[Public Companies at a Crossroads] ② Gisan Telecom Faces Double Trouble of Poor Orders and Worsening Performance and Finances

Every year, March to April becomes a brutal period in the KOSDAQ market. This is the time when business reports and audit reports are released, and depending on the contents of these reports, listed companies may face delisting or be designated as management-listed companies. Especially, companies that have recorded losses for several consecutive years struggle desperately to survive in the stock market by conducting large-scale fundraising or restructuring. Asia Economy aims to assist investors by examining the present and past of companies with continuous losses and forecasting their future prospects.

[Asia Economy Reporter Lim Jeong-su] KOSDAQ-listed telecommunications repeater specialist company Gisan Telecom is at risk of being designated as a management-listed company due to four consecutive years of operating losses. Having recorded operating losses for three consecutive years until 2018, the company remained in the red through the third quarter of last year. Whether it will be designated as a management-listed company depends on the fourth quarter performance.

Founded in 1994, Gisan Telecom grew by developing and producing various telecommunications repeaters such as mobile communication repeaters and Wibro repeaters. Its main products are in-building solutions including Distributed Antenna System (DAS) repeaters and wireless transceivers (WiFi AP). The founder, CEO Park Byung-ki, and his family hold 35.22% of the shares.

◆Decline in Orders Leads to Rising Cost Ratio... Chronic Low-Margin Structure Trap

Gisan Telecom’s sales have been continuously declining due to a decrease in orders. Sales, which approached 50 billion KRW in 2012 and 2013, shrank to 24.9 billion KRW by the end of 2018. This means sales have halved over the past five years.

As sales decreased, unit costs increased, pushing the cost ratio from below 80% to around 85%. The proportion of selling and administrative expenses to sales also rose from 17% in 2013 to 27% at the end of last year. With cost of sales and selling expenses exceeding sales revenue, the company has recorded operating losses for three consecutive years from 2016 to 2018.

In the first to third quarters of last year, it recorded an operating loss of 400 million KRW. The Korea Exchange (KRX) designates companies with four consecutive years of losses, excluding those with special exceptions such as biotech firms, as management-listed companies.

Due to consecutive losses, shareholders’ equity has rapidly decreased. The equity, which was 38.7 billion KRW in 2015, dropped to 27.3 billion KRW by the end of the third quarter last year. This reflects accumulated losses exceeding 10 billion KRW over about four years.

A securities industry official commented, "Most of Gisan Telecom’s products have low profitability with a low-margin structure, and since large-scale orders for 4G communication equipment in the past, order performance has continuously declined, deteriorating profitability. Unless 5G order performance significantly improves, it seems difficult to escape the cycle of continued losses or low profits."

◆Expansion of Short-Term Borrowings Due to Cash Depletion... End of Debt-Free Policy

Emphasizing financial stability, Gisan Telecom maintained a debt-free policy, so the debt burden was not significant. As of the end of the third quarter last year, total borrowings were only 4.9 billion KRW. The company held cash equivalents slightly exceeding borrowings, making it possible to cover debts with cash on hand.

However, prolonged poor performance depleted cash reserves, prompting the company to increase borrowings starting last year. Cash equivalents, which exceeded 20 billion KRW at the end of 2015, decreased to about 4.5 billion KRW by the end of September last year. With cash holdings and cash generated from operations significantly reduced, new borrowings became inevitable to secure funds for research and development (R&D) and operations.

In August last year, Gisan Telecom borrowed 3.5 billion KRW in short-term borrowings with maturities under one year. This included 1.14 billion KRW through overdraft and 1.2 billion KRW via private bonds. These funds were used to purchase land for constructing self-sufficient facilities within the public housing district in Godeok Gangil, Seoul.

Accordingly, short-term borrowings increased from 2.3 billion KRW to 5.8 billion KRW. Most of the borrowings are short-term debts that must be repaid or refinanced within one year. A credit rating agency official predicted, "Unless order performance becomes visible and cash flow improves, the trend of expanding borrowings mainly through short-term debts will continue."

◆Financial Support Burden for Unlisted Affiliates in Defense and Aviation

Financial support to affiliates is also considered a financial risk factor. Gisan Telecom holds 71.73% of shares in Hyundai J-COM and 81.69% in Mophions, among other affiliates. Hyundai J-COM is a defense company producing military communication and security equipment. Mophions specializes in aviation wireless communication equipment and develops aviation safety systems distributed to airports.

Gisan Telecom continues financial support to its defense and aviation affiliates. Through multiple capital injections, it has invested a total of 14.9 billion KRW: 9.7 billion KRW in Hyundai J-COM, 2.7 billion KRW in Mophions, and 2.6 billion KRW in its U.S. subsidiary. However, due to consecutive poor performances of these affiliates, impairment losses of about 6 billion KRW have been recognized.

Additionally, 7.8 billion KRW has been loaned to affiliates as short-term loans. Mophions has issued 3 billion KRW convertible bonds (CB) guaranteed by Gisan Telecom’s growth partnership, and contingent liabilities to affiliates exceed 6 billion KRW. Approximately 4 billion KRW worth of long- and short-term financial products have been provided as collateral for loans to related companies.

On the other hand, affiliate performance remains sluggish. Hyundai J-COM records sales in the 20 billion KRW range but has an average net profit of only about 300 million KRW over the past three years. Mophions has recorded operating losses for four consecutive years.

◆Management-Listed Designation Hinges on Fourth Quarter Performance

Gisan Telecom developed neutral repeaters for telecommunications operators and entered the Japanese market. It is also seeking entry into Europe through cooperation with value-added resellers (VAR). However, due to trade disputes between Korea and Japan, overseas business has yet to show clear results.

Above all, large-scale orders are necessary to return to profitability. Gisan Telecom has a cooperative relationship with KT domestically. From May 2018 to March this year, it agreed to supply repeaters worth approximately 6.7 billion KRW over about two years. In September last year, it signed a contract to supply optical repeaters worth 7.7 billion KRW by August this year.

A securities industry official analyzed, "The operating loss in the first to third quarters of last year was not large, so annual performance could turn profitable depending on fourth quarter results. However, although 5G repeater orders are occurring, they are not as active as competitors, making it difficult to guarantee an annual profit turnaround."

This content was produced with the assistance of AI translation services.