Haitron Purchases Building More Expensive Than Assets... What About Profitability?

Seoul Gangnam 6-Story Building Purchased for 27.8 Billion Won
Financed by Borrowing... Increased Interest Burden

Hightro Systems, a company listed on the Korea Composite Stock Price Index (KOSPI), is purchasing a building in Gangnam, Seoul, that exceeds the size of its total assets. Since a large portion of the acquisition funds is expected to be borrowed, there is keen interest in whether the investment will be profitable.

According to the Financial Supervisory Service's electronic disclosure on the 17th, Hightro Systems recently announced it will acquire the BK Building located in Cheongdam-dong, Gangnam-gu, Seoul, for 27.8 billion KRW. The building has a land area of 509㎡ and consists of one basement floor and six above-ground floors.

Hightro paid 10% of the purchase price as a deposit on the 9th and plans to pay the remaining 90%, 25 billion KRW, by June 28. The balance will be arranged through the company’s own funds and borrowings.

Hightro Systems specializes in security equipment. It offers a variety of products including CCTV cameras, storage devices, monitors, and controllers. The company’s trading was suspended after receiving a disclaimer of opinion in 2021 but resumed in November last year following rehabilitation procedures.

The price of the building being acquired is larger than Hightro’s total assets. As of the end of last year, Hightro’s total assets stood at 27.6 billion KRW, with liabilities accounting for 20.5 billion KRW. The debt ratio increased due to the issuance of convertible bonds (CB) worth 18 billion KRW during the rehabilitation process.

Hightro’s cash and cash equivalents amount to 16.5 billion KRW. The company holds a high proportion of cash relative to its assets, having raised funds through capital increases and CBs. Nevertheless, excluding operating funds, it is expected that approximately 15 billion KRW in additional loans will be needed to purchase the building.

However, it is uncertain whether profitability can be secured if additional loans are taken out. According to the audit report of White Bear, the corporation selling the BK Building, White Bear earned rental income of 560 million KRW from the building last year. However, it incurred interest expenses of 970 million KRW, resulting in a net loss of about 500 million KRW. The company also recorded a net loss due to interest expenses in 2022.

White Bear has borrowed about 15 billion KRW using this building as collateral, with an interest rate of approximately 5.8%. Assuming Hightro takes out a similar scale of additional loans, it will be difficult to secure immediate profitability.

Issuing mezzanine bonds such as CBs also poses an overhang (potential waiting supply) issue. Hightro already issued CBs worth 18 billion KRW in August last year. The conversion price is 500 KRW, and if converted into shares, 36 million shares could be released into the market. This corresponds to 130% of Hightro’s total issued shares.

Meanwhile, Hightro Systems recorded sales of 5.5 billion KRW and an operating loss of 6.6 billion KRW on a separate basis last year. Interest expenses on borrowings exceeded 900 million KRW, resulting in a net loss of 7 billion KRW for the period.