[Funding] ZenenBio③ Invests 11.7 Billion KRW to Sustain Waste Disposal Business

Focus on Waste Disposal Business After Acquiring Gonggam ENT in 2016
Waste Sales 18.1 Billion KRW in 2017 → 4.2 Billion KRW in 2019

[Asia Economy Reporter Hyungsoo Park] Zenenbio will use 11.7 billion KRW of the funds raised through a rights offering to purchase the Gyeongsan landfill site.

Previously, Zenenbio acquired the waste disposal company Gonggam E&T in December 2016 and merged with it in May of the following year. Since then, waste disposal has become its core business. As the business continued, the remaining landfill volume at the Gyeongju waste landfill steadily decreased. As of June, the remaining landfill volume was only 53,504 tons, and it was expected that landfill operations would end in the first half of next year. To continue the business, efforts were made to secure a new landfill site, and in August 2017, a land sale contract for waste disposal facility land was signed with Gyeongsan Knowledge Industry Development. Of the 13 billion KRW sale price, 1.3 billion KRW was paid as a deposit, and the remaining 11.7 billion KRW is scheduled to be paid by December 30.

Zenenbio's environmental business division sales have declined since recording 18.2 billion KRW in 2017. Sales decreased to 6.9 billion KRW in 2018, 4.2 billion KRW in 2019, and 1.4 billion KRW in the first half of this year. The sales figures for 2018 and 2019 were 6.9 billion KRW and 4.2 billion KRW, respectively. These figures differ from the expected sales at the time of acquiring Gonggam E&T.

Zenenbio acquired 99.78% (598,668 shares) of Gonggam E&T's shares for 7.685 billion KRW. A loan of 2.3 billion KRW was converted into equity before the investment. At the time of acquisition, the value of the shares subject to evaluation was assessed at 12.6 billion KRW, considering the weighted average cost of capital (WACC) and changes in landfill unit prices.

Gonggam E&T began substantial operations after obtaining a final waste disposal permit in late October 2011. In April 2014, it received a designated waste final disposal permit, and sales from designated waste began in May. After starting operations in October 2011, the initial business phase involved securing volume, ensuring liquidity for loan repayment, and indiscriminate expansion of processing volume, resulting in a processing unit price of about 27,000 KRW per ton. Starting the designated waste processing business with higher unit prices in 2014 and securing volume considering unit prices raised the processing unit price to about 35,000 KRW per ton.

Gonggam E&T projected sales of 14.2 billion KRW, 14.4 billion KRW, and 14.7 billion KRW for 2017 through 2019, respectively. Operating profits were estimated at 6.8 billion KRW, 8.6 billion KRW, and 5.7 billion KRW. Considering that landfill operations would be completed in 2019, it was judged that no sales would occur from 2020, only management costs. This assessment was based on landfill capacity and average monthly landfill volume as of November 30, 2016, just before acquisition.

According to the Ministry of Environment's "National Waste Generation and Treatment Status" data, business waste such as non-designated waste, designated waste, and construction waste has been increasing annually. Due to the Ministry of Environment's ban on marine dumping of waste, waste treatment through landfilling has increased. Additionally, China's restrictions on waste imports have led to a situation where domestic waste must be treated domestically. Although various wastes previously exported abroad must now be treated domestically, there is a shortage of waste treatment facilities due to various permits and civil complaints.

Although business conditions are improving, if there was a difference between the expected and actual sales three years ago, it could be seen as either overly optimistic expectations or poor business management. Looking at the remaining landfill volume by year, it decreased from 519,452 tons at the end of 2018 to 74,274 tons at the end of 2019, while sales in 2019 decreased by about 40% compared to the previous year.

Zenenbio explained that it intends to manage mainly small-volume waste emitters rather than large-volume emitters. Even with the same volume, it can respond quickly to contract periods and unit prices, and this is an operational method that generates profits, it added.