[Reporter Reading Securities Report] Daejin Advanced Materials IPO Launch Amid Secondary Battery Cold Wave

Secondary Battery Process Material Production... "Q3 Cumulative Sales 67 Billion Won, Surpassing Last Year"
Continued Electric Vehicle Market Slump Raises Concerns

Daejin Advanced Materials, a specialized company in materials for secondary battery processes, has submitted its securities registration statement and is proceeding with the initial public offering (IPO) process in earnest. Despite the electric vehicle chasm (temporary demand decline), Daejin Advanced Materials is experiencing rapid growth. However, concerns about the secondary battery market in the stock market remain a burden.

Daejin Advanced Materials was established in 2019. It developed and commercialized carbon nanotube (CNT) surface modification products. Its main products include secondary battery process materials such as ▲anti-static trays ▲PET release films. These products are used during battery manufacturing processes to prevent foreign substances during battery cell movement, manage static electricity, and reduce fire risks.

Despite the downturn in the electric vehicle market, its performance is on the rise. Since its establishment, it has recorded a steep sales growth with a compound annual growth rate (CAGR) of about 69% over five years. Sales increased from 28 billion KRW in 2021 to 64.7 billion KRW last year. On the other hand, operating profit decreased from 3.5 billion KRW to 1 billion KRW during the same period. The cumulative sales for the third quarter of this year reached 67 billion KRW, a 95.64% increase compared to the same period last year, already surpassing last year's performance. Operating profit turned positive, reaching 4.2 billion KRW.

Although performance is growing, market contraction due to the chasm is a concern. Especially, the poor performance of secondary battery-related companies in the stock market can be considered a negative factor.

Daejin Advanced Materials’ desired offering price ranges from 10,900 KRW to 13,000 KRW per share. It plans to offer a total of 3 million shares, aiming to raise approximately 32.7 billion to 39 billion KRW.

Mirae Asset Securities, the lead underwriter, used the enterprise value to EBITDA (EV/EBITDA) ratio to determine the desired offering price. EV/EBITDA is mainly used to value manufacturing companies with large-scale facilities. The company currently owns factories in the United States, Poland, and Finland. Comparable companies selected were Top Material and WCP. Their EV/EBITDA ratios on a trailing twelve months basis for the third quarter were 39.9x and 23.2x, averaging 31.54x.

Based on this, Daejin Advanced Materials’ per-share valuation was calculated at 19,200 KRW. Applying a discount rate of 32.29% to 43.23%, the desired offering price was derived. The average discount rate compared to valuations of companies listed on KOSDAQ from 2023 to November this year ranges from 21.52% to 33.79%. This appears to reflect the recent downturn in the secondary battery industry and poor stock market performance. Additionally, since the recent IPO market has not been as popular as before, the offering price was set to be market-friendly.

Based on the lower end of the offering price, Daejin Advanced Materials plans to allocate 29.952 billion KRW for facility funds, 652 million KRW for operating funds, and 1.482 billion KRW for debt repayment. For facility funds, 14.5 billion KRW and 13.5 billion KRW will be invested in the completion of the Tennessee 2nd plant and Georgia 3rd plant, respectively. Additionally, 1.9 billion KRW will be invested in establishing a CNT conductive material production facility.

Through the securities registration statement, the company explained, "The Tennessee plant plans to expand sales to various secondary battery manufacturers based on existing delivery records," and "The Georgia 3rd plant, along with the Tennessee 2nd plant, will produce products for customers in the southern United States."

A concerning factor is the previously mentioned downturn in the secondary battery market. This year, the electric vehicle and electric vehicle battery markets continued sluggish sales due to subsidy reductions and suspensions in major countries, ongoing high interest rates, and high electric vehicle prices. Consequently, battery companies’ performances have also been weak. Opinions on the electric vehicle market outlook for next year are divided, leaving uncertainty.

For reference, there are convertible bonds (CB) that can be converted into shares and released into the stock market one year after listing. Daejin Advanced Materials issued a total of six CBs this year, amounting to 9 billion KRW. The conversion price of these CBs is 16,068 KRW (assuming refixing at 70% of the lower end of the offering price), which corresponds to a total of 1,179,552 shares.

The total shares planned for listing, including the offered shares, amount to 14,796,820 shares. The proportion of the 1st to 6th CBs to the total shares is only 7.97%. However, depending on the company’s future performance and stock price, these may be converted into shares or subject to redemption requests, so this should be kept in mind.