Stock Analysis - Osung Advanced Materials Co Ltd., 050420.KQ

Three Line Summary

- The financial structure has improved in number and sales are likely to recover. 

- The company’s operating value and business attractiveness are low. Competitors are much better. 

- Major shareholders and executives who have taken over the company seem not interested in technology or sales. 

Before We Start

Osung Advanced Materials Co Ltd (hereinafter referred to as "the Company") manufactures and sells display panel inspection equipment, light heat treatment equipment, etc. It was established in 1994 as Osung Science Co., Ltd. and changed its name to Osung LST in 1999. The company was listed on the KOSDAQ in 2001 and operated normally until 2011, but it entered corporate workout program in 2013 The reason is because the Company started the photovoltaic business, but the oil price plummet and photovoltaic market was fucked. In 2015, the Company was acquired by a private fund Rutherford 4, with Kyung Sook Cho as its head. The actual buyer is S-Mac Co., Ltd., a company worth about 400bn KRW that manufactures and sells touch screens for tablets and mobile phones, but now it is a nominal manufacturer, such as Synergy Innovation. S-Mac seems like a manufacturing company; however, it invests in bio-pharmaceuticals and other technology stocks. It has become like a listed company for investment clubs. I will discuss more in the shareholders section.

In fact, it seems there is no interest in R&D, since the R&D cost fell from 4bn KRW in 2015 to 1.8bn KRW in 2017, and all of the R&D expenses were processed as SG&A. Therefore, it seems that the research center is just for tax cut and benefit from the Korean government. In fact, no progress in technology or patents registration since 2015. It is not common for the whole R&D expenses to be handled as SG&A expenses. In normal cases, expenses for R&D can be handled as R&D expenses, unless the Company to increase deficit? It's not the company that makes a lot of money. This form also appears in S-Mac (5 billion -> 1.9 billion)

 

But we still need to know what the Company does. Please refer to the picture below.

Above are the pictures of the temperature control unit (TCU). When the display panel is manufactured, the temperature of each of the manufactured panels is different; however, if the temperature of each panel is not kept constant, the defect rate increases. It’s nothing special. It is just a temperature control machine for factories. And Samsung and LG are the only customers. International sales? There is no such thing for the Company. Well… There are overseas sales… 700 million KRW in China and 90 million KRW in Vietnam. I believe the number is from selling the machine to Samsung and LG factories in China and Vietnam. In addition, with the number, it can be concluded that the overseas business do not actually exist. The TCU sales accounted for about 28% out of total sales of 12.8bn KRW. And this is the company's identity. Now, let's look at the film products. It is a film product that used to be made by a company called Soosung Chemical, which was acquired in 2000s. It produces protective film for polarizing plate attached to display panel. The sales of this product is about 30bn KRW and is 66% of total sales. 

It is just an industrial protective film. Except it is thicker and stronger than the ones we use for the smart phone. There is not much of added value… well… it used to be… Other than that, the Company develops and sells testing machines that test electronic modules at high and specific temperatures. But… I'm sorry… the sales of the product is actually 0. However, we will still go over the product. Let's see what it looks like and please refer to the picture below.

The Company should give this one up. There may be a possibility of using the product at universities… like maybe... In fact, sales are zero.

 

The name of the Company has changed from Osung LST to Osung Advanced Materials. It seems that the Company has will to change its focus from the display equipment business to the material industry. However, the Company officially gave up on solar cell business and related assets were sold to other companies. In December 2015, the Company sold its equipments related to solar cell business for 4bn KRW to a company with 500 million KRW capital (SN Materials); however, the book value of the equipments is about 160bn KRW. The Company also sold real estate for Chungju plant (solar power business) to SBC Linear (linear motion bearing company) for 13.5bn KRW, but the book value was 95.6bn KRW. Anyway, the company had a major giveaway for its assets while ex-CEO Wan-Mo Kang was in the office. A year after selling the assets, the Company was taken over by an investment company. Wan-mo Kang, the former CEO of Osung worked as an executive at Samsung Electronics before, but he seems to have been recruited to secure sales. Well, he really didn’t do much as a CEO, but at the time of Wan-mo Kang, at least there was some research or development going on. Now, I think that the research and development cost of the Company is just 0. A tech company without research and development? Well… this is the one.

Executives and major shareholders

The Company's largest shareholder is S-Mac Co., Ltd. with a stake of approximately 20%. Thus, although it is not a wholly owned subsidiary, it is considered that S-Mac’s management rights are actually secured. S-Mac formed the largest shareholder group with 23% with Rutherford union No.1, Osung LST, East Burgundy, G-base and Adelaide until December 31, 2017. Since then, Jae-sup Kim became the owner from G-base with 8% of shares and Aprogen with 20% shares. Kyung-sook Cho is the CEO of above mentioned Rutherford, Osung LST and East Burgundy. East Burgundy is a corporation with a capital of KRW 50 million and is an advisory firm for management consulting. Where did East Burgundy get the money and bought the company? East Burgundy borrows money from another investment advisory firm called Erindale, another company of owned by Kyung-sook Cho. East Burgundy borrowed KRW 3 bn with the interest rate of 4.6%, but the interest expense paid to Erindale in 2017 was KRW 270 million. With 4.6% interest rate, even though you borrow money for a full year, the interest is only about 144 million for a 3 billion. Then what the heck is this 270 million? That money seems to be borrowed to Adelaide. Adelaide 's stake in S-Mac is about 1.5 percent, and the share price was 6,000 won in the beginning of 2017, the total value is about 90-100 billion won. I think I see the picture. It will sell $ 10 billion in S-MAC shares had been sold to Adelaide for KRW 10 bn. But now that 10 billion dropped to about 3 to 4 billion. Anyway Adelaide paid back 10.7 billion won in 2017, with interest of 100 million won. I do not know whether it was a bridge loan is or anything. The CEO of Adelaide is Kyung-ae Kim, and the company is not far from the headquarters of East Burgundy. What is Erindale Investment Advisory Company? Unlike its name, it manages a wholesale business related to electrical machinery and equipment and established in 2012. It seems that Kyung-sook Cho bought the business at some point because she needed a corporation. Previously, Ms.Cho was also a CEO of the company called Enesol, which manufactures condensers. Well, not CEO is a different person, but nothing looks normal.

Above picture is the Aprogen CEO Jae-sup Kim. For companies with governance structures such as G-base, shareholders are DUPEs. Very precious dupes... Shareholder value? There is no such thing. So who is the CEO of Kyung-Sook Cho? Nobody knows. She was born in 1960 and worked at a securities company in the 1990s and that is probably why she could get some investors. The only official photo is the one in below. However, the CEO comments below do not make sense. She got rid of all the research and development expenses and will lead the technology development without stopping? Hungry spirit? For those who mention hungry spirit in Korea has one common feature. They are not hungry. A man should not lie. A man does not have to tell the truth, but you must not lie. Below is a lie with purity of 100 percent. You can see that in financial statements.

Anyway, S-mac is a touch screen developer for mobile phones. However, nowadays it the market is really competitive and it is really difficult for small companies to compete. S-mac supplies the product to Samsung Electronics only. It's almost like a subsidiary of Samsung Electronics. This is a major problem for Korean SMEs. They really cannot expand their business abroad because huge companies intervene with SMEs. Their capability is another problem and some are really not interested in R&D, but just wishes to receive something from Samsung or LG and just manufacture the given products. Even the previous CEO Sung-chul Lee sold the company shares quietly while Samsung Electronics was watching S-mac.

Another major shareholder is Doo-young Kim, who is from Samsung Electro-Mechanics Quality Control division and became a general manager of S-MAC. In addition, he is also an executive officer of the Company. I do not know if he has the trust of CEO Kyung-Sook Cho, but he owns one million shares (about 0.8%) of S-mac. The market value is worth KRW 2 billion, which was worth 6 ~ 8 billion a year ago.

It seems that S-Mac became an investment company like Synergy Innovation. However, the company has no subsidiaries, and most of the investments are made with equity investments. The stake is usually 15 ~ 25% and investments are made for pharmaceutical / biotech companies and the Company. Why the heck a touch screen manufacturing company invests in a pharmaceutical company stake? It is obvious... In addition, one of the major shareholders of S-mac, G-base is a holding company that dominates Aprogen. G-base is a 'management consulting' firm owned by Dr.Jae-sup Kim, the founder of Aprogen. It dominates Aprogen and S-Mac also invested for the Aprogen shares. In other words, it is a cross-shareholding structure. It is not a normal structure. It seems that Mr.Jae-Sup Kim and Ms.Kyung-Sook Cho worked together several years ago. This is just a guess, believe it or not.

In conclusion, S-Mac is a company is like a private equity that Ms.Kyoung-sook Cho collects money from investors and is not interested in manufacturing. There is no such thing as R&D or manufacturing / sales. The company runs somehow and the management and major shareholders are united, there is a high possibility that S-mac raise 'fund' though stock market with intentional disclosure of investment information. The coalition between the major shareholders seems quite strong either in a good way or a bad way. In addition, the Company recently increased the capital stock (30 to 40bn KRW) and I wonder what that money is for.

 

Financial Status

Interestingly, everything is not normal, but the Company’s financial structure is improving quite a bit. First of all, the operating profit turned to black, the debt-to-equity ratio declined (this is the effect of the capital increase), and overall costs went down. Sales have also decreased but slightly recovering. It was difficult to get orders during the workout period but now it seems to be in a good situation for the company to normalize and increase sales. It’s just my feeling but it seems really sketchy…

The number of assets increased by about 50bn KRW, most of which were cash inflows from capital increase and cash assets. Non-interest-earning financial assets increased by about 15 billion KRW, but what is it? Perhaps it is equivalent to 5.49% share of parent company S-mac.

Although sales have been on a downward trend, but the decline has narrowed and the cost structure has improved, so we can expect profitability, but I believe it is a better idea to invest in somewhere else instead. As the financial structure improves, thanks to the capital increase, the debt ratio is about 30 ~ 40%, which is not going to be a problem in the near future. However, it is quite obvious how the Company will make profit. Think about it, investing in the Company is just gambling. When we look at management of the company and the people who control it, it is unlikely that the Company will be able to compete with sales or technology.

 

Technical Analysis

Let's look at the below picture.

It seems that it has hit the bottom with price being 3050 won and there is a possibility of rising because the management purpose is quite clear. But it is a high risk high return.

If I'm the CEO

There is but one step from a business to a crook. I am not qualified to say this, but life should not be all about money.