[Funding] KC Cottrell Faces Sharp Rise in Debt Ratio Amid Large-Scale Losses

Unexpected Losses Reflected in Large-Scale Project Last Year
Concerns Over Shrinking Air Quality Market Amid Governments' Renewable Energy Promotion Plans
Business Expansion Through Ship Desulfurization, Odor Reduction Devices, and ESCOs

[Asia Economy Reporter Hyungsoo Park] KC Cottrell, which recorded large-scale losses last year, is planning a rights offering to improve its financial structure.

According to the Financial Supervisory Service's electronic disclosure system on the 6th, KC Cottrell will raise funds through a rights offering issuing 0.28 new shares per existing share, followed by a general public offering of forfeited shares. The planned issue price of the new shares is 6,890 KRW, with a total of 4.6 million shares to be issued. The company plans to raise 31.7 billion KRW, using 10 billion KRW to repay debt and 21.7 billion KRW for raw material purchases.

KC Cottrell is an air pollution control environmental plant company that installs air pollution control equipment (APCE) in domestic industrial complexes such as power plants and steel mills. It supplies dust collection equipment, gas treatment equipment, and waste treatment equipment. Since 1973, it has been manufacturing air pollution control environmental plants for 48 years. KC Cottrell is understood to hold market shares of approximately 70-80% in electrostatic precipitators, 30-35% in flue gas desulfurization facilities, and 25-30% in selective catalytic reduction facilities.

Last year, KC Cottrell recorded sales of 327.9 billion KRW, an operating loss of 44.7 billion KRW, and a net loss of 63.1 billion KRW. Although sales increased by 9.1% compared to the previous year, the company turned to a deficit. The company explained that unexpected losses occurred in large-scale projects such as the desulfurization facilities at Goseong High Power Plant and Gangneung Anin Power Plant. During the construction period, subcontractors went bankrupt, and the company also suffered flood damage in August last year.

The large-scale losses also affected the financial structure. KC Cottrell's debt ratio was 132.0% in 2017, 182.4% in 2018, and 335.6% in 2019. As of the end of last year, the debt ratio rose to 2,183.57%. The total equity decreased from 76.2 billion KRW in 2019 to 12.3 billion KRW last year. Retained earnings sharply declined due to net losses. The debt stood at approximately 269.6 billion KRW as of the end of last year.

The company stated that it conservatively reflected the expected losses from ongoing large projects in the 2020 first half financial statements. It expects that the possibility of additional large-scale losses is low. However, due to the nature of the environmental plant industry, unexpected additional costs may arise if design changes occur during construction. There is also a possibility that construction costs may be incurred before completion and not recovered in a timely manner. Unexpected construction delays could lead to deteriorated profitability.

Along with concerns about deteriorating profitability, the shrinking of the upstream market is also cited as a factor to watch for growth slowdown. Currently, worldwide regulations to curb carbon dioxide emissions and reduce greenhouse gases are being strengthened to prevent environmental pollution. Governments are implementing policies to expand the supply of renewable energy, which is relatively more environmentally friendly compared to fossil fuel power generation.

According to the government's '9th Basic Plan for Electricity Supply and Demand,' nuclear and coal-fired power plants are being gradually reduced, and eco-friendly energy centered on renewable energy is being significantly expanded. Ten aging coal-fired power plants will be shut down by next year, and six coal plants including Dangjin Eco Power will convert fuel to LNG as part of coal-fired power reduction plans. The annual share of coal power generation is expected to decrease by 10.5 percentage points from 40.4% in 2019 to 29.9% in 2030. This increases the likelihood of reduced demand in the air environment market.

To sustain continuous growth, KC Cottrell is newly pursuing businesses such as ship desulfurization devices, odor (VOC) reduction devices, air environment equipment for tunnels and underground spaces, and energy-saving specialized company (ESCO) projects. The International Maritime Organization (IMO) is strengthening regulations on sulfur oxide emissions from all ships in operation. KC Cottrell has entered the ship desulfurization device market using desulfurization technology proven on land.