[Funding] Hyungji I&C, Early Redemption of BW and Rights Offering for Shareholders

Plan to Raise 15 Billion KRW by Allocating 0.96 New Shares per 1 Old Share
Allocated 10 Billion KRW Last June to Early Redeem Publicly Issued BW
Concerns Over Profitability Decline Due to High Offline Proportion

[Asia Economy Reporter Park Hyungsoo] Hyungji I&C is raising funds to repay the convertible bonds with warrants (BW) issued last year through a rights offering. Amid a decline in the domestic stock market, the stock price has fallen below the warrant exercise price. Due to the increased possibility of early redemption requests, Hyungji I&C has decided to proceed with a rights offering.

According to the Financial Supervisory Service's electronic disclosure system on the 4th, Hyungji I&C will conduct a rights offering allocating 0.96 new shares per existing share. The planned issue price is 1,030 KRW, and a total of 1.25 million shares will be issued. The largest shareholder has not yet decided on the scale of participation in the capital increase.

Hyungji I&C owns domestic menswear brands YEZAC and BON, as well as womenswear brands Carries Note and BON:E. The products are mainly sold through offline stores such as department stores, outlets, dealerships, and online distribution channels.

Of the planned 15 billion KRW to be raised, 10 billion KRW will be used to prepare for the early redemption request (put option) of the '6th series convertible bonds with warrants' issued through a public offering in June last year. The put option can be exercised 18 months after the issuance date of the convertible bonds with warrants. The first redemption payment date will arrive on December 4. The closing price on the 29th of last month was 589 KRW, below the warrant exercise price of 1,287 KRW.

When recruiting BW investors last year, Hyungji I&C offered a coupon rate of 2.0% and a maturity interest rate of 4.0% as issuance conditions. The warrant exercise price could be lowered from 1,838 KRW to 1,287 KRW if the stock price declined. The subscription rate recorded was 12,438 to 1. The raised funds were used for purchasing production costs, overseas business investments, and debt repayment. In the first half of this year, sales reached 35.2 billion KRW and operating profit was 1.1 billion KRW. Compared to the same period last year, sales increased by 7.6% and operating profit turned positive.

Although external funding was secured to put out the urgent fire, increased market volatility this year has become a hindrance. The stock price has fallen about 60% this year. The stock price, which was above 1,500 KRW at the end of last year, dropped below 600 KRW. News of a capital reduction to improve the financial structure also acted as a negative factor for the stock price.

Hyungji I&C held a board meeting on August 10 and resolved a 3-for-1 free capital reduction. After the reduction, capital will decrease from 19.5 billion KRW to 6.5 billion KRW. An extraordinary general meeting of shareholders was held on the 19th of last month to approve the capital reduction agenda. Due to net losses in 2020 and 2021 caused by the COVID-19 pandemic, the capital impairment ratio was 38.4% as of the end of last year. With a return to profitability in the first half of this year, the capital impairment ratio decreased to 28.6%. As of the end of the first half of this year, the debt ratio was 287.64%, and total borrowings reached 21.4 billion KRW.

Although profitability turned positive in the first half of this year, improving profitability remains urgent. The stores mainly consist of department stores, outlets, large shopping malls, and dealerships. Since sales are conducted through consignment contracts, additional sales commissions are incurred. Before the COVID-19 pandemic in 2019, the operating profit margin was only 0.4%, and it recorded 3.0% in the first half of this year. The cost of goods sold ratio decreased from 40.5% in 2019 to 33.9% in the first half of this year, but the selling and administrative expense ratio increased from 59.0% to 63.1%.

After the COVID-19 pandemic, consumer trends rapidly shifted from offline to online. Hyungji I&C's online sales ratio increased from 17.1% in 2019 to 27.7% in 2020. In 2021, the online sales ratio decreased by 5.6 percentage points to 22.1%. In 2020, long-term inventory was mainly liquidated through online channels, but last year, long-term inventory was mainly cleared through offline discount events. Although the proportion of new products sold online was increased, consumer price resistance caused online sales to decline.

Hyungji I&C is trying to increase the proportion of online sales in line with changing consumer trends, but visible results have not yet appeared. Due to the high proportion of offline stores, there are limitations in strengthening online promotional events.