[Funding] Why Cherrybro is Proceeding with a 34 Billion KRW Rights Offering

[Asia Economy Reporter Yoo Hyun-seok] Cherrybro is set to improve its financial structure through a large-scale paid-in capital increase worth 34 billion KRW. Amid increasing borrowings due to continuous operating losses every year, resulting in a debt ratio exceeding 400%, the early redemption period for previously issued bonds with warrants (BW) is approaching, increasing the burden of debt repayment.

◆ Securing funds for debt repayment including BW... Increased borrowing burden due to poor performance = Cherrybro recently decided on a paid-in capital increase of 34 billion KRW through a rights offering followed by a general public offering of forfeited shares to secure operating and debt repayment funds. The new shares will be issued at 1,700 KRW per share, with a total of 19 million shares to be issued.

Cherrybro plans to use more than half of the funds raised, 25.2 billion KRW, to repay borrowings. Specifically, 15.2 billion KRW will be used to repay bridge loans, and 10 billion KRW will be allocated to the first series of bonds with warrants (BW).

Cherrybro issued 15 billion KRW worth of BW in September last year. The exercise price of the first series BW is 2,530 KRW. As of the previous day, Cherrybro’s closing price was 2,190 KRW, below the BW exercise price. The early redemption date requested by investors will occur every six months starting from September 24, requiring funds to prepare for investors’ exercise of put options (early redemption rights).

The fundamental reason for the increased borrowing burden is poor performance. Cherrybro has posted losses since 2018. Operating losses of 500 million KRW in 2018 expanded to 14.5 billion KRW in 2019 and 25.7 billion KRW in 2020. Although operating profit of 3.6 billion KRW was recorded in the first quarter, it is insufficient to cover the accumulated losses.

Continuous losses have led to reliance on borrowings for necessary funds, worsening the financial structure. Borrowings increased from 134.4 billion KRW in 2018 to 156.1 billion KRW in the first quarter of this year. The debt ratio soared from 165.5% in 2018 to 420.2% at the end of last year. As of the end of the first quarter, it stands at 421.3%.

The largest shareholder, Korea 105, is expected to participate 100% in the allocated shares for this capital increase, alleviating concerns about dilution of the major shareholder’s stake. However, since 19 million new shares will be issued, accounting for 68.17% of the total issued shares of 27,872,374, share dilution is unavoidable.

◆ Earnings fluctuate with live chicken prices... Uncertain performance improvement = Cherrybro is showing signs of performance improvement, turning profitable in the first quarter of this year, but earnings fluctuate depending on live chicken prices, making it uncertain whether steady performance improvement can be achieved to improve the financial structure.

In the first quarter of this year, Cherrybro recorded sales of 88.7 billion KRW and operating profit of 3.6 billion KRW. Sales increased by 30.0% compared to the same period last year, and operating profit turned positive.

Improvement in cost ratio was the driving force behind the performance improvement. The cost ratio in the first quarter of last year was 101.7%, meaning losses increased with every sale. However, in the first quarter of this year, the cost ratio dropped to 87.4%.

The rise in live chicken prices also contributed to profitability improvement. According to the Korea Broiler Association, the average price of live chickens (large) was 1,503 KRW in the first quarter of last year, but rose by more than 400 KRW to 1,969 KRW in the first quarter of this year.

However, recent declines in live chicken prices are putting pressure on performance. The average price of live chickens in the second quarter of this year was 1,604 KRW, about 300 KRW lower than the first quarter. Nevertheless, it remains somewhat higher compared to the average price of 1,330 KRW in the second quarter of last year.

In its securities registration statement for the capital increase, Cherrybro explained, "Sales are greatly affected by live chicken prices. When prices are high, sales growth and profitability improve significantly, but when prices are low, sales and profitability may be negatively impacted."

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