KG Mobility, which turned to profit after being acquired by the KG Group, announced a large-scale capital reduction. Although there is still a long way to go, it has escaped from chronic deficits and is not currently at risk of capital erosion, drawing investors' interest with the announcement of the capital reduction.

Stock prices took a direct hit. After the announcement of the capital reduction, KG Mobility returned all of its recent gains. The stock price of KG Mobility, which was around 3,500 won a month ago, rose to 4,700 won this month. However, on the 11th, following the decision to reduce capital, the stock price plummeted to the 3,700 won range.

Like the drop in KG Mobility's stock price, capital reduction usually acts as bad news for stocks. Since capital reduction is an accounting mechanism that converts capital into surplus, it is decided by corporations that have accumulated operational losses for a long time in order to avoid capital erosion.

On Nov. 5, KGM Chairman Jae-sun Kwak attends the MUSEO EV new car launch event held at KGM headquarters. /Courtesy of KGM
On Nov. 5, KGM Chairman Jae-sun Kwak attends the MUSEO EV new car launch event held at KGM headquarters. /Courtesy of KGM

KG Mobility announced on the 10th that it held a board meeting and decided to reduce the par value of common stocks from 5,000 won to 1,000 won through capital reduction. However, even with this capital reduction, the number of shares remains unchanged. Unlike capital reduction by consolidation, which reduces the number of shares in a predetermined ratio, KG Mobility decided on a par value reduction capital reduction that maintains the number of shares while only decreasing the capital.

Both methods have the same purpose of offsetting deficits and improving financial structure, but there are significant differences in the change of the number of shares post-reduction.

In the case of KG Mobility, it is interpreted that the company chose capital reduction to overcome an excess of capital. If the reduction is implemented, KG Mobility's capital of 982 billion won will decrease to 196.4 billion won. The capital reduction resulting from this process will be converted into surplus.

While it is difficult to expect dividends immediately since KG Mobility has just turned to profit, if consistent performance improvements occur, this capital reduction decision could serve as the starting point for a shareholder return policy.

However, remaining concerns are whether the company will pursue a paid capital increase, and if so, in what manner.

Many corporations decided on paid capital increases to secure additional funds immediately after implementing capital reductions for improving financial structures. Samsung Heavy Industries, which had previously faced a capital erosion crisis, decided on a 1/5 capital reduction along with a paid capital increase of 1 trillion won. Similarly, Jeju Air, which experienced managerial difficulties during the COVID-19 pandemic, simultaneously pursued a capital reduction and a paid capital increase of 200 billion won.

KG Mobility plans to expand its electric vehicle models and increase investment in autonomous driving and vehicle software. This indicates a significant need for investment funds.

This capital reduction decision must pass through the shareholders' meeting scheduled for the 26th. If approved at the meeting, stock transactions will be halted from the 10th of next month until May 8, with new shares listed on May 9.