[Wealth Succession] Codes Combine② Owner's Son Hits Big with Innerwear... Headquarters' Profits Lag

When Ko&Com Earned 120 Billion Won, Headquarters Only Made 23 Billion Won
Ko&Com Started with 100 Million Won, Now Largest Shareholder of Codez Combine

‘Ko&Com,’ which has become the largest shareholder of fashion apparel company Codes Combine, has reportedly earned substantial profits through Codes Combine’s innerwear business. In contrast, during the same period, Codes Combine’s profits did not even reach one-fifth of Ko&Com’s.

According to the Financial Supervisory Service’s electronic disclosure on the 2nd, Ko&Com is a corporation established in August 2014 with a capital of 100 million KRW. Director Kim Sang-hyun, who is also a director of Cotton Club and Ko&Com, holds 100% of the shares. Kim Sang-hyun is the son of Kim Bo-sun, chairman of Codes Combine and Cotton Club. Ko&Com was first established when Director Kim was 21 years old.

Shortly after its establishment, Ko&Com signed a business transfer agreement with Codes Combine and acquired the ‘codes combine’ trademark and inventory assets for a total of 25 billion KRW. The trademark was valued at 18.6 billion KRW, and the inventory assets at 6.4 billion KRW. Utilizing this trademark and inventory, Ko&Com started the innerwear business of Codes Combine.

Ko&Com, with a capital of 100 million KRW, was able to raise 25 billion KRW largely due to the support of Chairman Kim Bo-sun. In 2014, Chairman Kim lent 14.2 billion KRW to Ko&Com at an annual interest rate of 3.1%. At that time, the statutory interest rate for financial transactions between related parties was 6.9%, so this loan was provided at a much lower rate.

The company explained, “At that time, Ko&Com also borrowed from Hana Bank, and under the review of a law firm, the interest rate on Chairman Kim’s loan was set at the same level as that bank loan.”

Ko&Com also borrowed 13 billion KRW from Hana Bank. Regarding this loan, Cotton Club provided joint guarantees. Cotton Club is a company wholly owned by Chairman Kim.

With Chairman Kim’s support, Ko&Com acquired the Codes Combine innerwear trademark and hit the jackpot from the first year. Starting business in August 2014, it recorded sales of 11.5 billion KRW and operating profit of 5.1 billion KRW in about five months until the end of that year. The operating profit margin approached 44%. They made enormous margins by selling inventory purchased from Codes Combine.

According to the fashion industry, the average operating profit margin for apparel companies is around 8-10%. F&F, considered to have the highest operating profit margin, recorded 27% last year. Ko&Com made profits far exceeding the fashion industry level from its first year.

Ko&Com continued to thrive thereafter. Operating profit grew every year, and even during the COVID-19 pandemic in 2020, it surpassed 10 billion KRW in operating profit for the first time. As of last year, Ko&Com recorded sales of 95.4 billion KRW and operating profit of 27 billion KRW.

In contrast, Codes Combine showed sluggish performance during the same period. Codes Combine turned to operating profit in 2016 for the first time and recorded operating profits ranging from 1.3 billion to 4.1 billion KRW annually until last year. As of last year, sales were 40 billion KRW, and operating profit was 2.2 billion KRW, a 31% decrease from the previous year. During the same period, Ko&Com’s operating profit increased by 14%.

The difference is even more pronounced when looking at cumulative operating profits. Ko&Com’s cumulative operating profit over 10 years since 2014 is 122.2 billion KRW. Meanwhile, Codes Combine’s cumulative operating profit from 2016, when it turned profitable, to last year is 23.8 billion KRW, about one-fifth of Ko&Com’s.

Ko&Com’s ability to secure high margins is analyzed to be due to its ability to procure products at low prices from affiliates and others. Ko&Com purchases products from factories in the Philippines and Vietnam affiliated with Cotton Club, as well as from C&C Apparel.

In 2016, Ko&Com also directly purchased goods worth 10.9 billion KRW from Codes Combine. That year, Ko&Com recorded sales of 38.1 billion KRW and operating profit of 4.3 billion KRW. More than 60% of the products sold were purchased from Codes Combine. In the same year, Codes Combine recorded sales of 16.3 billion KRW and operating profit of 1.3 billion KRW. There is a suggestion that if Codes Combine had sold the products directly, the margin rate might have been different.

Regarding this, a Codes Combine official stated, “Due to a liquidity crisis in 2015 and the possibility of delisting, the trademark was sold, and Ko&Com, which acquired it, increased profits through building an online self-operated mall, leading exports, and expanding marketing. Since Ko&Com acquired Codes Combine for management participation, it plans to apply this management method to Codes Combine in the future.”

Meanwhile, on the 22nd of last month, Codes Combine’s largest shareholder changed to Ko&Com. The previous largest shareholder, Cotton Club, transferred 19 million shares (50.21%) to Ko&Com at 1,694 KRW per share, totaling 32.2 billion KRW. Ko&Com, which started with 100 million KRW, became the largest shareholder of Codes Combine in 10 years.