Shares of spinal implant medical device company L&K BIOMED jumped. The rally appears to reflect investors piling in on expectations that sales will increase in overseas markets such as the United States.
As the stock rose, holders of the convertible bonds (CB) issued last year have been filing for conversion. When a stock price climbs, CB investors can request to swap their bonds for shares (conversion), and when new shares are issued and listed, the value of existing shares inevitably falls. This means retail investors should keep the overhang risk (a large volume of potential sell orders waiting) in mind.
L&K BIOMED shares have seesawed this year. After starting the year around 10,000 won, the stock fell to the 5,000–6,000 won range in June, recovered to the early-year level last month, and then climbed to 14,000–15,000 won this month. Notably, the stock rose more than 40% over four trading days this month.
Founded in 2008, L&K BIOMED makes spinal fixation devices, expandable cages, and cervical, lumbar, and thoracic plates and screws. It has U.S. Food and Drug Administration (FDA) approval and European certification (CE), and sells products overseas.
The recent surge appears to stem from expectations of rising overseas sales. The company said last month that it was nearing a supply contract with a major global company, adding that a due diligence team visited its Yongin, Gyeonggi plant and conducted a review of overall systems.
Still, overhang concerns are cited as a risk to the recent rally. As the stock has risen since the second half, existing CB investors have been filing for conversion one after another. The company issued 20 billion won in CBs in May last year to raise operating funds. The bonds were issued to financial firms including NH Investment & Securities, Samsung Securities, and KB Securities, and as the share price fell sharply through July, the conversion price was adjusted (refixing) to about 6,371 won.
The conversion period began in May this year, one year after the bonds were issued. From July through the 3rd of this month, conversion rights were exercised in five rounds, and 10 billion won—half of the 20 billion won total—has been or will be converted into shares. The remaining 10 billion won has not been converted. The number of shares still available for conversion is about 1.58 million.
One factor easing overhang concerns is that 25% (5 billion won) of the CBs issued carries a call option (put option to sell to the issuer; the company's right to redeem the convertible bonds). This appears to reflect the low equity stake of the largest shareholder.
The combined equity stake of CEO Kang Guk-jin and related parties is 12.78%. As the company continued issuing CBs to raise needed funds, the largest shareholder's equity kept falling.
Expectations for expanding the U.S. business are not without uncertainty. In the past, L&K BIOMED pushed to expand in the United States but spent years in trade secret litigation with a local company, and its overseas business stagnated for a long time.
Kim Hyun-gyeom, an analyst at KB Securities, said L&K BIOMED's growth is promising, but noted, "The ongoing order contract could face delays in coordination and negotiations with the partner," adding, "If the stock price rises, conversion demands on the unconverted bonds could increase volatility."