[At a Crossroads: Listed Company] Otek① Chairman Kang Sung-hee Reaches Out to Shareholders for Family Company

120 Billion KRW Used to Repay Owner Company's Redeemable Preferred Share Acquisition Losses
Shareholders' Funds Flow from Subsidiary to Owner Company

Kang Sung-hee, Chairman of Otek Group. Screenshot from Otek website

Special-purpose vehicle manufacturer Otek has decided on a paid-in capital increase through a rights offering worth 18.4 billion KRW. It is analyzed that 12 billion KRW of the capital increase proceeds will be used for the family company of Otek Group Chairman Kang Seong-hee, which has been effectively grown through internal transactions.

According to the Financial Supervisory Service's electronic disclosure system on the 16th, Otek decided on a paid-in capital increase of 18.4 billion KRW through a rights offering followed by a general public offering of forfeited shares. The planned issue price is 2,160 KRW per share, and 8.5 million new shares will be issued. This is a large volume corresponding to 55.2% of Otek's total issued shares.

Otek plans to re-invest 12 billion KRW of the capital increase proceeds into its subsidiary, CRK. CRK is a company that manufactures and sells refrigerated and frozen showcases installed in large supermarkets and convenience stores. As of the end of last year, Otek holds 62.5% of CRK's shares, and Otek CEO Kang Seong-hee holds 37.5%.

As of the end of last year, CRK's total assets amounted to 127.3 billion KRW, total liabilities were 126 billion KRW, and total equity was 1.3 billion KRW. With a capital stock of 13.3 billion KRW, the capital erosion rate reaches 90%.

The deterioration of the financial structure is due to a sudden large-scale loss recorded last year. CRK posted an operating loss of 7.8 billion KRW and a net loss of 19.8 billion KRW last year. Operating profit turned negative from 2.3 billion KRW the previous year, and net loss expanded by 1,656% from 1.1 billion KRW the previous year.

The main causes of the loss were the simultaneous reflection of 'accounts receivable impairment' and 'fair value measurement loss on financial assets through profit or loss.' CRK recorded 6.4 billion KRW as allowance for doubtful accounts on accounts receivable last year, more than six times the 1 billion KRW recorded the previous year. This is analyzed to be influenced by the corporate rehabilitation of major clients such as Angang Construction.

Additionally, CRK recorded 6.1 billion KRW as a fair value measurement loss on financial assets through profit or loss, a loss that did not exist the previous year. CRK holds 20 billion KRW worth of redeemable preferred shares (RPS) of its affiliate FDsys through a special purpose company (SPC), and it evaluated the value of these redeemable preferred shares as impaired.

FDsys's redeemable preferred shares were first issued in 2016, circulated within Otek group companies, and became owned by CRK in 2023. To acquire these redeemable preferred shares, CRK borrowed 15 billion KRW as senior debt from IBK Capital and DB Financial Investment, and 10 billion KRW as subordinated debt from Otek group companies.

CRK plans to repay the borrowed funds upon receiving 12 billion KRW from Otek through this capital increase. Originally, CRK could repay the acquisition funds by redeeming FDsys's redeemable preferred shares, but FDsys's situation is unfavorable. FDsys was in a state of capital erosion as of the end of last year, which is why CRK recorded an impairment loss on FDsys's redeemable preferred shares.

Ultimately, if Otek proceeds with the rights offering capital increase, the shareholders' money will flow from Otek to CRK and then to FDsys.

FDsys is a company where Chairman Kang Seong-hee's family corporation is the largest shareholder. The largest shareholder, SH Global, which holds 50.3% of FDsys's shares, is a corporation where Chairman Kang holds 20%, and his two sons, Kang Shin-wook, Executive Director of Otek, and Kang Shin-hyung, Managing Director of Otek, each hold 40%. Most of FDsys's sales are generated from Otek's subsidiary, Otek Carrier.

An Otek official stated, "CRK acquired the redeemable preferred shares of FDsys believing in their investment value," and added, "Through this capital increase, Otek will improve the financial structure of its subsidiary and strengthen its capabilities in the energy-efficient refrigeration and freezing business using inverters to drive substantial growth."

Meanwhile, besides the funds going to CRK, Otek plans to use the remaining proceeds for facility funds for the electric special-purpose vehicle (PBV) conversion center, raw material purchases, and repayment of short-term borrowings.