Hanwha Group decided on another large paid-in capital increase by an affiliate in just one year, fueling a backlash from shareholders. In particular, unlike last year's Hanwha Aerospace case, this Hanwha Solutions capital increase is to raise funds for debt repayment, dealing a heavier blow to the stock price.
Brokerages are downgrading their investment view on Hanwha Solutions to "neutral" or "sell." It is interpreted to mean there is a high chance the stock will not recover even after raising funds through the capital increase. By contrast, Hanwha Aerospace's share price actually rose right after last year's capital increase.
On the 26th, Hanwha Solutions announced via a regulatory filing that it will conduct a paid-in capital increase worth 2.4 trillion won. The size is 72 million shares, equivalent to 42% of the existing shares outstanding (171.89 million shares).
Hanwha Solutions' share price plunged after the announcement. The sell-off is seen as reflecting concerns that a sharp increase in shares outstanding could dilute existing shareholders' equity value. Following the capital increase announcement, Hanwha Solutions fell 18.2% on the 26th and 3.13% on the 27th.
Investor sentiment was hit especially hard because the reason for the fundraising is debt repayment. The company said it plans to use 1.5 trillion won—more than half of the 2.4 trillion won to be raised—on debt repayment.
Despite strong backlash to a rights offering that asks existing shareholders for funds, rather than a third-party allotment that brings in outside capital, Hanwha Solutions chose a shareholder allotment because its financials are under strain.
Over the past two years, Hanwha Solutions sold assets worth about 1.6 trillion won and issued 700 billion won in hybrid securities. Even so, as of the end of last year, Hanwha Solutions' debt ratio stood at 196.3%, with net debt at 12.6 trillion won. This is why there are concerns that additional fundraising will follow even after securing funds through the capital increase.
The case of Hanwha Aerospace, another group affiliate that carried out a capital increase just a year ago, is also being cited. In March last year, Hanwha Aerospace executed a 2.3 trillion won rights offering and a 1.3 trillion won third-party allotment.
Hanwha Aerospace's stock also plunged right after the announcement, but it recovered relatively quickly. The increase in share count was a burden, but the company used the raised funds for future investments.
At the time, Hanwha Aerospace said it was raising funds to build facilities for unmanned system and engine development and to acquire other companies' securities.
Hanwha Aerospace's share price plunged immediately after the announcement but then rebounded as expectations for the investment plan were priced in. The rights offering was also a success. The subscription rate by existing shareholders was 106.4%, and the public offering competition rate reached 227.6 to 1, drawing strong investor interest. As of the subscription date for the capital increase, the stock was up about 18% from the announcement.
On top of that, Hanwha Aerospace was improving its results on favorable industry conditions. In contrast, Hanwha Solutions is seeing continued deterioration, with the solar and chemical businesses suffering from weak industry conditions.
Kim Yong-sik, a professor of business administration at Sogang University, said, "The difference between the two companies is that Hanwha Aerospace was overall in good shape and its stock was rising," and added, "Hanwha Solutions has been holding on with borrowings and is shifting responsibility to shareholders, so it needs to clearly spell out its plan for financial improvement."