[Why&Next] Is Now the Right Time?... Inside Aekyung Group's Sale of Its Core Business

AK Holdings Considers Sale of Aekyung Industrial and Jungbu CC
"Improving Financial Structure and Adjusting Portfolio"
Supporting Affiliates with Stock-Backed Loans... Debt Dependency Reaches 52%
Aekyung Industrial's High Exposure to China Draws Attention to Corporate Value

Aekyung Group has begun the process of selling its core affiliate, Aekyung Industrial. As its main businesses have consecutively deteriorated, leading to continued leveraged management, the liquidity worsened further following the Jeju Air disaster, prompting the group to sell even its foundational business to resolve financial difficulties. Analysts also suggest that the timing of the sale is favorable, given the global K-beauty boom, which has increased the valuation of domestic cosmetics companies.

According to the Financial Supervisory Service's electronic disclosure system on the 4th, AK Holdings, the holding company of Aekyung Group, recently stated regarding the sale of Aekyung Industrial, "We are reviewing various options to improve the group's financial structure and reorganize the business portfolio," adding, "Nothing has been finalized yet."

Within the industry, the sale of the golf course 'Jungbu Country Club (CC),' owned by Aekyung Industrial and Aekyung Chemical, is also considered likely.

Aekyung Group Affiliates Suffer Consecutive Profit Declines... Financial Structure 'Shaken'

Aekyung Group traces its origins to Aekyung Oil Industry, founded in 1954 by the late founder Chae Mong-in. At that time, Aekyung Oil Industry gained recognition with the explosive sales of the cosmetic soap 'Mihyang' and expanded its business by excelling in household products such as the kitchen detergent 'Trio.' After Chae Mong-in passed away in 1970, his wife, Chairwoman Jang Young-shin, took over management. Chairwoman Jang secured cash by selling household goods and established Aekyung Chemical, entering the chemical industry.

In the 1980s, the company entered the cosmetics business through a technical partnership with the British company Unilever. At this time, Aekyung Oil Industry changed its name to Aekyung Industrial. Until its split from Unilever in 1992, Aekyung Industrial produced cosmetics such as 'Ponds,' which Unilever had acquired. Subsequently, it launched brands like A Solution, Luna, and AGE20'S, transforming into a cosmetics company. As of last year, Aekyung Industrial's sales composition was 39% cosmetics and 61% household products. In the 1990s, Aekyung Group built the Aekyung Department Store in Guro, Seoul, entering the department store business. In 2004, it co-founded Jeju Air with Jeju Special Self-Governing Province, expanding into the aviation business.

The recent liquidity crisis of Aekyung Group stems from the consecutive poor performances of these affiliates. According to the business report of AK Holdings, the group's holding company, most major affiliates recorded net losses last year. Aekyung Chemical's sales decreased by about 100 billion KRW last year, and its net income turned from a profit of 27 billion KRW in 2023 to a loss of 800 million KRW last year. Jeju Air, which recorded net income in the 100 billion KRW range during the same period, also turned to a loss last year due to the impact of the high exchange rate, and AK Plaza's net loss expanded to 65.9 billion KRW. Among major affiliates, only Aekyung Industrial posted a net income of approximately 43.7 billion KRW.

'Relief Pitcher' AK Holdings, Rapid Debt Increase Due to Affiliate Support

AK Holdings has acted as a relief pitcher, providing financial support whenever affiliates faced management difficulties. During the COVID-19 pandemic, when Jeju Air's operations were virtually halted, AK Holdings participated in Jeju Air's capital increase (284.5 billion KRW) and AK Plaza's capital increase (79 billion KRW), injecting operating funds. Earlier this year, it provided 100 billion KRW each in loans and funding to AK Plaza, which required financial restructuring.

This affiliate support was financed through borrowing. AK Holdings' total assets on a separate basis last year amounted to 975.8 billion KRW. Of this, the company's external borrowings reached 504.9 billion KRW. The debt dependency ratio, calculated by dividing borrowings by total assets, surged from 22% in 2020 to 52% last year. A higher debt dependency ratio indicates a deterioration in the company's financial soundness.

As of last year, AK Holdings' current assets stood at 1.346 trillion KRW, while current liabilities were 2.6735 trillion KRW, resulting in a current ratio of about 50%. The current ratio is an indicator of a company's ability to repay debts due within one year. Ideally, the current ratio should be maintained above 200%, and companies with a ratio below 100% are classified as insolvent.

A more significant issue is that most of the borrowings were secured by shares of listed affiliates held by AK Holdings (Aekyung Industrial, Aekyung Chemical, Jeju Air). AK Holdings pledged shares to NH Nonghyup Bank, KB Securities, and others to obtain short-term loans. The borrowings secured by shares amounted to 333 billion KRW, accounting for 65% of total borrowings (504.9 billion KRW) as of last year.

Loans secured by shares can lead to financial pressure if the stock prices of the collateral decline. When stock prices fall, the asset value is considered to have decreased, prompting financial institutions to demand additional margin calls. Most of Aekyung Group's listed affiliates saw their corporate values decline, especially Jeju Air, which dropped about 40% over the past year. Since the Jeju Air disaster on December 29 last year, its stock price has struggled to recover. Aekyung Chemical's stock also fell by 47% during the same period. Only Aekyung Industrial's stock price rose about 30% following the sale rumors.

In February this year, AK Holdings faced an early redemption request of 78.7 billion KRW on Jeju Air exchangeable bonds (EB), which is expected to limit its capacity to support affiliates going forward. The company issued exchangeable bonds worth 78.7 billion KRW in September 2022, exchangeable for Jeju Air shares. These bonds included a clause allowing early redemption of all or part of the bonds if the stock price of the exchange target falls below the exchange price (15,050 KRW) after September 6 last year, two years after issuance.

Favorable Timing for Selling Aekyung Industrial Amid K-Beauty Boom

Industry insiders predict that since Aekyung Industrial is the group's only cash cow, the sale will be used to quickly extinguish the liquidity crisis. AK Holdings and related parties hold 63.38% of Aekyung Industrial's shares (AK Holdings 45.08%, Aekyung Asset Management 18.05%, etc.). Aekyung Group is structured such that Vice Chairman Chae Hyung-seok and related parties control AK Holdings (the holding company), which in turn controls each affiliate. Aekyung Asset Management, a 100% privately owned company by the Chae family, also holds shares in Jeju Air, AK Plaza, and Aekyung Industrial.

Aekyung Industrial's market capitalization is around 430 billion KRW, with the value of the shares to be sold estimated at about 260 billion KRW. Adding management premiums and asset values, the sale price is expected to be much higher. Especially with the recent boom in K-beauty, Aekyung Industrial's share value can be highly valued. Last year, K-beauty exports surged about 20% compared to the previous year, and growth is expected to accelerate further this year. A capital market industry insider said, "The beauty sector has been the most favored and closely watched by private equity funds (PEFs) and funds since last year," adding, "Employees actively attend beauty industry events to gather industry information."

However, Aekyung Industrial's corporate value may be hampered by its limited benefit from the K-beauty boom. Recently, K-beauty has surged mainly in the U.S., while Aekyung Industrial has focused on the Chinese market. The Chinese market is struggling due to economic recession and Guochao (preference for domestic consumption), causing domestic cosmetics companies to face difficulties. As a result, last year, Aekyung Industrial recorded sales of 679 billion KRW and operating profit of 46.8 billion KRW. While sales slightly increased, operating profit declined by more than 20%. Aekyung Industrial stated, "With entry into new countries, we aim to increase non-China sales to 40% by 2027," and "We plan to expand cosmetics sales within Aekyung Industrial from the current 38% to 50%."