SK and CJ shares decline on fundraising concerns

[Photo by Kim Ho-young]

Shares of SK and CJ Group’s holding companies have been struggling this year and investor concerns grow as their affiliates have embarked on large-scale rights offering plans, which has raised concerns on potential financing risks that have been raised constantly this year and thus result in a further decline.

According to Korea Exchange, shares of SK Inc. and CJ Corp. are down 15 percent and 14 percent, respectively, this year. This decline came with poor performance of their subsidiaries, raising concerns about financing. One of the key triggers was their rights offering plans. As for SK Group, SK innovation Co. announced plans to raise 1.18 trillion won ($899.4 million) on Friday in a regulatory filing after the market close. Within CJ Group, CJ CGV Co. unveiled a 1 trillion won funding plan, including a 570 billion won capital increase on Tuesday.

SK innovation will raise 1.18 trillion won by issuing 8.19 million new shares. Of the total, 418.5 billion won of the proceeds will be used to fund facilities and 35 billion won to repay debt. Meanwhile, 409.2 billion won will be spent on acquiring securities of another entity.

SK Group has been proactive in calming market fears over its efforts to raise massive capital for SK hynix Inc. and SK on Co., a subsidiary of SK innovation engaged in the battery business.

SK on has raised more than 8 trillion won in the last six months through a rights offering, borrowing and corporate bond issuance from Korea Investment Private Equity, Eastbridge Consortium, MBK Consortium, SNB Capital Co., and Hyundai Motor Group.

Although this may have somewhat relieved the company’s funding situation, the market anxiety may grow again as its parent SK innovation plans for a capital increase in the 1 trillion won range. The concerns are propelled by the fact that the capital increase amounts to 7 percent of SK innovation’s market cap of 16.84 trillion won and that Korea’s 20th-largest conglomerate by market cap made an unusual choice to announce the plan after the market closed on Friday.

“A capital increase of more than 1 trillion won is highly likely to have a negative impact on the stock price,” said Lee Sang-heon, an analyst at Hi Investment & Securities Co.

SK hynix also issued corporate bonds worth 1.69 trillion won in the first quarter and exchangeable bonds worth 2.24 trillion won in April, and even recently borrowed around 200 billion from Hana Bank. Yet, SK hynix still needs to pay the balance of $2 billion for the acquisition of Solidigm by 2025 and funds for its own investments. SK Group executives spent a considerable amount of time discussing the funding situation at an expanded management meeting chaired by Chairman Chey Tae-won on June 15, according to sources.

Shares of SK, which closed at 158,200 won on Friday, had exceeded 360,000 won in 2021 after the pandemic but has recently returned to the level of late March 2020. “Falling international energy prices and a surge in semiconductor inventories due to sluggish global demand have worsened the profitability of subsidiaries except SK telecom Co.,” said Choi Jeong-wook, an analyst at Hana Securities Co.

[Photo by Lee Seung-hwan]

In the meantime, CJ stock, which closed at 71,800 won on Friday and had experienced a plunge during the Ra Deok-yeon scandal in late April, has been falling on reports of CJ CGV’s plan to raise about 1 trillion won. It is down 8 percent from a day prior to CJ CGV’s funding announcement. CJ has injected a total of 800 billion won in CJ CGV, including its participation in the recent capital increase, over the past three years since the pandemic.

The stock’s decline came as CJ CGV’s earnings was slow to recover and CJ had to continuously fund the company. The capital for CJ CGV will be raised through a public offering of forfeited shares after shareholder allocation, and CJ will contribute to a capital increase worth 60 billion won.

Yet, some also raise expectations that the stocks of the holding companies that have fallen significantly may recover with improved earnings of their affiliates.

“Operating profit of SK is expected to bottom out in the second quarter as downstream industries recover and energy prices stabilize,” said Lee Seung-woong, an analyst at EBest Investment & Securities Co. He also unveiled a positive outlook for the growth of SK’s unlisted subsidiaries such as SK E&S Co. and SK siltron Co.

“CJ has full potential for a higher dividend on the back of CJ Olive Young Corp.’s strong earnings,” said Choi Kwan-soon, an analyst at SK Securities Co. “In the two days following the announcement (of CJ CGV’s capital increase), CJ’s market cap dropped 92.2 billion won while CJ CGV’s net asset value fell 34.6 billion won, and the decline in shares was somewhat excessive.”