Stock Analysis - KD Construction , 044180.KQ

1. Three Line Summary

• Management's questionable management activities

• Financial statements with low credibility

• Previous Financial Behavior Restarted

2. Before we start

KD Construction (hereinafter referred to as "the Company") was the first company to successfully localize its original mold base. The Company developed mold base in 1980 under the name of Daeyang Precision Machinery. In 1999, the Company changed its name to DY. In 2008, it changed its name to GLONEX, Daewoo Solar in 2009, E&C International in 2010, and to Kukje DY after acquired by Kukje Corp in 2013 AND AGAIN, in 2015, the Company changed its name to KD Construction. The name of the Company changes really frequently, and we can consider the Company as the best practice of management led stock-in-trade manipulation of a junk stock. During 2008 ~ 2014, the CEOs period (The CEOs of the Company were Jung Min Myung, Ahn Tae Il, Jang Cheon Min, Park Hyung Woo, Oh Byung Ki, Yoo In Yeop, and Myung Jin Kim for that time period… like for f%$# sake, 7 CEOs in 6 year period? And I believe 6 of them are just puppets) of the Company were charged with breach of trust, and eventually were acquitted, but I personally think this is really fishy. And there was a huge and many increase/reduction in capital during that period.

Well anyway, what is mold base? Mold base is a comprehensive name used for the parts for containing the cavity for plastic injection mold. It is essential to produce goods in large quantities. Funny thing is that the Company succeeded in developing it for the first time; however, the industry leader in Korea is Kishin Corp. The mold base sales is about 24 percent of of the total sales of the company, which is only about 8 percent in terms of domestic market share. Therefore, it is really difficult to think this company as a company specialized in mold base and the Company is reducing the size of the mold base business.

Sales of mold base for both domestic and exports are 2.6 billion KRW, which makes total 5.2 billion KRW. The sales growth rate is steadily at about 2 percent per annum. However, technically the sales are being decreased since the rate of inflation is higher. I just think the Company gave up on mold base.

Then, construction must be the main business for the Company, but I am really not sure whether the construction compnay with sales of 17 billion KRW can be seen as a construction company. In particular, there are only three major contracts this year. One being 15 billion KRW for apartment, another being 400 million KRW for commercial building, and the other is school gym with 1 billion KRW which in total 16.4 billion. I am really amazed that this company is listed in the stock market.

The Company’s total revenues are around 22billion KRW, and market capitalization of around 50 billion KRW, with a price per share of 140 KRW. This tears ahead. Let me wipe out my tears first…

In 2017, the Company acquired a statutory management company called Alti Electronics to create synergy with the mold-base business with 16 billion KRW. In 2018, the Company bought a fashion company, Jeyung Co., for 500 million won, and Jeyong Co. went through a corporate workout, so the Company can be called a total insolvent company group. Jeyung Co. was a company that sold clothes with a brand called Pierre Gardin in 1989. The reason for the acquisition is to become a total developer by linking with the real estate development business with fashion apparel industry, but I am not so sure whether that makes sense at all.

There are about 43 employees in the company.

3. Executives and major shareholders

The major shareholder is KD Technology Investment Co., Ltd., with a stake of approximately 7 percent. Representative of the largest shareholder is CEO Tae-Il An. KD technology investment is a company specialized in corporate restructuring but we can consider it as just a private equity. The company is practically selling stocks since 2012, selling, reducing capital, and increase capital to increase equity ownership, THEN sell stocks again, buy convertible bonds, buy new shares, increase shareholding by 7 ~ 10% and has repeated the cycle. This is not a normal investment activity. The strange thing is that the timing of exercising warrants is always near the bottom of the share price. The stocks have been exercised in the low point and sold again after a certain period of time, and the timing is just brilliant if you take a closer look at it.

Who is Ahn Tae-Il the Chairman and CEO of the Company?

He was a senior vice chairman of the Korea M&A Consulting Association. The Korea M&A Consulting Association seems to be an association that has been trying to earn some easy money, but it is not really famous. It seems to be carrying out various M&A related education / research projects through cohesion with government.

In addition, there are four internal directors among the registered executives of the company, including President Ahn Tae-il, his son Ahn Jae-hyung (born in 1989), and one of the questionable directors Yoo In-yeop (Him and CEO are at the same age). The actual construction-related management is thought to be done by Ham Do-Kuk, but it has been about only six months since he was appointed.

Some kind of family is formed, and some of them are in charge of management of each company, and they are listed as outside directors or internal directors. It may be called Mafia, a company that is exiting.

4. Brief company value memo

The real-estate and the building have a book value of about 4.5 billion KRW, but not a meaningful number. It is a company with a market capitalization of 50 billion KRW, with sales of 20 billion KRW, and even the sales is really difficult to be the real money. The average operating profit rate of the real estate development business is about 5 ~ 10%. In order to explain the market cap. with business capability, an average sales revenue of 50 billion KRW should be made but the number we see is really far from it. In terms of valuation, I beleive this is the company that you should never buy. However, it makes sense to use volatility in management risk. Well… you only live once…

5. Financial Status

The company has a book value of about 100 billion KRW, of which 50 billion KRW is inventory. Financial assets are about 17 billion KRW, and this equivalents to 18.6 billion KRW capital increase in 2017. In 2016, the Company also increased capital by 12.3 billion KRW. The reason for capital increase is to diversify the business, but it has never been successful.

However, there was a slight operating profit until 2016, and suddenly reached a net loss of 16.7 billion KRW in 2017. The reason is the surge in SG&A expenses. SG& A expenses, which range from 2 ~ 3billion KRW annually, suddenly jumped to 12 billion KRW in 2017. Of the SG&A, commission fees increased to 1billion to 3.7 billion KRW and loan loss provision jumped from 300 million to 2.9 billion KRW. The reason for this is simple, the 4.4 billion KRW has been depreciated from from the loan loss provision of 8.6 billion KRW. Funny thing is that only about 300 million KRW has been depreciated in the previous year. I believe the depreciation will continue in the future, but it seems unlikely to be positive.

Inventories suddenly increased to 45 billion KRW, including 20 billion KRW worth of building site, 7.3 billion for unfinished construction, and 4 billion won for completed buildings. Buying construction site is the main reason for the increase, but I could not find where it is. The problem is that the apartment building on the East Sea will be completed on December 30, 2018, with a pre-sale rate of 60%, a total construction cost of 40 billion won, contracts worth 34.6 billion won, and 20 billion more is needed to complete the construction. A pre-sale rate should increase by 10% to be a break-even point. Assuming a pre-sale rate of 90%, the estimated margin is about 10 billion won. I have accounted for about 3 billion losses in the 2017 financial statement.

Non-operating expenses are estimated at 1.5billion KRW, and losses on investment property are estimated at 2.0 billion KRW. Costs increased by about 5 billion KRW compared to the previous year. Financial expenses increased by 1 billion (from 300 million to 1.3 billion) compared to the previous year, mainly due to a loss on the sale of available-for-sale assets of 500 million and decreased income of 400 million KRW from interest. In the end, it means they are all debt.

6. If I am the CEO

I do not wanna be a boss of this company.