[Click eStock] 'Rights Issue' Cosmax, Cautious Target Price Downgrade... What Is the Reason?

[Asia Economy Reporter Ji Yeon-jin] Cosmetics manufacturer Cosmax has launched a paid-in capital increase exceeding 140 billion KRW. While the securities industry views a short-term stock price decline as inevitable, there is optimism about improved earnings.

According to the Financial Supervisory Service's electronic disclosure system on the 27th, Cosmax announced a paid-in capital increase worth 144.3 billion KRW the day before. Through this capital increase, the company plans to issue 1.3 million shares (issue price 111,000 KRW) to raise 144.3 billion KRW.

This fund will be used for facility investment with 81.5 billion KRW and 62.8 billion KRW for improving financial structure and securing liquidity. Of the facility funds exceeding 80 billion KRW, 41.5 billion KRW will be spent on constructing the Pyeongtaek 2nd factory and logistics center. Additionally, 24 billion KRW will be invested to expand factory automation and introduce research institute equipment. 16 billion KRW will be invested in systems for customized cosmetics production.

Typically, a paid-in capital increase negatively affects corporate value because the number of traded shares increases. Since earnings per share (EPS)?the company's net profit over a certain period divided by the number of issued shares?is considered a measure of investment value, an increase in issued shares lowers EPS. The stock dilution rate (based on the number of shares) from Cosmax's recent capital increase is about 11.5%.

However, the securities industry places more weight on earnings improvement, as this capital increase is for facility investment to expand the color cosmetics production line. Currently, Cosmax’s color products are produced only at the Hwaseong factory, where the color line’s operating rate is already reported to exceed 100%. Since the color cosmetics market, which had been sluggish due to the COVID-19 pandemic and mask-wearing becoming routine, is showing signs of recovery amid growing expectations for the end of the pandemic, expanding production capacity is necessary.

Also, since Cosmax conducted a paid-in capital increase worth 93.9 billion KRW in October 2016, its separate corporation sales have grown at an average annual rate of 11%, contributing to expectations of earnings improvement. At that time, the stock dilution rate was 10.4%, and the stock price fell until the subscription date after the announcement but later recovered. Although 2017 was a challenging year due to China’s THAAD (Terminal High Altitude Area Defense) retaliation, this year’s strong stock market is expected to lead to a faster stock price recovery.

Han Yoo-jung, a researcher at Daishin Securities, said, "Despite the COVID-19 situation, remarkable external growth was achieved in the separate and Chinese corporations, and with recent signs of revived color cosmetics consumption, the proactive investment decision is judged to be positive," maintaining a target stock price of 170,000 KRW. Park Jong-dae, a researcher at Hana Financial Investment, lowered the target stock price from 150,000 KRW to 147,000 KRW, stating, "If the stock price decline exceeds the EPS decrease rate (13%) caused by this capital increase, a bottom-fishing strategy is also valid." Shin Soo-yeon, a researcher at Shin Young Securities, considering the increased number of shares issued due to the capital increase, lowered the target stock price by 11.8% from the previous 170,000 KRW to 150,000 KRW.

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