Secondary Battery Growth Slows... Will Huesung Succeed in Capital Increase? [Reporter Reading Securities Registration Statement]

Husung Raises 100 Billion Won for Secondary Battery and Semiconductor
Concerns Over Slowing Secondary Battery Market and Passive Major Shareholder Participation

Huosung is raising over 100 billion KRW through a rights offering. The company plans to use the secured funds for investments related to secondary batteries and semiconductors. The issue lies in the market conditions. While the semiconductor sector is expected to recover from the bottom, concerns about a slowdown in the front-end industries such as electric vehicles are growing for secondary batteries. Additionally, the largest shareholder plans to participate in only half of the new share allocation. This is likely to be a factor that investors will have to carefully consider.

Huosung recently announced through a disclosure that it will proceed with a rights offering followed by a general public offering of unsubscribed shares. It plans to issue 12,903,226 common shares, which corresponds to 13.68% of the existing 94,352,104 shares. Based on the planned issue price of 7,850 KRW per share, the company aims to raise a total of 101.3 billion KRW.

"Raising 100 billion KRW, investing 50 billion KRW in secondary batteries"

Specifically, 49.29 billion KRW will be used for facility investment in the electrolyte segment related to secondary batteries, 21 billion KRW for next-generation technology development and related facility investment in the semiconductor gas segment, and 18 billion KRW for building a smart logistics system. Additionally, 13 billion KRW will be spent on raw material purchases.

Huosung is a company specializing in the manufacture of chemical materials such as semiconductor specialty gases and refrigerants for refrigerators and air conditioners. It is expanding its business areas by entering the secondary battery electrolyte business.

The funds invested in secondary batteries are a follow-up to the new investment in liquid electrolytes decided in 2022. At that time, Huosung planned to invest 106.1 billion KRW to build a factory to secure a competitive edge in the secondary battery market. Of the amount raised through this rights offering, 28 billion KRW will be used for new factory construction and process improvements at existing factories. The remaining 21 billion KRW will be invested in a next-generation process additive factory that will enhance battery life and reduce charging time. The total cost for this is 49.29 billion KRW.

In addition, 21 billion KRW will be invested in next-generation technology development and related facility investment in the semiconductor gas segment. The company plans to invest 10 billion KRW in 2025 and 11 billion KRW in 2026. The remaining amount will be used for building a smart logistics system (18 billion KRW) and purchasing key raw materials such as fluorite and lithium carbonate (13 billion KRW).

Concerns over market conditions and the largest shareholder’s passive participation

Concerns lie in the market conditions and the largest shareholder’s passive participation in the rights offering. Huosung recorded cumulative sales of 417.1 billion KRW and an operating loss of 27 billion KRW in the third quarter of last year. Sales decreased by 9.61% compared to the same period last year, and operating profit turned to a loss.

The reason is the sluggishness in semiconductor specialty gases and secondary battery materials. Since September last year, some products in semiconductor specialty gases have been discontinued due to production cuts by major customers. As a result, sales of semiconductor specialty gases, which were 161.9 billion KRW in 2022, amounted to only 106.6 billion KRW as of the third quarter of last year.

However, this year, with the increase in artificial intelligence (AI) demand, the semiconductor market is expected to improve, and performance is anticipated to get better. Last month, the World Semiconductor Trade Statistics (WSTS) predicted that although the semiconductor market size decreased by 9.4% in 2023 compared to the previous year, it will grow by 13.1% this year. Recently, SK Hynix also announced plans to double its production capacity of high-bandwidth memory (HBM) compared to last year.

There is significant uncertainty in the secondary battery materials sector. Huosung halted production of LiPF6, a secondary battery electrolyte, at its Ulsan plant from April to August last year due to oversupply and price declines. The price of LiPF6 dropped from 590,000 CNY per ton in 2022 to recently 68,500 CNY per ton.

As a result, the proportion of secondary battery materials in Huosung’s total sales as of the third quarter last year was only 17.36% (72.4 billion KRW), a sharp decline from 46.05% (281.2 billion KRW) in 2022. The company explained in its securities registration statement that "due to the decline in electrolyte prices, sales in the secondary battery materials division decreased by 66.5% year-on-year as of the third quarter of 2023."

Especially, concerns about a slowdown in electric vehicle demand continue to grow. If electric vehicle demand slows, secondary battery companies will inevitably be affected. Recently, Tesla also raised uncertainty by stating that "the growth rate of automobile sales may be lower than last year" in its outlook for this year.

The low participation of the largest shareholder is also a concern. Huosung’s largest shareholder is Kim Yong-min, Vice Chairman of Huosung Group, holding 22.28%. The combined shareholding of the largest shareholder and related parties is 47.62%. Currently, the largest shareholder and related parties plan to subscribe to 3,072,072 shares, which is 50% of the total allocated 6,144,144 shares in the rights offering. If they participate as planned, their shareholding will decrease by 2.87 percentage points to 44.75%. Although the possibility of a change in the largest shareholder is limited despite the partial decrease in shareholding, investors may perceive the largest shareholder’s participation in only half of the rights offering as a negative signal.

The final issue price will be confirmed on April 4. Huosung’s stock closed at 8,750 KRW on the 29th, higher than the initially expected issue price of 7,850 KRW at the board resolution. Depending on the stock price movement over the next three months, the issue price may be higher or lower than planned. If the issue price falls, the company may not raise the planned amount of funds, which could disrupt the planned use of funds.

Meanwhile, Huosung plans to announce the confirmed issue price of the rights offering on April 5. Subscription for existing shareholders will be conducted from April 9 to 11. Any unsubscribed shares from the existing shareholders’ subscription will be offered to general investors from April 15 to 16, and the new shares are scheduled to be listed on the 30th of the same month.