilers means performance is affected by price fluctuations, making performance improvement difficult in the near term.
The prospectus also states, "Due to oversupply, broiler prices have been low, deteriorating Cherrybro's profitability, and the recent outbreak of COVID-19 has delayed broiler price recovery, making short-term profitability improvement difficult."
Last month, NICE Credit Rating assigned a 'BB-/Negative' rating to Cherrybro's 1st series senior unsecured BW. Researcher Lee Kang-seo explained, "The domestic broiler market experiences repeated cycles of oversupply and shortage annually, causing continuous price fluctuations. Despite Cherrybro's efforts at vertical integration through upstream and downstream business consolidation, its ability to respond to volatility is insufficient, making it difficult to escape operating losses during 2020."
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