[At a Crossroads] Son Ogong① A Company with No Sales and Capital Erosion Signs 163 Billion KRW Investment Agreement with Gochang-gun

Continuous Losses Since Establishment of 'Sonogong Materials' in January This Year
Rights Offering to Shareholders for Debt Repayment Amid Poor Performance

Sonokong Materials, a subsidiary of Sonokong, a KOSDAQ-listed company, announced that it will invest 163 billion KRW in Gochang, Jeollabuk-do. Sonokong Materials is a company in a state of capital erosion that has never generated sales since its establishment. The parent company, Sonokong, is also facing financial difficulties and is seeking help from shareholders, drawing attention to how the investment funds will be secured.

According to the financial investment industry on the 27th, Gochang-gun, Jeollabuk-do, announced that it signed an investment agreement worth 163 billion KRW with Sonokong Materials on the 23rd. The investment agreement ceremony was attended by Shim Deok-seop, the mayor of Gochang-gun, Kim Kwan-young, governor of Jeollabuk-do, and Choi Won-sik, CEO of Sonokong Materials.

According to materials released by Gochang-gun, Sonokong Materials plans to invest a total of 163 billion KRW from May next year until 2027 in an unsold site of 98,418㎡ (approximately 29,711 pyeong) within the Gochang New Vitality Industrial Complex to produce 25,000 tons of lithium carbonate annually.

Sonokong Materials was established in January this year as a corporation with a 3 billion KRW investment from Sonokong, a KOSDAQ-listed company. The toy distribution company Sonokong started the lithium carbonate distribution business for secondary battery materials, which is completely unrelated to its core business, under the pretext of overcoming management difficulties.

Sonokong Materials announced that after its establishment, it signed a contract with the Bolivian Lithium Corporation (YLB) to establish a lithium carbonate plant and supply 3,000 tons of lithium carbonate by 2028. Additionally, it stated that it secured a supply chain for lithium spodumene by investing 1 million USD in a Nigerian lithium mine operator.

However, Sonokong Materials recorded zero sales as of the end of the third quarter this year. It has incurred a net loss of more than 1.7 billion KRW so far, and its equity capital has fallen to about 1.3 billion KRW, resulting in capital erosion. In other words, it has only consumed Sonokong’s investment funds without any performance since its establishment. Without external funding, it will be difficult to secure the money to invest in Gochang, Jeollabuk-do by May next year.

It is also unlikely to expect financial support from Sonokong, the parent company of Sonokong Materials. On the 20th, Sonokong decided on a paid-in capital increase of 15 billion KRW through a rights offering to existing shareholders followed by a general public offering of unsubscribed shares. The company is asking existing shareholders to invest more money because it needs funds. If the capital increase raises money, Sonokong plans to use 9.6 billion KRW to respond to early redemption requests (put options) on convertible bonds (CBs).

Sonokong has been running deficits for several years. In 2022, it recorded consolidated sales of 66.7 billion KRW and an operating loss of 6 billion KRW, turning to a deficit. Last year, sales dropped to 50.3 billion KRW and operating losses worsened to 9.5 billion KRW. Cumulative sales up to the third quarter this year also fell 31.8% compared to the same period last year, recording 23.9 billion KRW, and operating losses expanded by 23.5% to 7 billion KRW.

As losses accumulate, it is analyzed that Sonokong is finding it difficult to repay debts with its own funds. Moreover, with sluggish new business performance, the stock price has fallen, making it difficult for already issued CBs to be converted into shares. The conversion price of the currently issued 9.6 billion KRW CB is 1,696 KRW. Considering Sonokong’s recent stock price is in the 1,000 KRW range, the price must rise more than 70% for conversion to shares to be worthwhile. In fact, 4.6 billion KRW worth of CBs have already undergone early redemption requests as of the 20th.

Meanwhile, Sonokong did not respond to inquiries regarding the paid-in capital increase and Sonokong Materials’ 163 billion KRW investment execution.