The secondary battery corporation Kumyang is expected to see over 20 billion won in passive funds withdrawn all at once as it is designated as an unfaithful disclosure corporation and a management issue, leading to its exclusion from major domestic indices, including the KOSPI 200. Additionally, concerns are rising regarding margin calls on chairman Ryu Gwang-ji's stock collateral, which accounts for 4% of circulating shares, due to a recent sharp plunge in stock prices.
According to the Korea Exchange on the 10th, Kumyang will be excluded from 19 domestic indices, including the KOSPI 200, KOSPI 100, and KRX100, due to automatic exclusion regulations stemming from its designation as a management issue. The securities industry expects passive fund sales of 21.3 billion won related to Kumyang. Passive funds refer to funds that track specific markets or indices. The estimated outflow of passive funds is 43% of Kumyang's average daily trading value of 50 billion won over the past year, which is equivalent to 2.5% of Kumyang's market capitalization as of the 7th.
Koh Kyung-beom, a researcher at Yuanta Securities Korea, noted, "If we conservatively assume that funds tracking the KOSPI 200 amount to 36.6 trillion won, the outflow demand would be about 2.1 billion won," adding, "In effect, the impact on indices other than the KOSPI 200 is likely to be minimal." The index rebalancing will occur based on the closing price on the 7th.
In September last year, Kumyang announced plans to expand its secondary battery factory in a Busan industrial complex and proceed with a paid capital increase of 450 billion won allocated for shareholders. However, facing backlash from shareholders and a halt imposed by the Financial Supervisory Service, the plan was entirely retracted in January of this year. This decision was deemed a reversal of disclosure, leading the exchange to designate Kumyang as an unfaithful disclosure corporation on the 5th and impose 7 points of penalties along with a disclosure violation fine of 70 million won.
Kumyang's accumulated penalties have reached 17 points over the past year, surpassing the threshold of 15 points that led to its designation as a management issue. Kumyang announced plans to acquire a stake in a mine in Mongolia to secure a stable supply of lithium, a raw material for secondary batteries. However, the company faced controversy for inflating its earnings estimates and received 10 penalty points last October.
Kumyang's stock price has dropped by 42% this month, raising concerns about margin calls on the largest shareholder's stock-backed loans. Currently, approximately 14% (2,345,000 shares) of chairman Ryu Gwang-ji's 16,984,028 shares are tied up as collateral. Last month, to maintain the collateral ratio, an additional 300,000 shares were set as collateral, increasing Ryu's loan-to-equity ratio from 3.2% to 3.7%.
When stock prices fall, the value of existing collateral also decreases, meaning that more shares must be provided as collateral to maintain loans. If Kumyang's stock price continues to plunge, Ryu will have to provide more collateral or partially repay the existing stock-backed loans, which could lead to further stock price declines. The volume set as collateral for Ryu amounts to 4% of Kumyang's circulating shares (57,925,411 shares).
Analyses also suggest that Kumyang lacks adequate funding solutions. As it has been designated as a management issue, finding investors has become more difficult, and if more than 15 penalty points are added due to issues like reversing disclosures in the funding process over the next year, it may face material examination for listing eligibility.
It is also challenging for the largest shareholder to put forth their cards. As Kumyang faced delays in its capital increase last year, the factory expansion was conducted through a loan from Chairman Ryu. Consequently, Ryu's stake dropped significantly from 37.7% to the 20% range. Researcher Koh said, "Given the largest shareholder's equity has decreased to 26.6%, it seems unlikely that they will be able to utilize methods of disposing of treasury shares to defend management rights in the future."
Additionally, there is pressure regarding the 2024 business report that Kumyang must submit by the end of this month. Kumyang received an 'inadequate' opinion from external auditors, Ankyung Accounting Firm and Samil Accounting Corporation, regarding its internal control system in 2022 and 2023. In particular, Samil pointed out that as of the end of 2023, current liabilities exceeded current assets by 288.2 billion won, indicating the presence of going concern uncertainties, with Kumyang's debt ratio estimated to be 579% as of the end of last year.
Meanwhile, Kumyang issued an apology on the 5th, considering the potential exodus of investors, stating, "We sincerely apologize for causing concern among investors," and pledged to implement rigorous improvement measures to actively resolve the issues and take it as an opportunity for the company's development.