[At a Crossroads]② Selling CBs and Increasing Capital... Joongang D&M Becomes a 'Stock Factory'

Reselling Expensively Purchased CB
Another Capital Increase Before Completing Previous One
Additional CB Issuance
New Stock Flood Upon Conversion

[Asia Economy Reporter Jang Hyowon] Jungang D&M, a KOSDAQ-listed company, is reselling convertible bonds (CB) worth 11.7 billion KRW that it previously held. Additionally, although it has not yet completed a paid-in capital increase worth 5 billion KRW, it is pushing forward with a 20 billion KRW paid-in capital increase and CB issuance, raising concerns about a large-scale supply burden (overhang).

According to the Financial Supervisory Service’s electronic disclosure on the 13th, Jungang D&M announced on the previous day that it would resell the 10th series CB with a face value of 11.7 billion KRW. The sale price includes a 0.5% premium on the face value, totaling 11.7567 billion KRW. Jungang D&M issued this CB to GY Invest in March. However, due to a stock price decline and before the put option (early redemption right) period, the company repurchased the CB on September 9. The conversion price of the CB is 1,050 KRW, but since the stock price remained in the 600 KRW range, it was judged that the likelihood of conversion to shares was low. The repurchase price of the CB was 12.26655 billion KRW. The company repurchased the CB, which had been issued less than a year ago, at about a 5% premium. In this process, GY Invest, the CB underwriter, earned profits including a 3% interest on the CB plus the premium despite the stock price decline.

Jungang D&M is now selling the CB it bought at a higher price back at a lower price. This transaction will result in a loss of about 500 million KRW. The buyers of this CB are Dodream No. 2 Association (6 billion KRW) and B&M Solution Investment Association (5.7 billion KRW). A representative of the Dodream Association said, “The stock conversion eligibility date for this CB is March next year, and we will decide whether to convert or redeem based on the stock price trend at that time,” adding, “The CB payment deadline is at the end of January, so there is still some leeway.” Prior to the CB resale, Jungang D&M also disclosed a 20 billion KRW fundraising plan. On the 9th, Jungang D&M decided on a third-party allotment paid-in capital increase worth 10 billion KRW. It plans to issue 16,129,000 shares at 620 KRW per share. The allotment targets are the largest shareholders, HF Networks and Skadi Holdings.

Previously, since May, Jungang D&M had been conducting a third-party allotment paid-in capital increase worth 5 billion KRW. The issuance target was HF Networks. This capital increase has been delayed five times, with the payment date recently changed to the 16th, and it has not yet been completed. Nevertheless, the company decided on a new capital increase. Along with this, it also decided to issue CB worth 10 billion KRW. The conversion price of the newly issued CB is 716 KRW, with a minimum adjusted price of 500 KRW. The issuance target is the B&M Solution Investment Association, which had agreed to purchase the 10th series CB.

With this CB issuance, Jungang D&M will have issued a total of 24.6 billion KRW in CBs. If converted at the current conversion price, 30,595,051 new shares could be issued. This corresponds to 88.26% of the total issued shares of Jungang D&M. Including the new shares from the paid-in capital increase, the per-share value of currently issued shares is likely to be significantly diluted. Moreover, there is no visible strategy on how the company plans to grow using the raised funds. Jungang D&M disclosed that the purpose of this fundraising is simply operating funds. When it raised 12 billion KRW through CBs in March, it also disclosed the purpose as operating funds, but the company has not shown growth since then.

Jungang D&M is a company engaged in manufacturing PVC products and building materials, sales agency business, and telecommunications equipment and devices. As of the third quarter on a consolidated basis, it recorded cumulative sales of 19.9 billion KRW, an operating loss of 2.9 billion KRW, and a net loss of 2.7 billion KRW. The operating loss widened by 8% compared to the same period last year. Recently, following changes in KOSDAQ regulations by the Korea Exchange, the company was removed from the management item list, causing its stock price to surge.