[CB Crisis] ⑦ Cosnine, 70% Potential Shares... Warning of a Volume Bomb

[Asia Economy Reporter Jang Hyowon] The conversion period for the 15 billion KRW convertible bonds (CB) issued by Kosnine, a KOSDAQ-listed company, has arrived. If these CBs are converted into shares, newly issued shares will account for 44% of the total volume. Furthermore, if all remaining CBs are converted into shares, approximately 70% of the currently circulating shares could be released into the market, which is expected to place significant pressure on the stock price. Kosnine is a company that manufactures and sells basic and color makeup products.

According to the Financial Supervisory Service’s electronic disclosure on the 6th, the conversion availability date for the 21st series CB worth 15 billion KRW, issued by Kosnine on October 20 last year, is approaching on the 20th of this month. This CB was issued with a nominal interest rate of 1% and a maturity interest rate of 5% to repay Kosnine’s debt. The initial recipients were SangSangIn Savings Bank and SangSangIn Plus Savings Bank, but in March, SangSangIn requested early redemption, and Kosnine repurchased the CB.

After repurchasing the CB, the 21st series CB was not disclosed in Kosnine’s semi-annual report. However, about six months after repurchasing, on the 23rd of last month, Kosnine signed a contract to resell the CB. As a result, the overhang risk (potential pending volume) of the CB suddenly emerged. The resale contract involves selling the CB with a face value of 15 billion KRW for 15.75 billion KRW including interest. An initial deposit of 750 million KRW has already been received, and the remaining balance will be paid on the 21st, at which point the CB will be transferred.

The transaction counterparties are Samma Group No. 1 Investment Association and four others. Since the investment association is acquiring the CB, there is a high possibility of immediate profit-taking after acquisition. If the CB is converted after receipt on the 21st, new shares are typically listed after 10 trading days. Therefore, the shares could be released in early November. The initial conversion price of this CB was 1,413 KRW, but as of the 20th, it has been adjusted downward to 679 KRW. Since the minimum conversion price adjustment limit is the face value (500 KRW), the conversion price could be further lowered in the future.

If this CB is converted into shares, 22,091,310 new shares will be issued. This volume accounts for 44.4% of the total circulating shares. As of the previous day, Kosnine’s stock price was 1,055 KRW. Based on the current stock price, a valuation gain of 55% compared to the conversion price is expected, but if a large volume of shares is released into the market, dilution of existing shares’ stock price is inevitable.

In addition to the 21st series CB, Kosnine still has the 17th, 19th, and 20th series CBs outstanding. The 17th and 19th series CBs, worth 2 billion KRW and 1.1 billion KRW respectively, were converted on the 30th of last month, resulting in 4,631,557 new shares to be issued on the 17th. This volume corresponds to 9.3% of the total shares. After conversion, unconverted volumes remain at 2.7 billion KRW for the 17th series and 600 million KRW for the 19th series. Additionally, the 20th series CB, worth 4 billion KRW, can be converted at any time. The 20th series CB could convert into shares accounting for 10.8%. If all CBs issued by Kosnine are converted into shares, approximately 70% of the total new shares could be released into the market.

Although there is significant potential for stock dilution, the company’s performance to defend against this has been continuously declining. As of the end of the first half of this year, Kosnine recorded sales of 3.3 billion KRW and an operating loss of 4.2 billion KRW. Compared to the same period last year, sales decreased by 45.8%, and operating losses expanded by 40%.

A company official stated, “Since the COVID-19 pandemic, the overall cosmetics market has shrunk, and sales to China have decreased. However, from the second half of this year, OEM sales to our major customer LG Household & Health Care are increasing, and we are pursuing orders with other major domestic cosmetics companies, so performance is expected to rebound.” He added, “Although the number of shares will increase if the CBs are converted into stock, the financial structure will improve, which will be beneficial to shareholders.”