[Funding] AST, Funds Poured into Public BW... Has the Aircraft Parts Industry Hit Bottom?

BW Subscription Rate Hits 11,198.63%
Passenger Demand Expected to Recover After Vaccination, Boosting Sales
Raised 30 Billion KRW to Repay 29.6 Billion KRW Debt

[Asia Economy Reporter Hyungsoo Park] The aircraft manufacturing industry is going through a dark tunnel due to the impact of the novel coronavirus disease (COVID-19). As air passenger demand plummeted, airlines around the world canceled aircraft orders or postponed existing investment plans. Domestic aircraft parts manufacturer Aste also experienced a decline in sales and disruptions in cash flow. Aste issued bonds with warrants (BW) through a public offering to repay its debts.

According to the Financial Supervisory Service on the 18th, Aste will issue BWs worth 30 billion KRW to repay the principal and interest of convertible bonds (CB) issued in 2018. The coupon rate is 1.0% per annum, and the yield to maturity (YTM) and yield to put (YTP) on the bonds are applied at a 3-month compound annual rate of 3.0%. The subscription price for new shares is 5,830 KRW, and the maturity date is October 19, 2023.

As a result of the general public subscription conducted from the 14th to the 15th, the subscription rate recorded 11,198.63%. The high subscription rate for Aste’s BW appears to reflect expectations due to the spread of COVID-19 vaccinations. Vaccinations are being actively administered in the United States and Europe. If herd immunity is achieved, industries that have been depressed by COVID-19 are likely to recover. Demand for overseas travel, which has been suppressed for over a year, may revive, and investment in the aviation industry could increase again.

Aste, an aircraft parts manufacturer, exclusively supplies the bulkhead, which is the rear fuselage where the tail fin of Boeing’s main production model 737 is attached, and the aircraft’s bulkhead. The rear fuselage bears high load pressure because the tail fin, which adjusts altitude and direction, is attached. Unlike the central fuselage, it has many curves and bends, requiring precise processing and assembly.

The aircraft parts industry is difficult for new entrants due to the technical skills required for product manufacturing, stringent certification procedures, and the need to build trust with aircraft manufacturers. Generally, suppliers deliver parts until the model is discontinued, and there are only one or two suppliers for each part.

With a stable growth foundation, Aste’s sales steadily increased from 97.2 billion KRW in 2017 to 117 billion KRW in 2018 and 144.6 billion KRW in 2019. However, as COVID-19 spread worldwide, Aste’s growth momentum was halted. The cumulative sales for the third quarter last year were 33.5 billion KRW, a 67% decrease compared to the same period the previous year. Due to the decline in sales, operating losses of 19.7 billion KRW were recorded in the third quarter alone.

Due to the nature of aircraft parts manufacturing, the period from purchase, production, transportation, delivery, to accounts receivable collection takes about 285 days. If deliveries are suddenly delayed and orders canceled while sales are increasing, the burden of working capital inevitably grows. When purchasing raw materials that depend on imports, payment must be made the following month.

As of the end of September last year, Aste’s inventory assets amounted to approximately 172.5 billion KRW. NICE Credit Rating explained, "Inventory assets of major finished product manufacturers, including Boeing, remained at higher levels than usual last year," adding, "Due to Boeing’s decision to reduce aircraft production and the resulting decrease in customer order volumes, Aste’s working capital burden continues."

As of the end of September last year, on a consolidated basis, Aste’s debt ratio was 191.4%, and its debt dependency was 53.2%.

With the financial structure burden increasing, the possibility of an early redemption request for the CB issued two years ago has grown. Previously, in October 2018, Aste issued CBs to institutional investors, raising 26 billion KRW. At issuance, the conversion price was 11,191 KRW, but due to a stock price decline, the conversion price was adjusted down to 8,476 KRW. Currently, Aste’s stock price is hovering around 5,500 KRW. Considering the gap between the conversion price and the stock price, investors holding the CB are likely to request early redemption. Aste plans to use 26 billion KRW of the funds raised from issuing BWs to repay the principal and interest of the CB. The remaining funds will be used to repay 3 billion KRW borrowed from KB Securities, and about 400 million KRW will be spent on raw material purchases.