[At a Crossroads: Listed Company] Seongan Gains Attention as Lee Jae-myung Stock, But Actually Accumulates Losses for 7 Years 'Quagmire'

[Asia Economy Reporter Lim Jeong-su] Seongan, one of Korea's leading textile companies, is facing difficulties as losses have accumulated over seven years due to a decline in export volumes caused by COVID-19. Sales have sharply decreased for two consecutive years, and the accumulated deficits have worsened the company's financial capacity. Although some losses were offset by valuation gains through asset revaluation, it is expected to be difficult to escape the deficit trap easily unless the business recovers.

Cost Ratio Exceeds 100% Due to Sales Decline... Deficit Widens

Seongan's sales have shown a declining trend for two consecutive years. Consolidated sales slightly decreased from 220 billion KRW in 2018 to 216.9 billion KRW in 2019. Especially in the third quarter of last year, sales were only 97 billion KRW due to a decrease in exports caused by COVID-19. This figure is more than 40% lower than the same period last year.

As sales declined and raw material prices rose, the cost ratio increased, causing the operating loss to widen. The cost ratio, which was in the low 90% range, rose to 97% in 2019 and exceeded 100% in the third quarter of last year. In particular, the performance of Seongan's subsidiary, Seongan Hwasum, deteriorated significantly, leading to an overall decline in Seongan's profitability.

Accordingly, Seongan's operating losses increased from 5 billion KRW in 2017 to 10.7 billion KRW in 2018 and 13 billion KRW in 2019. By the third quarter of last year, it recorded a loss of 13.7 billion KRW, suggesting that the annual deficit likely increased compared to the previous year. In the third quarter of last year, EBITDA also turned negative for the first time.

Deteriorating Financial Condition... Reduced Financing Capacity Including Real Estate and Deposit Collateral

The financial structure is rapidly deteriorating due to accumulated losses. With consecutive net losses, equity capital decreased from 107.8 billion KRW in 2017 to 62 billion KRW by the third quarter of last year. During the same period, the debt ratio rose from 177% to 366%. It is estimated to have approached 400% by the end of last year.

The burden of borrowings is also increasing. Net borrowings, excluding cash equivalents from total borrowings, increased from 79.9 billion KRW at the end of 2016 to 154.4 billion KRW at the end of last year. During the same period, total borrowings grew from 90.5 billion KRW to 174.7 billion KRW.

There is also a significant burden to repay or refinance short-term borrowings. About 80% of total borrowings are short-term borrowings that must be repaid or refinanced within one year. Seongan's subsidiary, Seongan Hwasum, issued 39 billion KRW worth of 2-year maturity private bonds with call options at an interest rate of 4.925%, underwritten by IBK Investment & Securities last year.

Most borrowings are facility funds borrowed from KDB Industrial Bank and loans from Daegu Bank, with which the company has had a long-term relationship, so immediate refinancing is not expected to be difficult. Seongan provides collateral such as owned real estate and deposits during the borrowing process. The maximum claim amount on real estate collateral is 251.2 billion KRW. Some borrowings are guaranteed by the Korea Credit Guarantee Fund.

A credit rating agency official evaluated, "Investments in overseas subsidiaries such as the Egypt corporation and poor performance also increase the overall financial burden."

◇Repeated Asset Revaluations as a 'Breakthrough' (?)... Not a Fundamental Solution

Seongan has recently conducted successive asset revaluations as a measure to improve its financial structure.

Seongan recently revalued real estate in Geomdan-dong and Duryu-dong, Daegu, with a book value of 48.3 billion KRW, at 65.6 billion KRW reflecting market prices. The revaluation gain amounts to 17.3 billion KRW. Although liabilities (deferred corporate tax liabilities) increased somewhat, it can largely offset the net loss (-13.7 billion KRW) up to the third quarter of last year.

In 2018, the company also improved its financial structure through asset revaluation. The same real estate included in the recent revaluation list and six units of Daemyeong Bellion at 127 Beobwon-ro, Songpa-gu, Seoul, were valued at 50.6 billion KRW, resulting in a valuation gain of 25.4 billion KRW. Of this, 19.8 billion KRW was recognized as capital to improve the financial structure, but due to consecutive losses, equity capital has again decreased to 62 billion KRW.

A securities analyst explained, "Asset revaluation only improves some financial figures such as the debt ratio, but since cash inflow does not occur until the real estate is sold, Seongan's financial burden is bound to continue."

Capital increase through paid-in capital is also considered difficult. Due to consecutive losses, attracting investors is challenging, and there is a significant concern about dilution of major shareholders' stakes. An investment banking (IB) industry official analyzed, "Currently, special related parties including Chairman Park Sang-tae hold 33.38% of shares, so without personal contributions from major shareholders, dilution of shares is inevitable."

Meanwhile, Seongan clarified that the stock price, which recently moved in the 300-400 KRW range, surged to as high as 1,385 KRW when it was spotlighted as a company related to Gyeonggi Province Governor Lee Jae-myung, stating that Governor Lee and Vice President Park Sang-wan of the company are merely alumni who graduated from the same high school and have no business relationship. Even after Vice President Park sold his shares on the market, the stock price did not fall significantly and was trading in the 1,150 KRW range as of the 2nd.