"Cosmax Resolves Duplicate Listing Risk... Target Price Maintained" [Click E-Stock]

Hanwha Investment & Securities Maintains Buy Rating

Hanwha Investment & Securities maintained its target price for Cosmax, a company specializing in cosmetics original equipment manufacturing (OEM) and original design manufacturing (ODM), at 300,000 won and upheld its 'Buy' rating as of September 2, stating, "The concerns over a potential duplicate listing have been resolved, as the financial investor (FI) stake cleanup in Cosmax East, the Chinese subsidiary, has been completed." This implies an upside potential of 4.5% compared to the closing price of 287,000 won on September 1.

On September 1, Cosmax decided to allocate 110 billion won to Cosmax East alongside a short-term loan of 100 billion won. The interest rate on the loan is 4.1%, and these funds will be used to make an early repayment of convertible bonds (CB) issued by Cosmax East. The remaining repayment resources are planned to be covered with dividends received by Cosmax East from Cosmax China and Guangzhou, among others.

Back in 2019, Cosmax East attracted investment for its business in China by conducting a capital reduction for SV Investment's shares, amounting to approximately 114.9 billion won in 2023. To raise these funds, Cosmax East brought in KDB Investment and Hana Securities as new financial investors (FIs), issuing 3.81 million redeemable convertible preferred shares (RCPS) worth about 114.3 billion won. The entry of these new FIs increased uncertainty around the company’s potential initial public offering (IPO). Then, in March last year, the RCPS were reduced and converted into CBs of the same amount.

With the early repayment of these CBs, all investment relationships with the existing FIs will be completely settled. Under the previous agreement, if the IPO was not completed by September 2026, Cosmax East could have incurred additional financial costs; however, since an early repayment arrangement was reached, this burden has also been removed. Yoojeong Han, a researcher at Hanwha Investment & Securities, analyzed, "With this transaction, as the FI completes its exit, the IPO obligation is also resolved, thereby entirely eliminating the risk of a duplicate listing."

The financial structure will also become simpler. The existing CBs carried an interest rate of 2% plus a redemption premium to ensure the internal rate of return (IRR), along with additional financing costs based on the effective interest rate. After this transaction, the structure will shift so that Cosmax borrows 100 billion won from financial institutions and then lends it to Cosmax East, which is a conventional arrangement. Since the loan’s interest rate of 4.1% is based on Cosmax’s weighted average borrowing rate, it will be offset in Cosmax’s consolidated financial statements.

Taking into account the investment period and IRR, approximately 130 billion won in cash is estimated to be paid to the FI. Despite this, Hanwha Investment & Securities determined that the benefits outweigh the costs, citing the following: ▲ the elimination of duplicate listing risk ▲ removal of overhang risk from the FI and conversion rights (potential shares for sale) ▲ mitigation of additional financial cost burdens ▲ conversion from complex financial products to standard bank loans ▲ the use of Chinese subsidiaries' dividend resources to limit new external borrowing to 100 billion won.

Researcher Han concluded, "With the accelerating growth of the China business, the need to separately list Cosmax East has disappeared," adding, "It is positive that the full enterprise value of the China business can now be attributed entirely to Cosmax shareholders."

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