While subsidiary EcoPro BM is moving forward with a rights offering, holding company EcoPro will take part in an oversubscription worth 529.2 billion won. The move is intended to show its commitment to responsible management as the largest shareholder. But the market is voicing concerns that the holding company's available cash will be largely depleted, which could significantly undermine its financial flexibility.
According to the Financial Supervisory Service's electronic disclosure system on the 2nd, EcoPro plans to oversubscribe to 120% (4,366,131 shares) of its existing stake in EcoPro BM's rights offering. The acquisition amount is 529.2 billion won, equivalent to 11.79% of its shareholders' equity. EcoPro BM is pushing a 1.2 trillion won rights offering to fund investments in a nickel smelter in Indonesia and a cathode materials plant in Hungary.
The investment funds are expected to come from price return swap (PRS) proceeds secured last year. In Oct. last year, EcoPro obtained 800 billion won in liquidity through a PRS contract using 6,379,680 shares of EcoPro BM equity as the underlying asset. PRS is a derivative transaction in which a company raises funds by entering into a contract with a financial institution using held shares as the underlying asset and settles gains or losses at maturity based on stock price movements.
The market is concerned that the holding company's financial flexibility could decline due to the large-scale capital injection. The 529.2 billion won EcoPro will inject this time amounts to about 75% of its standalone cash and cash equivalents (711.5 billion won) as of the end of March this year. In effect, it is pouring a substantial portion of its available cash into supporting its subsidiary.
Lee Young-gyu, a researcher at NICE Investors Service, said, "The fact that a significant portion of the holding company's cash and cash equivalents will be used in the process of EcoPro's participation in the rights offering could weigh on the holding company's credit profile." In particular, he expected some deterioration in financial stability indicators such as double leverage—which indicates the scale of subsidiary investments relative to shareholders' equity due to the large capital injection—and the net debt dependence ratio.
These concerns were reflected in share prices. EcoPro BM fell 6% the previous day, while EcoPro, the holding company, dropped 9%. Because dividends and the value of its held equity in subsidiaries make up most of its corporate value, EcoPro typically trades at a holding company discount. On top of that, expectations that a significant portion of its cash and cash equivalents will be committed through this rights offering added to worries about financial burden, widening the decline.
On the other hand, some say it will positively affect the overall financial structure of the EcoPro group companies. By raising investment funds through a rights offering instead of borrowing, it can reduce interest expense burdens. On a consolidation basis, EcoPro's debt ratio is projected to fall to 105.9% from 120.0% at the end of March this year when reflecting the rights offering and investment plans.
Ultimately, the key is whether this investment will lead to improved profitability. The focus is on whether cost savings in nickel procurement through Indonesia's BNSI and increased revenue from nickel sales materialize as the company expects, and whether the Hungary cathode materials plant can raise its utilization rate in line with a recovery in the European electric vehicle (EV) market.
Park Jeong-ha, a researcher at iM Securities, explained, "It is necessary to confirm whether cost savings in nickel procurement appear after BNSI actually begins operations and whether the Hungary subsidiary's utilization rate continues to improve."