[Into the Stock] Kosmax Conducts Paid-in Capital Increase... What Is the Stock Price Direction?

Stock Price Plunges 11.57% the Day After Announcing 144.3 Billion KRW Capital Increase
Investors Burdened by Capital Increase Due to High Debt Ratio
Sharp Rise in Chinese Subsidiary... Domestic Facility Investment Also Contributes to Margin Improvement

[Asia Economy Reporter Gong Byung-sun] The stock price of Cosmax, which conducted a paid-in capital increase, fell close to the scheduled issue price. Although concerns about the high debt ratio and dissatisfaction over not using available funds have emerged among investors, the consensus in the securities industry is that the decline will be short-term.

According to the Korea Exchange on the 27th of last month, Cosmax's stock price recorded 118,500 won, down 11.57% (15,500 won) from the previous trading day. The stock price, which was in the 130,000 won range, dropped to the 110,000 won range in one day. On the 28th of last month, it also fell 5.91% (7,000 won). As of the 3rd, Cosmax closed the market at 117,000 won.

The reason Cosmax's stock price started to fluctuate is due to the paid-in capital increase. On the 26th of last month, Cosmax announced that it would issue 1.3 million common shares at a scheduled issue price of 111,000 won, raising a total of 144.3 billion won through the paid-in capital increase. Cosmax explained that 81.5 billion won of the funds raised will be used for facility investment, and 62.8 billion won will be used to improve financial structure and secure liquidity.

Clearly, more money is being spent on facility investment than on improving the financial structure. Additionally, there is high expectation that performance will exceed market consensus based on improvements in China in the first quarter of this year. Nevertheless, investor reactions are lukewarm. Some investors expressed concerns that the stock price could fall below the scheduled issue price. So, what aspects of Cosmax caused the stock price to start falling?

A Trend Similar to 2016... Investors Dissatisfied as Paid-in Capital Increase Conducted Despite High Retention Ratio

First, the high debt ratio. Cosmax shows a higher debt ratio compared to competitors. As of the end of last year, Cosmax's debt ratio was 337%, while Amorepacific's was 277%, and Korea Kolmar's was 149%.

The securities industry says that the high debt ratio is inevitable because Cosmax has made aggressive investments. A securities industry official explained, “Cosmax adopted a strategy of making pre-investments to increase production capacity before the demand for cosmetics in the target regions rises, and then benefiting when demand arises,” adding, “The key is whether profitability strengthens in line with aggressive investments.”

However, investors are uneasy because the situation is unfolding similarly to October 2016. At that time, Cosmax used a paid-in capital increase of 93.9 billion won to spend 61.3 billion won on expanding domestic production facilities and 32.6 billion won on operating funds and debt repayment. Although more money was spent on facility investment, the debt ratio reached 412% as of the quarterly report prepared at the end of September 2016, so more emphasis was placed on debt repayment.

As a result, the stock price, which was in the 140,000 won range at the time, plummeted by 10.69% (15,500 won) on October 24, 2016, compared to the previous trading day. On November 24, 2016, it closed at 97,300 won, breaking the 100,000 won level. It took about four months to return to the original price level.

Among investors, dissatisfaction with the retention ratio is also significant. The decision to conduct a paid-in capital increase despite having available funds for reinvestment is seen as disregarding existing investors. Since the scheduled issue price is lower than the stock price at the time of the paid-in capital increase announcement and the high debt ratio means that if the paid-in capital increase is for financial structure improvement, the stock price decline would harm existing investors. As of the end of last year, Cosmax's retention ratio reached 7,118%.

Securities Industry: "Decline Due to Paid-in Capital Increase Will Be Short-Term"... Notable Growth in Chinese Subsidiary

However, the securities industry views the stock price decline due to this paid-in capital increase as a short-term issue. Unlike in 2016, the profit structure has improved. Shin Su-yeon, a researcher at Shin Young Securities, predicted, “The operating profit margin, which was around 4.8% at the end of last year, is expected to improve to 6.8% this year.” In 2016, despite conducting a paid-in capital increase, the operating profit margins in the first and third quarters of 2017 were only 4.3% and 4.36%, respectively.

In particular, the securities industry is paying attention to the growth of the Chinese subsidiary. Daishin Securities expects Cosmax's Chinese subsidiary's sales in the first quarter of this year to increase by 42% compared to the same period last year. Hanwha Investment & Securities also forecast a 42.8% increase. This is the result of securing online customers by increasing production efficiency through aggressive investments and targeting major e-commerce platforms in China. Additionally, due to the base effect caused by COVID-19, order volumes from existing customers are also increasing.

Although the retention ratio is high, considering the location of this facility investment, it is deemed inevitable by the securities industry. The expansion through this paid-in capital increase is in Pyeongtaek, Gyeonggi Province, and it is important whether the domestic corporation has the capacity to reinvest. As of the end of last year, the domestic corporation held only 17.5 billion won in cash and cash equivalents separately. Cosmax's consolidated cash and cash equivalents amount to 102.5 billion won, meaning most of the cash is held by the Chinese subsidiary.

A securities industry official explained, “The Chinese subsidiary is also preparing for reinvestment, so there is no capacity to bring cash to the domestic corporation,” adding, “With a high debt ratio and difficulty in obtaining loans, it seems the decision to conduct a paid-in capital increase was made.”

Furthermore, the additional facilities are expected to contribute to meeting the recovering demand in the color cosmetics market. The operating rate of the color cosmetics division at the Hwaseong plant in Gyeonggi Province has already exceeded 100%. Han Yoo-jung, a researcher at Daishin Securities, predicted, “Due to the manual nature of the color cosmetics process, the margin structure was poor, but this facility investment will allow the introduction of automated equipment,” adding, “Full-scale production of main products is expected to be possible from the second half of 2023.”