[Funding] Gyeongnam Pharmaceutical Faces Setback in Fundraising Plans Due to Stock Price Decline

First Phase Price of Rights Offering Set at 2,540 Won, 30% Lower Than Planned
Debt Repayment Reduced from 20 Billion to 15 Billion Won
Profitability Expected to Improve Through Efficient Advertising and Replacement of Aging Equipment

[Asia Economy Reporter Park Hyungsoo] Amid the domestic stock market showing weakness this year, warning signs have been raised regarding the fundraising plan of Gyeongnam Pharmaceutical. The scale of fundraising is expected to shrink by more than 12 billion KRW compared to the resolution for a paid-in capital increase at the end of last year.

According to the Financial Supervisory Service's electronic disclosure system on the 26th, Gyeongnam Pharmaceutical, which is conducting a paid-in capital increase through a rights offering followed by a general public offering of unsubscribed shares, has set the first issuance price at 2,540 KRW. This is about 30% lower than the issuance price of 3,650 KRW anticipated when the board of directors resolved the capital increase. Based on the first issuance price, the amount to be raised is 27.4 billion KRW, smaller than the initially expected 39.4 billion KRW.

Earlier, on the 24th of last month, Gyeongnam Pharmaceutical held a board meeting and resolved a paid-in capital increase allocating 0.54 new shares per existing share. They will issue 10.8 million new shares. Of the funds raised, 20 billion KRW will be used to repay borrowings, and 12 billion KRW will be allocated for advertising expenses. As of the end of Q3 last year, Gyeongnam Pharmaceutical recorded a debt ratio of 61.1% and a borrowing dependency of 40.1% on a consolidated basis. In July 2020, when purchasing the Gyeongnam Pharmaceutical Tower located in Gangnam-gu, Seoul, they borrowed 24 billion KRW from Shinhan Bank as part of the purchase price. The maturity date is July next year, but after raising funds as planned through the capital increase, they decided to repay early in April to reduce interest burden.

Gyeongnam Pharmaceutical experienced increased sales through aggressive marketing in 2020. With the global artist BTS serving as the advertising model, sales of their flagship product 'Lemona' surged significantly. Strong sales of the 'Jaha Noryeok Jeoryak' product line and the launch of the new product 'Gyeol Collagen' contributed to recording consolidated sales of 70.9 billion KRW in 2020, nearly a 60% increase compared to 44.8 billion KRW in 2019. Despite advertising expenses increasing by 4.7 billion KRW compared to the previous year due to aggressive marketing, operating profit turned positive at 2.2 billion KRW.

Accumulated sales for the first three quarters of last year were 51.3 billion KRW, slightly higher than the same period the previous year. Increased sales through home shopping channels led to higher commission fees, worsening profitability. Although the contract with BTS ended last year causing a decline in Lemona product sales, sales of health functional foods and general foods increased.

Considering management performance over the past two years and market characteristics of vitamins and health functional foods, Gyeongnam Pharmaceutical’s management judged that profitability could be improved through efficient advertising expenditure and upgrading of aging facilities.

This is why the board held a meeting and resolved the paid-in capital increase. However, Gyeongnam Pharmaceutical’s stock price plunged more than 17% immediately after the capital increase news and continued to decline thereafter. With the KOSDAQ market showing continuous weakness this year, Gyeongnam Pharmaceutical’s stock price was also affected. The stock price, which was above 4,000 KRW before the capital increase resolution based on the adjusted price, fell by 30% within a month. The first issuance price was also lowered. The final issuance price will be confirmed on March 2.

Considering the reduced fundraising amount, Gyeongnam Pharmaceutical has revised its funding plan. The debt repayment amount was reduced from 20 billion KRW to 15 billion KRW, and advertising expenses were cut from 12 billion KRW to 7 billion KRW. The shortfall caused by the reduction in fundraising will be covered by internal funds. As of the end of Q3 last year, Gyeongnam Pharmaceutical held 5.3 billion KRW in cash and cash equivalents.

The largest shareholder of Gyeongnam Pharmaceutical is Blueberry NFT, holding a 22.89% stake. The number of new shares allocated to Blueberry NFT in the capital increase is 2,472,273 shares. They will subscribe to 100% of the new shares. Blueberry NFT resolved at the board meeting on the 24th of last month not to transfer shares, including those allocated through the capital increase, for the next year.