Sungho Electronics more than doubled on news that it will acquire ADS Tech, which supplies products to a subsidiary of NVIDIA. As the stock rose, ordinary shareholders beamed, but KOSDAQ funds that invested in the company's convertible bonds (CBs) were left disappointed. That is because the CBs carry a call option (call right) that lets the company redeem the bonds if it chooses.
A CB is a bond that comes with the right to convert into stock. Investors can hold the CB to maturity and receive the set interest, or, if the stock price rises, they can exercise the conversion right and sell the shares to make a profit.
According to the Korea Exchange (KRX) on the 12th, Sungho Electronics closed at 5,230 won on the 11th, down 1,020 won (16.32%) from the prior trading day. The stock, which was around 2,970 won on the 5th, soared to as high as 6,250 won—more than doubling in just three trading days—after news broke of the ADS Tech acquisition. Although it gave back part of the gain and fell to 5,230 won that day, it is still 1.78 times higher than four trading days earlier.
Sungho Electronics' stock surged because the company moved to acquire ADS Tech. ADS Tech, a maker of optical module alignment equipment founded in 2000, counts Mellanox, a subsidiary of NVIDIA, as a key client. It is known that 80%–90% of last year's revenue came from Mellanox.
In particular, only two global companies make high-spec optical module alignment equipment—ADS Tech and Peacontech—and ADS Tech's growth potential is drawing more attention since Peacontech was acquired by China last year. Shareholders cheered the company's decision to acquire.
However, KOSDAQ funds that bought the 17 billion won CB issued in July face a letdown. Because the CB carries a 100% call option, if Sungho Electronics exercises it, the funds lose the chance to convert the bonds into shares and take profits in the market.
Sungho Electronics issued the 16th and 17th CB tranches in July, raising 12 billion won and 5 billion won, respectively. The conversion price is 1,150 won, and the maturity coupon is 5% and 4.5% per year, respectively. The conversion rights can be exercised starting in Feb. 2027 and Aug. 2027. If both CBs are fully converted into shares, the number of shares outstanding will increase by 14,782,608, or 20.84% of the current 70,922,823 shares.
Assuming the current share price (5,230 won) holds through Feb. 2027, the profit CB investors could gain through conversion is about 4,000 won per share. In the case of Prime Asset Management, which invested 2 billion won, exercising the conversion right and selling the shares in the market would yield about 8 billion won in profit.
CB investors are believed to have signed under a 100% call option condition, prioritizing interest income over the possibility of stock gains. Even without exercising the conversion right for a trading profit, CB holders can receive principal and interest at maturity. One CB investor noted disappointment with the recent rally but said, "We entered for the interest income (5%), so we contracted with a 100% call option."
Some predict Sungho Electronics may choose not to exercise the call option. Exercising it would ultimately require buying back the CBs and paying the 17 billion won principal plus related interest, increasing the financial burden.
However, Sungho Electronics has exercised a call option in a similar situation before. For the 11 billion won in bonds with warrants (BW) issued last year, it exercised the 100% call option in full and repurchased them on Oct. 2. Even though the stock price at the time—1,042 won—was below the conversion price (1,659 won), making it unlikely BW investors would exercise their warrants, Sungho Electronics preemptively triggered the call option.