'Bottomless Jar' AK Plaza... All-Out Effort to Escape Liquidity Crisis [Why&Next]

15 Consecutive Years of Capital Erosion... Debt Snowballing
AK Plaza Confirms 60 Billion Won Paid-in Capital Increase
Target Amount Falls Short of 100 Billion Won... Financial Improvement Faces Difficulties

AK Plaza, a department store affiliate of Aekyung Group, has attracted attention as it raised a large amount of funds this month. As the online shopping market expands and the department store industry continues to struggle, the company has been in a state of partial capital erosion for over a decade. Recently, concerns have emerged that the accumulated deficits and rapidly increasing debt could lead to a liquidity crisis.

According to the Financial Supervisory Service's electronic disclosure system on the 23rd, AK Plaza announced that it recently raised 60.1 billion KRW through a paid-in capital increase. This capital increase was conducted through a rights offering, with the largest shareholder, AK Holdings, participating. AK Holdings is the holding company of Aekyung Group.

Initially, AK Plaza set the target amount for this capital increase at 100 billion KRW. However, only AK Holdings among the major shareholders participated, resulting in a reduced amount raised. The major shareholders of AK Plaza are AK Holdings (60.09%), Korea Railroad Corporation (16%), and Aekyung Asset Management (16%). After the capital increase, AK Holdings' stake in AK Plaza increased from 60% to 71%.

Exterior view of AK Plaza Gwangmyeong branch.

Setback in 100 Billion KRW Capital Increase

AK Plaza's move to raise a large amount of capital appears to be aimed at improving its financial structure through capital expansion. According to AK Plaza's audit report, as of the end of last year, the total equity (99.3 billion KRW) was less than the capital stock (159.8 billion KRW), indicating partial capital erosion. The company has been in partial capital erosion for 15 years since 2008. Last year, it avoided complete capital erosion (a state where accumulated losses have fully depleted capital stock, resulting in negative total equity) by reducing capital stock through a capital reduction without consideration and offsetting deficits with retained earnings.

As of 2022, the company's capital stock was in the 230 billion KRW range, but total equity was only 11 billion KRW.

The deterioration of the financial structure was caused by poor performance. Until 10 years ago, AK Plaza recorded transaction volumes exceeding 2 trillion KRW, ranking fourth in the department store industry. However, as the offline market shrank and the industry downturn continued, its size decreased, and the gap widened with the so-called department store 'Big 3'?Lotte, Shinsegae, and Hyundai Department Store.

AK Plaza's 'Neighborhood Shopping Center (NSC)' strategy, implemented since 2018, failed to produce the desired effect. The NSC strategy aims to attract local customers by offering merchandise (MD) and services tailored to the region and commercial district, rather than relying on luxury brands.

In fact, sales significantly declined as luxury stores withdrew. During the COVID-19 pandemic, luxury consumption surged due to revenge spending, and the Big 3 department stores' sales per store grew to between 1 trillion and 3 trillion KRW. However, AK Plaza, which continued to open stores based on the NSC strategy, has been posting operating losses. As of the end of last year, AK Plaza's total store sales were around 200 billion KRW. Operating losses have continued since 2020, and net income has also been negative, with accumulated deficits reaching 70.7 billion KRW as of the end of last year. The return on equity (ROE), calculated by dividing net income by equity, is not computable.

Current Liabilities Doubled... Aekyung Group Affiliates Mobilize Funds

A bigger problem is the rapid increase in debt. AK Plaza's total liabilities amount to 656.6 billion KRW, with a debt ratio of about 700%. In particular, current liabilities due within one year stand at 610 billion KRW, accounting for most of the total liabilities. Among these, short-term borrowings alone amount to 240 billion KRW. Because of this, AK Plaza has been focusing all efforts this year on repaying current liabilities.

AK Plaza is raising funds this year by mobilizing its affiliates. Last month, it borrowed 50 billion KRW from Aekyung Industrial in the form of short-term loans, and in June and September, it pledged shares held by AK Holdings and Aekyung Asset Management as collateral for loans from Korea Securities Finance and Kookmin Bank. Additionally, in May, it transferred AK Mall to Interpark Commerce for 500 million KRW.

However, financial support for Mapo Aekyung Town, a key business of Aekyung Group, is a factor worsening AK Plaza's financial soundness. Established in December 2008, Mapo Aekyung Town operates a complex facility including office, commercial, and lodging spaces in the private station building at Hongdae Entrance Station on the Gyeongui Line, and manages Aekyung Group's Hongdae headquarters, 'Aekyung Tower.'

Mapo Aekyung Town has faced financial difficulties due to increasing vacancies during the COVID-19 pandemic. As a result, AK Plaza invested 12.5 billion KRW by participating in Mapo Aekyung Town's capital increase in May this year and also lent 9 billion KRW in operating funds in December last year.

Currently, AK Plaza operates four department stores (Suwon, Bundang, Pyeongtaek, Wonju) and seven neighborhood shopping malls (Hongdae, Incheon Airport, Giheung, Sejong, Seongsu, Gwangmyeong, Geumjeong).

AK Plaza: "Improving Profitability Through NSC Strategy"

AK Plaza plans to use the 60 billion KRW raised through this capital increase to improve its financial structure. Last year, AK Plaza laid the foundation for profitability improvement by absorbing and merging 'Suwon Aekyung Station,' which operates AK Plaza Suwon, a profitable store.

It also plans to focus on enhancing merchandise (MD) based on the NSC strategy to boost profitability. The plan is to strengthen high-margin fashion genre MD and minimize vacancies by opening stores suited to local commercial districts.

AK Holdings, the holding company, aims to increase its return on equity (ROE) from the current 6% range to over 10% by 2027. For this, improving AK Plaza's performance is essential, and the company is optimistic. AK Plaza's cash cow, 'AK Suwon Store,' is reportedly making progress despite aggressive competition from Shinsegae and Lotte. As of the cumulative third quarter this year, AK Plaza Suwon recorded sales of 332.1 billion KRW, a 1.4% increase compared to the same period last year. An AK Plaza official said, "There was a prevailing expectation that sales at Suwon Store would significantly drop after the opening of Starfield and Time Villas, but Suwon Store has maintained its sales well. This is the result of the NSC strategy, which was previously considered difficult to succeed."

The vacancy issue at Hongdae AK& has also mostly been resolved. Since the opening of 'Animate,' a store selling manga-related products, in 2021, the influx of young customers in their teens and twenties has increased. They have also introduced character-themed spaces such as the 'Cinnamoroll Cafe.'