Aekyung Industrial Basic Cosmetics Subsidiary One Thing
Recorded Goodwill Impairment Despite Paying a Premium
"Internal Process Improvement Underway"
Aekyung Industrial's operating value has been halved just one year after acquiring its basic cosmetics subsidiary 'One thing'. Aekyung Industrial embarked on a merger and acquisition (M&A) for the first time in 37 years to expand its cosmetics portfolio but ended up with a disappointing report card.
According to the 2023 business report submitted by Aekyung Industrial to the Financial Supervisory Service on the 25th, the company reflected a goodwill impairment loss of 4 billion KRW for One thing last year. One thing is a basic cosmetics company specializing in skincare products made from Houttuynia cordata and Artemisia capillaris extracts, which Aekyung Industrial acquired in 2022. Goodwill is the difference between the book value (net asset value) of the acquired company and the acquisition price in corporate M&A, meaning that Aekyung Industrial valued One thing highly and paid a premium.
In May 2022, Aekyung Industrial acquired 70% of One thing's shares for 11.1 billion KRW and recorded goodwill of 9.88454 billion KRW. At that time, Aekyung Industrial explained the goodwill as "expected synergy effects after the business combination." However, after one year, Aekyung Industrial admitted that it had overestimated the synergy effects and the company's value.
This goodwill impairment loss occurred because One thing did not generate as much profit as expected. In 2022, One thing posted sales of 8.977 billion KRW and a net profit of 542.4 million KRW. Last year, sales slightly increased to 9.75134 billion KRW, but it recorded a net loss of 303 million KRW, turning into a deficit. The company explained that costs increased due to system improvements after the acquisition. With the goodwill impairment on One thing, Aekyung Industrial's intangible assets also decreased. The intangible assets, which were 17.5 billion KRW in 2022, shrank to around 13 billion KRW.
Aekyung Industrial acquired One thing to rapidly grow into a global cosmetics brand. Aekyung Industrial is targeting overseas markets with its main brands 'AGE 20’S' and 'LUNA', increasing the proportion of cosmetics sales. As of 2021, the cosmetics division accounted for 34% of sales, which expanded to 38% last year. However, both brands are color cosmetics-based. Aekyung Industrial considered acquiring One thing, which specializes in basic cosmetics, essential to diversify its cosmetics portfolio. Since One thing has already entered the Japanese, Chinese, and Southeast Asian markets, the company analyzed that adding Aekyung Industrial's distribution network could significantly increase profits.
Aekyung Industrial plans to focus on finding synergy with One thing this year. It will improve the entire process from product manufacturing to marketing. Aekyung Industrial's know-how will be applied throughout product development, production, marketing, and sales. An Aekyung Industrial official said, "Since last year's performance was not good, we started to supplement and change internal systems," adding, "We are considering various ways to create synergy with Aekyung Industrial in logistics and production systems and are reviewing several options."
Although the basic cosmetics sector was sluggish, Aekyung Industrial recorded double-digit growth in both sales and operating profit in the cosmetics division last year. Cosmetics sales reached 251.3 billion KRW, and operating profit was 36.4 billion KRW, up 14% and 28% respectively from the previous year. Seventy percent of sales were generated overseas, with strong performance in China. AGE 20’S achieved good results in the Chinese market, benefiting from the endemic (periodic outbreak of infectious diseases) effect. Recently, it entered Vietnam and strengthened marketing by introducing essence pact products suitable for the local market. In Japan, LUNA is expanding its concealer sales channels.
Meanwhile, actor Ju Bae, co-CEO of One thing, left the company on December 30 last year. Aekyung Industrial will acquire Bae's remaining 15% stake next month on the 30th. The acquisition price will be determined based on the two business years of 2022 and 2023. Although the contract initially stipulated that the option price would be decided based on One thing's performance over three business years (2022?2024), the contract was revised because Bae left the company earlier than expected.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
