Jungang D&M "Expecting Improvement in New Business Performance in the Second Half... Actively Responding to Book Losses"

Jungang D&M announced on the 16th that it recorded sales of 5.5 billion KRW on a separate basis in the second quarter of this year, with an operating loss of approximately 7 million KRW.

Jungang D&M recently secured financial resources through external funding and is considering securing growth drivers through new businesses. Despite being in a transitional phase in terms of performance improvement, the company generated near break-even profits from existing businesses alone, so if profits arise in the new business sector in the future, there is a high possibility that the profit structure will improve rapidly.

During the same period, the net loss for the second quarter was 68.7 billion KRW (half-year net loss of 78.5 billion KRW), which was due to derivative valuation losses from convertible bonds (CB) (half-year derivative valuation losses of 87.6 billion KRW). This is a one-time cost and a book valuation loss without cash outflow, so it does not have a substantial impact on the company’s fundamentals, and its effect on financial soundness is also limited.

Mezzanine securities such as convertible bonds (CB) and bonds with warrants (BW) are recognized as ‘liabilities’ until they are converted into stocks. Jungang D&M explained that since it raised funds this year to proceed with the secondary battery new business, the scale of CB valuation differences increased, resulting in related derivative valuation losses.

A Jungang D&M official said, “Since the loss does not affect the company’s soundness or fundamentals, a large net loss does not mean increased financial risk,” adding, “This is a problem frequently experienced by many companies since the adoption of IFRS, where the loss increases as the value of companies issuing CBs rises. It is a paradoxical situation where the loss increases even though the company’s value has increased due to normalization.”

He continued, “Although it is only a book loss, we plan to reduce the volatility of net loss in the second half by converting CBs and changing the refixing clause,” emphasizing, “We will improve the performance structure through new businesses and create a stable performance structure.”

When the stock price rises after issuing CBs, derivative valuation losses must be recognized when preparing financial statements according to accounting standards. Typically, if there is a conversion price adjustment condition (refixing clause), the conversion right is separated as a derivative liability for accounting purposes. The company explained that by inducing CB conversion to reduce the overall amount and deleting the existing ‘refixing’ condition, the impact of related derivative losses can be minimized.

Jungang D&M is diversely reviewing new businesses and expects to demonstrate performance improvement from the second half through core raw material trading business for secondary batteries.

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