Governance Forum's Open Letter to Kim Dong-kwan: "Hanwha Aero Must Explain the Reason for the Capital Increase"

The Korea Corporate Governance Forum on the 31st urged Kim Dong-kwan, the third-generation representative of Hanwha Group and head of the Strategy Division at Hanwha Aerospace, through an open letter to reveal the real reason behind pursuing a large-scale paid-in capital increase that causes significant shareholder value dilution, despite having sufficient internal cash flow and capacity to issue corporate bonds.

On the 21st, when Hanwha Group stocks plummeted together following Hanwha Aerospace's decision on a large-scale paid-in capital increase, the stock prices of Hanwha and Hanwha Aerospace were displayed on the Yonhap Infomax screen in Jongno-gu, Seoul. Photo by Yonhap News

In the letter, the forum stated, "Considering the previously planned facility expansion and mergers and acquisitions (M&A) plans, the 3.6 trillion KRW paid-in capital increase, consisting of 1.2 trillion KRW for facility funds and 2.4 trillion KRW for acquiring securities of other companies, can be sufficiently covered by internal cash flow."

First, based on the company's announced earnings estimates and securities firms' forecasts, the forum estimated that Hanwha Aerospace will record sales of 65 trillion KRW and operating profit of 8.5 trillion KRW from 2025 to 2027. Taking depreciation and other factors into account, it analyzed that the company can generate nearly 10 trillion KRW in operating cash flow over the next three years.

Regarding the company's explanation for the capital increase citing high debt ratio and debt-related advances, the forum criticized, "The 281% debt ratio as of the end of 2024 is not a metric used by financial experts. The debt ratio and net debt ratio based on borrowings and net borrowings (reflecting cash) ? which indicate repayment ability ? are 98% and 72%, respectively, showing a solid financial structure."

The forum added, "Bond experts say that if Hanwha Aerospace, which has a good business outlook and sound financial structure, issues corporate bonds worth trillions of won, it would be a 'hot deal' with overwhelming demand. If the goal is to secure funds in advance, why did the company not consider issuing low-interest corporate bonds or bank loans based on its AA- credit rating?" It also urged the company to disclose the 3-5 year financial statement projections, which were likely provided as basic data at the board meeting on the 20th, to dispel market doubts.

Earlier, Hanwha Aerospace announced on the 20th that it would proceed with the largest paid-in capital increase in the history of the domestic stock market, amounting to 3.6 trillion KRW. However, the market has been rife with controversy due to the excessively long and unclear funding plan. The Financial Supervisory Service has even stepped in to halt the process.

In particular, the forum mentioned in the letter that the Financial Supervisory Service is pointing out controversy over the 1.3 trillion KRW used by Hanwha Aerospace to purchase shares of Hanwha Ocean just before the capital increase. Currently, the financial sector analyzes that this share acquisition was a kind of restructuring for Hanwha Group's succession, which led to this paid-in capital increase that harms existing shareholders.

The forum noted, "Wouldn't it have been more transparent and responsible to discuss the board agenda on February 10 regarding the recovery of the 1.3 trillion KRW Hanwha Ocean investment by Hanwha Energy, 50% owned by Vice Chairman Kim Dong-kwan, and its subsidiary Hanwha Impact, and the paid-in capital increase agenda on March 20 on the same day at the Hanwha Aerospace board meeting?" It further requested, "Since this is a transaction involving Kim’s personal company Hanwha Energy and represents a strong conflict of interest, we ask for a detailed explanation not only to the board but also to the shareholders about the overall context in which this was conducted."

Since the paid-in capital increase plan was disclosed on the 20th, Hanwha Aerospace’s stock price has fallen by double digits. As of the 28th, the market capitalization lost amounts to approximately 4.2 trillion KRW. The forum criticized, "This capital increase has caused significant harm to ordinary shareholders in terms of predictability and fairness and has damaged trust in Korea and Korean companies in the international financial community." It added, "The boards of Hanwha affiliates, representing Korea, should establish procedural legitimacy that meets global standards going forward."

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