Organic T Cosmetics Converts CB at a Price Higher Than Stock Price [After CB Issuance]

[Asia Economy Reporter Jang Hyowon] The convertible bonds (CB) of Organic T Cosmetic, a Chinese infant cosmetics company, were converted at a conversion price higher than the current stock price. Despite incurring a loss immediately upon conversion, conversion was chosen instead of redemption.

According to the electronic disclosure by the Financial Supervisory Service on the 19th, Organic T Cosmetic announced the day before that the second series of convertible bonds (CB) worth 5.028 billion KRW had been converted. The number of shares exercised was 6,215,451, accounting for 5.17% of the total issued shares.

Previously, on May 14 last year, Organic T Cosmetic issued the second series of overseas bearer unsecured private placement CBs worth 4.5 million USD in Hong Kong. The base exchange rate was 1,117.4 KRW, amounting to 5.028 billion KRW. Due to the recent rise in the exchange rate, it is estimated to have increased to about 5.7 billion KRW.

Organic T Cosmetic stated that the CB was issued for the purpose of acquiring other companies. However, the funds had not been used until the end of the third quarter last year. As of this date, no announcement regarding the acquisition of other companies has been made. Despite not fulfilling the purpose of the fundraising, shares are being released into the market first.

The conversion price of this CB is 809 KRW. The stock price fell from 1,155 KRW at issuance, lowering the conversion price to about 70% of the original, which is the adjustment limit. However, with the rising exchange rate, converting at the existing number of shares means acquiring one share at about 924 KRW. The current stock price of Organic T Cosmetic is around 450 KRW. The conversion request is made at a price higher than the stock price.

Organic T Cosmetic was established in 2009 by Haecheon Yakup in China, which set up the corporation in Hong Kong for Korean listing. Haecheon Yakup is a specialized infant cosmetics company producing shampoos, body washes, skincare, and cleansing products for infants in China.

According to the audit report submitted on the 17th, Organic T Cosmetic recorded sales of 270.5 billion KRW and operating profit of 16.9 billion KRW as of the end of last year. These figures represent a 10.5% decrease and a 22.1% increase respectively compared to the previous year. Earlier, on the 6th of last month, it had announced a shift to operating loss of 12.6 billion KRW due to sales fluctuations, but this was reversed within a month.

The market is increasingly curious about why the second series CB was converted at a price higher than the current stock price. The maturity date of the second series CB is May 14, 2024, with a nominal interest rate of 0% and a maturity interest rate of 5%. There are no early redemption rights (put options) or early purchase rights (call options). Holding until maturity would yield an interest income of over 15%.

It is not that there is no cash to redeem the CB. According to last year's audit report, Organic T Cosmetic holds cash equivalents of 475.19 million CNY (approximately 89.2 billion KRW). However, the cash balance appears to be rapidly decreasing. As of the end of the third quarter last year, cash equivalents were 183.8 billion KRW, but about 100 billion KRW decreased in just one quarter.