Sung Ho Electronics, which was considered a beneficiary of artificial intelligence (AI) after acquiring a U.S. Nvidia partner, is now paying the price for its aggressive mergers and acquisitions (M&A). Following a significant drop in stock prices due to deteriorating financial conditions from excessive funding, the largest shareholder has put up their holdings as collateral but is facing financial risks. Amid this turmoil, Sung Ho Electronics is pushing for a large issuance of convertible bonds (CB), raising concerns that the major shareholder is shifting financial risks onto the company.
According to the financial investment industry on August 5, Sung Ho Electronics has recently selected NH Investment & Securities and Kiwoom Securities as underwriters for a private placement of CBs worth 100 billion won. There are also predictions that the funding amount could expand to as much as 200 billion won through additional issuances.
Market skepticism is growing regarding the purpose of this large-scale fundraising. Critics suggest that the CB issuance may not be aimed at securing growth resources for the company but rather to support the major shareholder, Seoryong Electronics, which is facing a funding crisis due to its aggressive expansion.
The situation unfolded as follows: In February, Sung Ho Electronics executed a large-scale M&A exceeding 300 billion won, acquiring ADS Tech (2.8 billion won) and DS (400 million won), both partners of Nvidia. The acquisition cost for ADS Tech alone accounted for 65% of Sung Ho Electronics' total consolidated assets (approximately 430.6 billion won). During this process, the major shareholder, Seoryong Electronics, took out a 300 billion won acquisition finance loan on April 10, using its shares in Sung Ho Electronics as collateral to lend 154.8 billion won to facilitate the acquisition of the remaining shares of ADS Tech.
The problem arose from a significant decline in operating profit and net profit, which dropped by about 80% due to poor performance in its core power supply and film capacitor businesses. Concerns over liquidity crises stemming from the M&A led to a sharp decline in Sung Ho Electronics' stock price, which fell from a peak of 52,800 won in April. As the contractual collateral ratio (200%) collapsed, Seoryong Electronics was forced to sell additional shares of Sung Ho Electronics on May 21 (7.67 million shares), June 24 (1 million shares), and June 26 (7.25 million shares). Consequently, 99.88% (27,292,815 shares) of Seoryong Electronics' holdings (38.18%) became tied up as collateral, leaving no further shares to offer.
In July, the situation worsened. The stock price continued to decline, reaching around 11,850 won by the end of the month, triggering a clause that stipulated 'forced selling if collateral is not supplemented within three trading days.' If forced selling occurred, Seoryong Electronics' stake would plummet from 38.18% to 0.05%, resulting in an immediate loss of control over the company.
In response, Seoryong Electronics repaid a total of 135 billion won in cash in five installments from July 8 to July 31, as the stock price decline intensified. By proactively injecting cash to meet the collateral ratio, they managed to reduce the loan balance to 165 billion won, narrowly avoiding forced selling, but at the cost of significant cash outflow. As of today, Sung Ho Electronics' stock price has slightly rebounded to 19,000 won, but its reliance on borrowed funds has already reached a risky level (45%).
Sung Ho Electronics stated regarding the purpose and use of the CB issuance, "The use of funds from the CB issuance is a matter for disclosure, so we cannot legally disclose it in advance," adding, "The decision on whether to raise an additional 200 billion won has not yet been made internally."
A financial industry insider commented, "This is a classic case of self-inflicted harm, where the company aggressively pursued M&A despite collapsing cash generation capabilities, jeopardizing the major shareholder's control. The large-scale CB issuance by the company could lead to a risk of an oversupply, transferring financial burdens to general investors."
* This article has been translated by AI.
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