Fine Dust, COVID-19... and KM

[Asia Economy Reporter Jang Hyowon] As the novel coronavirus infection (COVID-19) continues to spread for several months, a mask shortage phenomenon persists. Although the government has taken the lead in implementing measures such as the ‘Mask 5-Day Rotation System’ to prevent public confusion, the demand for masks continues to rise. In this situation, the stock prices of several listed companies, commonly called ‘mask-related stocks,’ are experiencing rollercoaster rides. When the number of COVID-19 confirmed cases increases or news of mask shortages emerges, their stock prices show sharp fluctuations. So, how much profit can these companies actually make from mask production?

Semiconductor equipment company KM is one of the hottest stocks this year. This is because it produces masks, which have become an essential item for the entire nation. Until last year, masks accounted for only about 10% of KM’s total sales. However, amid the COVID-19 crisis, the company has maximized factory operation rates to drive performance. The mask division is expected to emerge as the leading business unit for KM in the future.

◆ Secured 35 billion KRW in mask sales = Established in 1989, KM manufactures and sells consumables used in cleanrooms during semiconductor processes. In 2016, it launched its own brand ‘Dr. Purie’ and entered the mask business.

Since starting the mask business, related sales have increased every year. Sales, which were around 300 million KRW in 2016, jumped to 800 million KRW in 2017 and 5.2 billion KRW in 2018. By the end of the third quarter last year, sales had reached 7.8 billion KRW, already surpassing the 2018 level. The proportion of mask sales in total sales also increased from 0.3% to 12%.

The success of the mask business is due to the increasing demand caused by worsening yellow dust and fine dust. In particular, KM was able to significantly increase sales by building a new mask production plant in 2018 to meet demand.

This year, KM’s mask sales are expected to have increased even more. This is because the large-scale spread of COVID-19 has caused a mask shortage.

KM’s masks are produced at the Anseong Plant 3. According to the company, orders have surged since early this year, and the factory is operating non-stop. Running the factory 24 hours a day allows production of up to 10 million masks per month. It is estimated that about 20 million masks were produced and sold during January and February.

As of the end of the third quarter last year, KM’s mask selling price was about 353 KRW per unit. However, this year, the wholesale price of masks is estimated to have soared about 2.5 times. In fact, on the 6th of this month, KM signed a mask supply contract worth 16.7 billion KRW with the Public Procurement Service, reportedly delivering masks at about 900 KRW per unit.

If masks were sold at the price supplied to the Public Procurement Service during January and February, KM is estimated to have recorded about 18 billion KRW in sales. This accounts for about 14.1% of last year’s total sales of 127.5 billion KRW. Adding the Public Procurement Service volume, about 27% of last year’s total sales have already been secured from masks alone.

Operating profit is also expected to increase. Although fabric prices have risen recently due to the surge in mask demand, KM is still producing masks using fabric previously secured.

As of the end of the third quarter last year, the material cost accounted for about 30% of the mask price. The operating profit margin of the mask business division is known to be around 20%. Even if selling and administrative expenses such as labor costs increased proportionally with sales, since material costs did not rise, the operating profit margin of recent mask sales is estimated to be about 38%.

◆ Increased borrowings but offset by performance growth = KM’s financial condition is also relatively sound. Although borrowings increased due to expanded investments since 2018, considering the improved performance and the surge in mask sales, it is expected to be manageable.

At the end of 2016, when KM started the mask business, total borrowings on a separate basis were 6.9 billion KRW. After subtracting cash equivalents of 13 billion KRW, net borrowings were negative, effectively operating without debt. However, as of the end of the third quarter last year, total borrowings surged 272.5% to 25.7 billion KRW, and net borrowings reached 22.3 billion KRW.

The increase in borrowings is attributed to the construction of Anseong Plant 3, the mask production facility. KM invested about 20.4 billion KRW in Anseong Plant 3 over the past three years. Most of the funds are analyzed to have been raised through short-term borrowings. As of the end of the third quarter last year, KM’s short-term borrowings were 20.1 billion KRW, and current portion of long-term debt was 1.1 billion KRW.

Also, most borrowings are short-term debts to be repaid within one year but are bank loans, so the burden is not significant. KM’s performance is also on the rise, so extension or refinancing is expected to be smooth. Last year, KM recorded an operating profit of 7.8 billion KRW, a 52.6% increase compared to the previous year.

A KM official said, “There are no plans to increase mask production facilities yet,” but added, “If mask demand continues due to the COVID-19 situation, additional investment will be considered.”

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