[Beginner's Guide] Lotte Chemical's Stock Fluctuates Amid Rights Offering Participation... Why Rights Offering Is a Negative Factor

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[Asia Economy Reporter Kwon Jaehee] Last week, Lotte Chemical's stock price fell sharply for three consecutive days. The stock price fluctuated significantly once when news broke that Lotte Chemical, the largest shareholder, would participate in Lotte Construction's 200 billion KRW shareholder allocation paid-in capital increase, and again when it was announced that Lotte Chemical decided to lend 500 billion KRW to Lotte Construction. Shall we find out when a paid-in capital increase can be a negative factor and when it can be a positive one?

What is a paid-in capital increase?

First, let's understand what a paid-in capital increase is. A paid-in capital increase literally means issuing new shares in exchange for money. Since it is a method of raising funds directly from the stock market, liabilities do not increase, only equity increases. Loans require interest payments, which are a cost burden, but paid-in capital increases do not have such burdens, so companies use this method to raise large amounts of capital.

What is the shareholder allocation paid-in capital increase that Lotte Chemical participated in?

On the 19th, Lotte Chemical announced through a disclosure that it would participate in Lotte Construction's 200 billion KRW shareholder allocation paid-in capital increase.

There are three types of paid-in capital increases: shareholder allocation, third-party allocation, and public offering. The shareholder allocation paid-in capital increase that Lotte Chemical participated in means that only existing shareholders are targeted for the capital increase. Only shareholders can pay money and participate in the capital increase. Third-party allocation targets special related parties or other investors who are not shareholders, and public offering is open to all investors without special restrictions, allowing anyone to participate.

When does a paid-in capital increase become a negative factor?

In the case of Lotte Chemical, the paid-in capital increase acted as a negative factor. To understand this, you need to look at the purpose of the fund raising. On the 21st, Lotte Construction announced that it had signed a monetary consumption loan contract worth 500 billion KRW for "operating funds." At the board meeting held the day before, Lotte Construction resolved to borrow 500 billion KRW from Lotte Chemical for three months until January 18 next year.

Earlier, on the 18th, Lotte Construction disclosed that it would raise 200 billion KRW through a shareholder allocation paid-in capital increase by issuing 1,714,634 new shares for operating funds. Lotte Chemical is the largest shareholder of Lotte Construction, holding 43.79% of the shares. Hotel Lotte holds 43.07%. Lotte Chemical plans to invest about 87.5 billion KRW in this capital increase.

Operating funds mean that the company is raising funds through a paid-in capital increase because it lacks the funds necessary to operate its business, which implies that Lotte Construction is facing a liquidity crunch. Since the capital increase is done due to a lack of cash, it acts as a negative factor on the stock price both in the short and long term. It is tantamount to admitting that the company cannot invest to make money and return profits to shareholders.

Moreover, the fact that the largest shareholder, Lotte Chemical, is lending this money, which may or may not be repayable, raises concerns among shareholders that this liquidity crisis could spill over to Lotte Chemical as well. This is why Lotte Chemical's stock price plunged sharply.

Can a paid-in capital increase also be a positive factor?

Yes, it can. A paid-in capital increase is not always a negative factor. As mentioned earlier, you need to look at the purpose of the capital increase. In the case of facility funds, which are funds needed for equipment investment and aimed at corporate growth, it acts as a positive factor in the mid to long term. Of course, in the short term, the increase in the number of shares may negatively affect the stock price, but usually, the stock price falls briefly and then quickly recovers.

L&F is a representative example. It conducted a large-scale paid-in capital increase for facility investment funds to expand secondary battery cathode materials, and after the capital increase, its stock price surged from 20,000 KRW to 48,000 KRW.

The aftershock from Legoland is fierce. You can see this clearly from the fact that Lotte Chemical's stock price dropped 14% in just three days after stepping in to support Lotte Construction's liquidity. It seems that the impact of Legoland will linger in our stock market for some time. The macroeconomic environment is already unfavorable. At times like this, it is important to pay close attention to disclosures that affect stock prices. Even if the stock price falls, if you understand why it is falling, you can respond accordingly. We support wise investments by beginner investors today as well.

Editor's Note[Beginner's Guide] is a smart investment guide for beginners (combining 'stock' and 'child' in Korean). We will explain unfamiliar stock stories to beginners in a kind and easy-to-understand way.

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