[Funding] CGV Faces Challenges in Fundraising Due to Prolonged COVID-19 Pandemic

Shareholder-Allocated Paid-in Capital Increase Planned... Board Expected to Raise 250 Billion KRW

Stock Price Drops Amid Growing COVID-19 Prolongation Concerns... New Shares Issued at 15,850 KRW

Urgent Fundraising to Extinguish Fire and Reduce Debt Ratio

[Asia Economy Reporter Park Hyungsoo] As the novel coronavirus disease (COVID-19) crisis continues for a prolonged period, CJ CGV is facing difficulties in raising funds. When CJ CGV held a board meeting and resolved a rights offering, the amount of funds raised was 31 billion KRW less than initially planned. Unlike early May when the board meeting was held, concerns over the prolonged COVID-19 crisis have intensified, leading to a continued decline in stock prices.

According to the Financial Supervisory Service on the 17th, CJ CGV will issue 13.94 million new shares through a rights offering followed by a general public offering of unsubscribed shares. Based on the new share issuance price of 15,850 KRW, the amount to be raised is approximately 220.9 billion KRW. The initially expected issuance price when submitting the investment prospectus was 17,950 KRW.

The subscription period for existing shareholders is from the 20th to the 21st. CJ CGV’s stock price is 19,550 KRW, about 9% higher than the new share issuance price.

If the difference between the new share issuance price and the stock price during the subscription period is not large, there is a high possibility of unsubscribed shares. The largest shareholder, CJ, has announced it will participate not only in the allocated shares but also in the oversubscription. The subscription rate for the 2.79 million new shares allocated to the employee stock ownership association is also a variable. While striving to reduce fixed costs amid COVID-19, employees may not have sufficient capacity to subscribe to new shares.

A general public offering will be conducted for unsubscribed shares after the rights offering. The unsubscribed shares will be underwritten by NH Investment & Securities as the lead manager and Korea Investment & Securities as the co-manager.

CJ CGV plans to use the raised funds for operating capital and debt repayment to improve its financial structure. About 161 billion KRW of the public offering proceeds will be used to repay corporate bonds and borrowings. According to the main contract terms of the 50 billion KRW corporate bonds issued by CJ CGV in November 2015, the debt ratio based on separate financial statements must be maintained at 850%. As of the first quarter, CJ CGV’s debt ratio based on separate financial statements was 891.1%.

Even on a consolidated financial statement basis, the increase in the debt ratio is significant. The consolidated debt ratio of CJ CGV reached 844.7%, rising 192.1 percentage points from 652.6% at the end of last year within three months. The increase is due to the change in lease accounting standards last year, which recognized approximately 2.2 trillion KRW of leases previously treated as expenses as liabilities, as well as cash outflows caused by the COVID-19 crisis. The reliance on borrowings rose from 18.2% at the end of last year to 21.5% as of the end of the first quarter this year.

As COVID-19 cases increased worldwide, CJ CGV’s sales sharply declined in the first quarter. Sales of 243.3 billion KRW decreased by 47.6% compared to 464.6 billion KRW in the same period last year. Operating losses of 71.6 billion KRW were recorded, turning the company into a deficit. The sharp decline in sales increased the burden of fixed costs such as rent, management fees, and labor costs. The operating loss trend is expected to continue through the second quarter. This is due to the lack of moviegoers visiting theaters and the very few new releases.

Hong Sejong, a researcher at Shinhan Financial Investment, analyzed, "In the second quarter, domestic theater attendance was 6.18 million, down 88.6% compared to the same period last year," adding, "The impact of COVID-19 is incomparable to the previous Middle East Respiratory Syndrome (MERS)." He further noted, "Major distributors postponed all new movie releases to the second half of the year," and "Considering that there were virtually no moviegoers in China, losses in overseas segments are also expected to be significant."

According to the Korea Film Council, domestic movie theater sales in the first quarter decreased by about 53% compared to the same period last year. The monthly sales decline rates compared to the previous year were -67% in March, -88% in April, and -93% in May. Movie consumption is further shrinking due to the spread of COVID-19.

Kim Sugang, a researcher at Korea Ratings, explained, "Considering CJ CGV’s cash and cash equivalents of approximately 338.1 billion KRW as of the end of the first quarter on a consolidated basis and annual operating cash generation of about 160 billion KRW, the liquidity sources directly available for use over the next year are around 500 billion KRW." He added, "This liquidity level is insufficient to cover short-term borrowings of 776.2 billion KRW maturing within one year, as well as capital expenditures and interest expenses over the next year."

CJ CGV is also promoting the sale of tangible and investment assets along with the rights offering. Considering CJ Group’s excellent external creditworthiness and support capacity comprehensively, it is expected to appropriately respond to the upcoming short-term funding needs.

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