[Beginner's Guide] From CJ to SK... What Is the 'Rights Offering' That Worries Retail Investors?

Editor's Note[Joorini Guide] is a smart investment guide for 'Joorini (stock + beginner)' investors. We will kindly and easily explain stock stories that are unfamiliar to Joorini.

Recently, as major domestic conglomerates have consecutively launched paid-in capital increases, individual investors' worries are deepening.

Paid-in capital increase is a method by which a company raises funds directly from the capital market without going through financial institutions,

which can be both positive news and negative news for the stock price.

Recently, the wave of paid-in capital increases in our stock market has all acted as negative news,

so let's find out what the story is behind this.

After CJ, even SK

On the 20th, CJ CGV announced a plan for a paid-in capital increase worth a total of 1.02 trillion KRW.

The number of shares to be issued is 74.7 million, which is 1.5 times the current number of listed shares (47,728,537 shares), meaning that a large number of new shares will flood the market.

From the perspective of supply and demand, an increase in the number of circulating shares inevitably leads to a stock price decline.

In fact, after CJ CGV announced the paid-in capital increase plan on the 20th, its stock price fell by 35.86% in just 8 trading days until the 30th (all based on closing prices).

On the 30th, CJ CGV's intraday low dropped to 9,020 KRW but closed at 9,300 KRW.

This is the first time in 15 years since October 2008 that CJ CGV's stock price has fallen below 10,000 KRW.

It's not just CJ CGV. Most CJ group stocks, including the holding company CJ, also fell consecutively.

The CJ Group argued that this was an inevitable measure to normalize CJ CGV, which has been struggling since the COVID-19 pandemic, but the market's reaction was cold.

Before the impact of CJ CGV faded, the second-largest domestic conglomerate SK announced a paid-in capital increase.

On the 23rd, SK Innovation disclosed that it would issue new shares amounting to 8.9% of the existing listed shares, conducting a paid-in capital increase worth 1.1777 trillion KRW.

Following this news, SK Innovation's stock price dropped 8.93% on the first trading day after the announcement, the 26th, compared to the previous close, and the holding company SK's stock price also fell by 4.17%.

SK Innovation's closing price on the 26th was 182,600 KRW, and it fell by 13.19% until the 30th (closing price basis: 158,500 KRW).

The Real Reasons Behind Companies Choosing Paid-in Capital Increases

As mentioned briefly earlier, paid-in capital increases can act as both positive and negative news.

It is clear that the sharp stock price drops after paid-in capital increases by CJ and SK are negative news.

The reason is that the purpose of the paid-in capital increase is not for future investments such as acquiring other companies or new businesses.

SK Innovation stated that out of 1.1777 trillion KRW, 350 billion KRW will be used for debt repayment, and CJ CGV said that out of 1.02 trillion KRW, 380 billion KRW will be used for debt repayment.

In other words, they intend to repay debts using shareholders' money.

Knowing that this will clearly act as negative news for the stock price, why did the companies make such decisions?

If a company has no cash equivalents, it would be understandable to make such a decision despite the stock price decline,

but major domestic conglomerates like CJ and SK surely do not lack cash equivalents.

Nevertheless, the background for deciding on a paid-in capital increase can be inferred from the current economic situation.

For companies, accumulating reserves to prepare for an uncertain future is a stable choice, and

with rising loan interest rates and difficulties in issuing bonds, paid-in capital increases are a way to secure funds without spending a single won.

Why Do Paid-in Capital Increases Make Retail Investors Cry?

This has been a long story.

You probably have a rough idea about paid-in capital increases, but some Joorini might still be wondering, "So what exactly is a paid-in capital increase?"

A paid-in capital increase is one of the ways a company raises funds.

When companies raise funds, they can go through financial institutions or issue bonds, but these all require paying interest costs.

However, paid-in capital increases raise funds directly from the stock market without incurring costs.

Therefore, debt does not increase, only capital increases.

Paid-in capital increase literally means receiving money and issuing shares, whereas a bonus issue means distributing shares for free without receiving money.

There are three methods of paid-in capital increases: rights offering, third-party allotment, and public offering.

Rights offering targets only existing shareholders.

Third-party allotment targets special related parties or investors other than shareholders.

Public offering targets all investors without restriction.

Third-party allotment has the advantage that the negative impact of stock dilution is minimal because it targets new investors or major shareholders.

Rights offering also allows shareholders to partially offset losses by purchasing new shares at a lower price even if the stock price plunges.

However, public offering does not provide benefits to existing shareholders and acts as negative news for the stock price.

SK Innovation announced that it will conduct a paid-in capital increase through rights offering followed by a public offering for unsubscribed shares,

which is a method that somewhat considers existing shareholders more than a public offering alone, but shareholder opposition continues.

Moreover, the issue price during a paid-in capital increase is often discounted from the current stock price, making it negative news.

This is because a large number of new shares are issued at prices lower than the current stock price.

On the other hand, paid-in capital increases can have a positive impact on stock prices in the medium to long term.

This happens when the purpose of the paid-in capital increase is for facility funds for capital investment or business acquisition funds for mergers and acquisitions.

In fact, L&F conducted a large-scale paid-in capital increase for facility investment funds to expand secondary battery cathode materials, and its stock price more than doubled after the capital increase.

Conversely, when the funds are for operating expenses or debt repayment, it acts as negative news.

This is because a lack of operating funds indicates poor financial conditions, and debt repayment literally means using the funds to pay off debts.

[Image source=Yonhap News]

Dear Joorini investors,

Since paid-in capital increases are events that greatly affect stock prices, please be sure to check the disclosure details.

Although it is difficult to prepare in advance, you can avoid significant losses.

Also, a paid-in capital increase does not necessarily lead to a stock price decline,

so please carefully examine the purpose of the paid-in capital increase.

We support your wise investments and will conclude here.

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This article is from [Joorini Guide], published weekly by Asia Economy. We explain stock-related financial news and difficult economic stories in an easy and friendly way so that stock beginners can understand. By clicking subscribe, you can receive articles for free.

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