Stock Analysis - Nature and Environment Co. , Ltd. , 043910.KQ

Three Line Summary

• Escaped from hostile M&A issues , the company is trying to get back on track , but it is still long way to go.

• The product itself is okay, but the competition is too tight, and the alternative product is too cheap.

• Only way to get normalized is to reinforce sales and marketing, however it would be still difficult to get black even with big effort on sales and marketing.

Before We Go

Nature and environment (hereafter referred to as 'the company') is a company that produces eco-friendly landscape materials. What is eco-friendly landscape material?

It is like the products above. It is a kind of block made of dirt, and the above product is called Geo Green Soil Cell and it was selected as excellent product by the Public Procurement Service. It is more than 30 kilograms, and the size is 50 centimeters by 50 centimeters thick and 10 centimeters thick. If you put something like that on the bank slope, it will be neatly arranged. It is not like the cementing over the bank , but makes it like a normal earth. On top of that, grass may grow over it. Price of the unit for a square meter is about 20,000 won. Horticulture and large retaining wall products range from 60,000 won to 70,000 won per square meter. Of course, tax-payers pays for those since the demand mainly comes from local government.

They are put on the slope as above. Let the grass grow on it and it will look like the picture below.

It is neat. It does not seem to be washed down even if the flood comes out and the water level goes up and down. After all, the company's block business is their identity, and it also sells blocks that fall into a pitcher block (such as a place where people travel). The pitcher block looks like this:

It is a sidewalk block that we may see everywhere.

As mentioned above, the company manufactures and sells such construction blocks, and many of the pitcher blocks are constructed in apartments, and the above eco-sole blocks enter the riverbank constructions. In the end, it is a construction-related stock. I do not know how much more sales are likely to increase now that apartments are under construction. In addition, there are 287 nationally procurable block manufacturers nationwide. They are not products with high value-add. The roughly quantity to be procured from the government is estimated at about 500 billion won per year. So it's roughly 2 billion won per company. Even if you keep the margin at 10%, it is hard to live well. During the procurement of the official block, the concrete block consists of half of the demand. They do not produce concrete blocks, so they should compete more than other industries. But the market is still small and competitors are growing fast. They have no issue on payment risk since the main customers are the land administration service or the local governments. In the case of the local government, there is a regional barrier that imposes an certain limitation to a nationwide corporation like this company to protect their local companies. Their block-related market share has moved back and forth within 2 ~ 3%, but now I think it will be even lower. There are a number of competitors. It's a perfectly competitive market! I only saw it in the book! Block-related revenues are W3.7bn, or 28% of total sales. The prices of the block products are the same for three years. Production capacity has been utilised around only 50% by 2017. The total sales of the business was KRWW 3.7 billion, but even if the utilization ratehits 100% the revenue would be only about KRW 7.4 billion. As competition is fierce and costs continue to rise, this business will continue to shrink unless game changing products come out.

In addition to the block, they are doing landscape gardening business (golfing course) and environmental plant business. However, the business cannot grow fast since there are too many golf courses already built. Furthermore there are so many landscaping companies. The same goes for apartment landscaping. There is not a great potential in the gardening business. The market size is about 200 billion won, and even though this company can outperform others, it would not make big sales. The landscaping and gardening materials business is about 300 million won in revenue. Let's think that there is not because it's too small to consider.

 The environmental plant business makes sewage sludge and food waste drying plant, and there are quite a few companies doing this. In 2017, Korea's environmental budget will be about 5.8 trillion won, including 3.4 trillion won in water and sewage management and 350 billion won in waste control. Their technology can generate revenue in these two areas. Sales amounted to about 8.4 billion won. Actually the environmental plant construction business is now the main business.

Although our sales have been recovering for the past two years, we have not been able to keep up with the dispute over management rights until last year. This is because of the ridiculously small shareholding of Chung Dae-yeol, the largest shareholder. The stake in Chung is only 3.44%. The market capitalization of our company is 84 billion, and the valuation of the largest shareholder is less than 3 billion. The current representative Lee Byung Yong says has 1.4%.

Name	Relation	Type	Number of holding shares	In percentage
Chung Dae-Yeol	Founder	Common	1,166,619	3.44%
Lee Byung-Yong	CEO	Common	531,388	1.4%

The company has 56 employees, and the average salary per capita is about 35 million won per year. The average number of years of service is only 2.42 years.

They do research and development, and, the annual budget of the activities is between KRW 250~300 millions. Considering that their profit margin is about 5 ~ 10%, they put a lot of profit into research and development. It is estimated that there are about 6 ~ 8 researchers because about KRW 250 million of the research and development expenses are mainly used for labor costs.

The quality of the blocks produced by the company is better than that of small ones, and many special blocks are manufactured. However, it is not at all unique and patented product. Only reason of existence of this company seems to be as the stable supplier's position.

The company headquarter is located in Gongju, Chungnam, so it seems that they are the only KOSDAQ listed company in that region.

Recent Corporate Events

The company's sales are up 10 ~ 70% for the block business annually, and landscape and water-related construction orders are increasing by 30 ~ 50% annually. After having made KRW 30 billion revenue 5 years ago and it plunged to KRW 10 billions. So, the minor shareholders asked for management change, and these minority shareholders seemed to have been inspired by the "minority shareholder movement" called for by a company named 3DEnter. 3DEnter is also associated with another company called Gogumi, and Gogumi is also known as a minority shareholder movement and corporate hostile M&A. The minority shareholder movement was fake, and when price came up from the movement Gogumi sold off all and left real minor investors behind. So the management was not able to do business properly and used up their time and resources to defend the management rights. In the end, in 2017, the company won the voting in appointing directors during shareholders' meeting, and 3DEnter sold off 10 percent of stakes and left again. In fact, if you are a real minority shareholder, there are a lot of things you can do to make a 10 percent equity stake in addition to the management change. But it didn't happen that way.

I have been thinking about the name of Gogumi for fun. It seems that Gogumi is an animation planning and production company located in Bucheon, Gyeonggi Province. The name of CEO, Go)Yu Chul, and Kang Myung-Gu, who are in-house directors. So, if you (Go) Yu-cheol + Kangmyung (Gu) + Lim Soo (Mi). The head office is Bucheon, and the stock joke seems being done in the Seoul office.

In 2016, Gogumi invested in Gemini Investments, as calling for a minority shareholder movement, and attempted a hostile merger to raise issues and boost share prices. However, when the stock price rose, they sold all the stocks and floundered away.

Major Stakeholders and Directors

The main shareholders are Chung Dae-yeol, former CEO and Lee Byung-yong, the current CEO. Lee Byung Yong was born in 1961, and Chung Dae Yeol was born in 1949 and two of them are founding members. Lee Byeong-yon and Chung Dae-yeol are on below pictures (left and right respectively)

Jeong Dae Yeol had graduated from Soongsil University Textile Engineering Department and worked as a teacher at Gyeongnam Industrial High School. Currently, He is the CEO of Dulos Engineering and Pirespie Co., Ltd. I am not sure exactly what the two companies are doing. It seems that Pirespie is engaged in the rubber processing business.

Lee Byung-yong, the CEO and had studied in Yonsei University, seems that he started the company with Mr. Chung. His management mind does not look too bad, but it does not look aggressive at the same time. It seems that the current CEO has completed the management dispute in 2017 and he improved company's cash flow by fetching construction orders after CEO appointment in 2015. Chung Dae - yeol seems to be just playing chairman thing.

Some of the executives are Kwon Hye-sook, who has recently been appointed as a board of director, and is the representative of a company that develops and supplies non-residential buildings called Ecotraum. The number of employees is one in that company whose head office is located in Dongducheon. The foundation date was June 2015, and I do not know what the company does. The funny thing is that the company was founded in June 2015, an then acquired by the company on August 20, 2015. I wonder if it's some kind of funny play. The company provided a debt guarantee of about KRW 5 billion to Ecotraum near the time of the acquisition in 2015. Now, the guarantee get increased to KRW 6 billion. The CEO of Ecotraum is a graduate of Seoul National Women's University and studied Food Science , but she has no outstanding career other than Ecotraum. Another director, Kim Chul-wook, who is almost a founding member, is in charge of management support. There are currently three full-time executives (Lee Byung-yong, Kwon Hye-sook, Kim Chul-wook)

Valuation Memo

In 2017, sales reached W13bn. The market cap is around KRW 85 billion. However, operating profit is a loss of 4.4 billion. So, I do not think there is any enterprise value other than "possibility" whether it will be better in the future or not. A company with sales of 13 billion won and an operating loss of zKRW 4.4 billion does not make sense to have a market capitalization of 85 billion won. Of course, there are about KRW 30 billion in remanining capital, but the continuing deficit of this amount will crumple the company over in a few years. Because it is a perfectly competitive market, there is not much business value. Basically, we can think of it as a construction company. Let's predict. If sales increase by 30% in 2018, it is likely to be 17 billion, and the COGS ratio is 85%. Then, the sales profit will be about KRW 2.6 billion, and the SG&A cost is 4.8 billion. So, this year (2018) it will likely to have a loss of about KRW 2.2 billion in operating profit, and even if the financial cost / other expenses stood at around KRW 1.6 billion a year, it is expected to be about KRW 4 billion loss on a net profit basis. Turning to black is not easy. The reason why sales are not so rapidly going up even if the government is implementing environment-friendly policies is that the number of competitors is too many, especially small companies. In this situation, it is very difficult to have price competitiveness. Then what if you could make $ 30 billion in sales in 2013? I think it will be still a deficit due to increased SG&A cost.

Comments on Technical Analysis

If you see above chart, recent reconciliating mood between South and North Korea billowed rosy expectations on infrastructure investment on North Korea by Southern capital. This company is being expected to be involved in infra construction business from the project.

Financial Matters

In 2015, SG&A expense increased from KRW 2 billion to KRW 5 billion won, up by KRW 3 billion. Most of the increase is related to construction expenses such as commissions, sales commissions, salary increases, bad debt expenses and taxes. The company itself is becoming a construction company if you see the increased number of construction orders.

If I am the CEO

Sales and marketing effor is essential to this business.