[Funding] KD's Critical 23.5 Billion KRW Capital Increase... "96% of Total Shares Issued as New Stocks"

[Asia Economy Reporter Hyunseok Yoo] KD is conducting a paid-in capital increase worth 23.5 billion KRW by newly issuing shares equivalent to the total number of outstanding shares. After receiving a disclaimer of opinion from auditors for the 2018 and 2019 fiscal years, its performance has sharply deteriorated, and through this capital increase, it plans to make intermediate payments for its apartment complex project and repay debts.

According to the Financial Supervisory Service’s electronic disclosure system (DART) on the 4th, KD is proceeding with a paid-in capital increase through a rights offering to existing shareholders worth 23.52 billion KRW.

The planned issue price is 1,470 KRW per share, and the planned number of shares to be issued is 16 million. This corresponds to approximately 96.82% of the total 16,525,360 shares currently issued by KD. Share dilution is unavoidable.

Despite considering share dilution, the reason for proceeding with the paid-in capital increase is interpreted as securing funds for the ongoing apartment complex construction project and reducing the increased debt ratio. KD will use 7.3 billion KRW of the raised funds as the first priority to pay the first intermediate payment for the Gunsan New Station Area land.

KD plans to build a total of 878 apartment units in Naheung-dong, Gunsan-si, Jeollabuk-do. Earlier, on April 28, it signed a contract to purchase land at 926-0 Naheung-dong, Gunsan-si, Jeollabuk-do. Approximately 4.3 billion KRW was paid as a contract deposit. On October 28, it must pay about 7 billion KRW as the first intermediate payment. Subsequently, by April 28, 2024, it must pay a total of 43.3 billion KRW through five intermediate payments and one final payment.

KD faced delisting reasons due to a disclaimer of opinion caused by audit scope limitations on its financial statements for the 2018 and 2019 fiscal years. Although it later received an unqualified audit opinion after re-audit, the aftermath led to no new orders from 2018 to 2020, causing a significant drop in sales.

On a consolidated basis, KD’s sales increased from 21.4 billion KRW in 2018 to 78.7 billion KRW in 2019 but sharply declined to 31.2 billion KRW last year. The order backlog, which was 100.8 billion KRW in 2018, also decreased to 2.9 billion KRW in 2019 and 2.1 billion KRW last year.

Additionally, cash equivalents decreased from 5.4 billion KRW in 2018 to 4.2 billion KRW in the first quarter of this year. The debt ratio surged due to a capital reduction without compensation conducted last year. On a consolidated basis, it recorded 416.80%, and on a separate basis, 487.29%. In 2020, these were 414.95% and 120.52%, respectively.

13.7 billion KRW will be used for debt repayment. KD’s reliance on borrowings was 30.80% and 25.38% on a consolidated and separate basis in 2018, respectively. In 2019, it was 39.92% and 32.64%, last year 41.53% and 42.43%, and in the first quarter of this year, 40.92% and 46.02%, showing a continuously increasing trend.

It is also difficult to pay interest. From 2018 to the first quarter of this year, except for 2019 when operating performance was favorable, the interest coverage ratio has been negative. An interest coverage ratio below 1 means that the profit generated from operating activities is insufficient to cover financial costs. To improve this, KD will first use 2 billion KRW to repay loans from Korea Securities Finance Corporation and then inject 11.7 billion KRW to repay bridge loans for the Haeundae U-dong project site.

The company explained in the securities registration statement, "If the interest coverage ratio remains below 1 in 2021, KD may be designated for external audit by the Financial Supervisory Service in accordance with the Act on External Audit of Stock Companies, etc."

Meanwhile, this capital increase may also reduce the largest shareholder’s stake. In this capital increase, the largest shareholder, KD Technology Investment (holding 8.99%), plans to participate in subscription at about 100%. However, the subscription decision of the related party, CEO Taeil Ahn (holding 5.14%), has not yet been finalized.

Through the securities registration statement, KD explained, "The largest shareholder plans to subscribe to about 100% of the allocation in the paid-in capital increase, so there will be no decrease in KD Technology Investment’s shareholding ratio, but CEO Taeil Ahn’s shareholding ratio is expected to fall to about 2.61%. Assuming 100% subscription by the largest shareholder, the combined shareholding ratio of the largest shareholder and related parties is expected to decrease from 14.13% to 11.60%."