[After CB Issuance] SD BioScience, Growing Pains in Health Functional Foods

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[Asia Economy Reporter Park Hyungsoo] SD Bioscience, a mask pack manufacturer, is planning a large-scale paid-in capital increase to improve its financial structure. The funds will be used to repay convertible bonds (CB) issued while fostering its health functional food business division. CEO Park Seol-woong, who holds about 56% of SD Bioscience's shares, plans to acquire 5-15% of the allocated shares. If any shares remain unsubscribed after the public offering to general investors, BNK Investment & Securities will underwrite them.

According to the Financial Supervisory Service's electronic disclosure system on the 18th, SD Bioscience will conduct a paid-in capital increase through a rights offering followed by a public offering of unsubscribed shares to general investors, allocating 0.848 new shares per existing share. The record date for new share allocation is set for the 28th of this month, and the new share issuance price will be finalized on the 31st of next month. Subscription for existing shareholders will take place from September 5 to 6. If unsubscribed shares occur, subscriptions will be opened to general investors.

The company plans to issue 19 million new shares to raise 35.2 billion KRW. All the raised funds will be used to repay debt. Previously, SD Bioscience issued the first series of convertible bonds in October 2020, raising 21 billion KRW. In June 2021, it issued the second series of CBs worth 17 billion KRW. These large-scale fundraisings were invested in the health functional food business division. This is related to the decline in sales in the existing cosmetics business division.

On a consolidated basis, sales decreased from 156.3 billion KRW in 2019 to 140.7 billion KRW in 2020, and further to 124.7 billion KRW in 2021. Due to the prolonged COVID-19 pandemic, outdoor activities decreased and mask-wearing increased, leading to reduced consumption of cosmetics. As cosmetic sales declined, the company recorded an inventory valuation allowance related to cosmetics, increasing the cost ratio. This contributed to the larger loss scale. Last year, operating loss was 34.8 billion KRW, and net loss was 45.1 billion KRW.

While promoting the health functional food business, the company invested 30 billion KRW to establish a new factory in Eumseong, Chungbuk, for in-house production of health functional foods. Advertising expenses also increased in the early stages of the business. The ratio of selling and administrative expenses to sales increased. As investments continued, the sales proportion of the health functional food division gradually increased from 4.9% in 2020 to 15.1% last year, and 17.2% in the first quarter of this year.

Despite growth in the health functional food division, overall sales declined and losses increased, causing the stock price to retreat. The conversion prices for the first and second series of CBs are 4,176 KRW and 3,378 KRW respectively, which are above the current stock price. From October this year, holders of the first series CB can request early redemption. The second series can be redeemed early starting June next year.

SD Bioscience's debt ratio rose from 68.88% at the end of 2020 to 199.06% at the end of last year. The total borrowings dependency worsened from 26.34% to 47.55%. As of the end of last year, total borrowings amounted to 69.652 billion KRW. After the capital increase and early redemption of CBs, the financial structure is expected to improve. If productivity in the health functional food division increases thereafter, there is potential for profit growth. If the rights offering to existing shareholders is successful, the previously stagnant growth pace is expected to accelerate again.

Major shareholder CEO Park Seol-woong and related parties are considering various methods to participate in the paid-in capital increase, including stock-backed loans and selling subscription rights certificates. It is expected that they will participate in about 5-15% of the allocated shares. CEO Park has provided some of his shares as collateral for loans from financial institutions. His shareholding ratio could decrease from 55.59% after the capital increase to as low as 31.36%.

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