Peak Performance Only at IPO... Declining Operating Profit Due to Lack of R&D
Ordinary Shareholders Bear Failed Businesses, While Successful Ones Are Spun Off... Damaging Shareholder Value
Stride Partners, leading the shareholder activism campaign for HPO, announced on the 19th that it has released a second Q&A document aimed at enhancing corporate value. In this Q&A, Stride Partners addressed issues such as the causes of HPO's poor performance, problems related to subsidiary listings, and the necessity of appointing audit committee members, emphasizing the importance of providing clear information to shareholders and exercising voting rights.
Below is the Q&A content.
Q. What is the current performance status of HPO?
A. Since its listing, HPO's operating profit has significantly declined, damaging shareholder value. In its first year of listing in 2021, HPO recorded an operating profit of 22.8 billion KRW with an operating margin of 14.3%, but last year, operating profit dropped to 7 billion KRW and the operating margin fell to 2.9%. In three years, operating profit has been cut to one-third, and the operating margin has decreased to one-fifth. The reason companies go public is to achieve 'growth,' but HPO only showed good performance at the time of listing.
Q. What are the causes of the poor performance?
A. The causes are analyzed as a lack of research and development (R&D) and declining competitiveness. HPO focuses only on advertising and marketing rather than R&D. Although developing differentiated ingredients is essential in the health functional food market, it has been confirmed that HPO does not have its own R&D facilities. Competitor Novarex has over 80 R&D personnel and maintains market competitiveness through independent ingredient development. The management style relying on short-term marketing without a competitiveness enhancement strategy is considered the main cause of poor performance.
Q. What are the issues related to subsidiary listings?
A. At the time of listing, HPO acquired several companies with 66.4 billion KRW raised from the public offering. Failed businesses (such as Copenhagen Recipe) were absorbed and merged into the parent company (HPO), while successful businesses (Arne and Biopharm) were separated as subsidiaries and are being prepared for listing. This structure means that losses from failed businesses are borne by ordinary shareholders, while profits from successful businesses are monopolized by certain shareholders and management.
As of the third quarter of last year, 85% of HPO's net profit was generated by Arne and Biopharm. If these subsidiaries are listed, HPO will be left as a shell. It is analyzed that subsidiary listings will effectively cause a sharp deterioration in the parent company's value.
In fact, in the domestic stock market, there are many cases of 'Korea Discount' where the parent company's corporate value is discounted by 40-50% after subsidiary listings. A representative example is LG Chem's stock price decline after listing LG Energy Solution. Subsidiary listings impose losses on ordinary shareholders, while the largest shareholders and management benefit through increased share value and liquidity.
Q. Are there problems with HPO's current board of directors and audit committee?
A. HPO's board currently lacks independence and cannot effectively check management. The largest shareholder also serves as the chairman of the board, so all decisions are made in favor of specific shareholders. The audit committee is also composed of individuals with interests aligned with management, so the monitoring function is practically non-operational.
In particular, current audit committee member Min Jeong-gi, an outside director, previously failed to check issues such as 'preferential transactions' while serving as an outside director at Kona I. Ultimately, to enhance the board's independence, shareholders must appoint candidates they recommend to the audit committee.
Q. Who is the audit committee candidate recommended by HPO?
A. HPO recommended candidate Kim Gap-ho, founder of K&T Partners, who has invested in several listed companies such as Gold Pacific (now K-Bio), Incon, and J. Stefan (now E-Root), and has been directly involved in management as the largest shareholder in some companies.
In the case of Gold Pacific, K&T Partners maintained the largest shareholder position from March 25, 2019, to November 10, 2022. During this period, they issued eight convertible bonds (CB) and one bond with warrants (BW), diluting ordinary shareholders' equity and damaging shareholder value through mezzanine securities issuance.
Additionally, using Gold Pacific's funds, they acquired Incon and incurred approximately 2.1 billion KRW in losses through stock trading of Jogwang ILI, which is currently facing delisting. As a result, Gold Pacific's market capitalization decreased from 59.2 billion KRW to 42.3 billion KRW during the 3 years and 6 months K&T Partners operated it.
Moreover, Gold Pacific was reported to the Financial Supervisory Service for financial statement manipulation and obstructing external audits. There are concerns that if a person with a history of harming ordinary shareholders' value through numerous convertible bonds and capital increases, and who has been sanctioned by financial authorities, is appointed as an audit committee member, they may focus more on protecting specific shareholders' interests rather than performing independent monitoring.
Q. Who is the audit committee candidate recommended by Stride Partners?
A. Stride Partners recommended Nam Jung-gu, a representative lawyer of Inheon Law Firm, as an audit committee member. Nam is a corporate legal expert who has handled numerous embezzlement and breach of trust cases for KOSDAQ-listed companies and has experience advising venture and startup companies. He is an ideal candidate to contribute to improving corporate governance and transparent management monitoring. If Nam is appointed as an audit committee member, the board's independence and corporate transparency will be greatly strengthened.
Q. Can ordinary shareholders appoint audit committee members through exercising voting rights?
A. Ordinary shareholders can decide on the appointment of audit committee members through exercising their voting rights. Since the 'separate election' method is applied for audit committee appointments, the voting rights of the largest shareholder and related parties are limited to 3%. This means that audit committee appointments are possible solely through the participation of ordinary shareholders. Shareholders should actively exercise their voting rights to check management and protect corporate value.
Q. Lastly, is there a message for HPO shareholders?
A. HPO must transform into a company where all shareholders can grow together. The activist campaign for withdrawing subsidiary listings, enhancing corporate value, and protecting shareholder rights is just beginning. Shareholders' voting rights can change the company's future. We hope you will cast your valuable vote at the shareholders' meeting on March 31.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
