[Corporate Exploration] KenkoAerospace, UAM Small Aircraft Mass Production Technology... Strong Global Network

The Yoon Suk-yeol administration is fostering future mobility (transportation means) such as electric and hydrogen vehicles, autonomous vehicles, and Urban Air Mobility (UAM). It has set a plan to commercialize UAM by 2025. The Presidential Transition Committee announced, "Mobility will be developed as a core future growth engine as a key axis to realize a digital platform government." The global mobility market is expected to grow to a scale of 900 trillion won by 2030. As the government decided to actively support to secure technological and industrial leadership, attention is focused on companies engaged in related businesses. Hanwha Systems has entered the UAM market through active equity investments backed by financial strength. Kencoa Aerospace is expanding its business area into the UAM sector based on the technological capabilities accumulated in the aerospace field.

[Asia Economy Reporter Jang Hyowon] The Urban Air Mobility (UAM) technological capabilities possessed by aerospace company Kencoa Aerospace (hereinafter Kencoa) are gaining attention. Based on its technology to mass-produce small aircraft, Kencoa has been proactively expanding its presence in the UAM market for several years. In particular, its solid network with major U.S. aerospace companies is expected to serve as a foothold into the global UAM market.

Kencoa, which was listed in 2020 under Tesla requirements, operates businesses including aircraft modification and maintenance, aircraft production, aerospace raw material supply, and space launch vehicle and drone businesses. By sales type, the proportions are U.S. civil and defense aircraft and space launch vehicles (27%), domestic civil and defense aircraft (46%), aerospace raw materials (26%), and MRO (2%).

The country with the largest share of Kencoa's sales is the United States. As of last year, sales in the U.S. accounted for 44% of the total. The rest are exports to other countries (33%) and domestic sales (23%). Kencoa has two subsidiaries in the U.S.: 'Kencoa Aerospace LLC,' a specialized company for defense aircraft and space launch vehicle parts processing, and 'California Metal & Supply Inc,' which supplies raw materials in the aerospace field. Major clients include leading U.S. aerospace companies such as Boeing, Lockheed Martin, and SpaceX.

Last year, consolidated sales reached 54.7 billion won, a 72.8% increase compared to the previous year. Despite the aviation industry's slump due to COVID-19, sales growth was achieved. However, operating losses amounted to 13.8 billion won. This is analyzed to be due to initial investment costs for the aircraft modification business, which started last year. Kencoa explained that it recorded cost of goods sold as an inventory valuation loss reflecting a high cost ratio, but if the cost ratio stabilizes in the future, it could be reversed as accounting profit.

Kencoa also expects to turn profitable from the fourth quarter of this year. This is the expected time when mass production stabilization of the aircraft modification business will be completed. Currently, the two U.S. subsidiaries, which account for 40-50% of consolidated sales, are generating net profits.

Kencoa's growth engine is its UAM technology. Kencoa has been promoting related businesses for 2-3 years as the first Korean partner of leading overseas UAM technology companies. Kencoa has strengths in the aviation safety certification sector essential for UAM business, having mass-produced 23 units of the Air Force's initial training aircraft KT-100 in 2016. It is also creating synergy by investing in 'AstroX,' which owns its own personal air vehicle (PAV) model.

In November last year, Kencoa established 'Kencoa Aviation' in Songdo, Incheon, and is actively fostering the UAM business by expanding research and development (R&D) personnel. Currently, it is securing technological capabilities by promoting large-scale government R&D projects related to UAM and drones.

Researcher Noh Shingyu of Korea Financial Analysts Institute said, "After signing partnerships with German flying car company 'Volocopter' and urban airport company 'Skyports,' Kencoa signed a memorandum of understanding (MOU) related to urban air mobility with Jeju Island," adding, "The trading relationships with major U.S. clients and possession of UAM-related technology will be key foundations for increasing the company's value."

Financially, Kencoa's debt ratio rose to 328.3% last year compared to the previous year. This is due to convertible bonds (CB). In February last year, Kencoa issued the 7th series CB worth 30 billion won. The raised funds were used for R&D, facility expansion for space launch vehicle business growth, and mergers and acquisitions (M&A).

Due to the CB, consolidated total liabilities increased from 52.3 billion won in 2020 to 81 billion won last year. According to the company, actual borrowings from financial institutions excluding CB and lease liabilities are about 20 billion won, and the debt ratio excluding these is about 150%. Furthermore, if the CB is converted into shares, capital will increase, and the nominal debt ratio is expected to decrease.

The conversion price of this CB is 13,102 won and has been convertible since last February. Recently, conversion requests worth 1.8 billion won were made, and currently, about 28.2 billion won of CB remains outstanding. The number of convertible shares is 2,293,428 shares.

Kencoa explained, "Of the 30 billion won 7th series convertible bonds, 40% have call options, so volume control is possible," adding, "The remaining 60% is expected to be converted sequentially, so the overhang issue will not be significant."