KG Mobility (003620.KS), or KGM, is expected to post its fourth consecutive annual profit this year on the back of strong overseas sales. But its financial burden is growing along with its top line. The company has raised most of the funds needed for future investments from outside sources, pushing up its reliance on borrowings at a steep pace. Analysts say KGM must quickly strengthen the earnings power of its core business to achieve sustainable growth as competition intensifies across the global automotive industry.
Short-term borrowings and bonds that KG Mobility must repay within a year stood at 630.1 billion won ($440 million) as of the end of June, nearly double the 329.3 billion won recorded at the end of last year, according to the Financial Supervisory Service on the 27th. The figure marks a 321% jump from 143.1 billion won in 2023, the year the company returned to profit. Short-term borrowings alone swelled more than 13-fold over the same period to 603.1 billion won. Cash and cash equivalents, by contrast, amounted to just 77.3 billion won. As a result, the debt-to-equity ratio rose to 154% from 126% at the end of last year.
KG Mobility expanded external borrowing further in the second half. In August, it issued convertible bonds worth 108.1 billion won and 154.5 billion won to fund operations and repay debt, respectively. Of the 154.5 billion won, 142.4 billion won will go toward repaying existing borrowings, allowing the company to cut its interest burden to 3.0% a year from about 6.0%. The 108.1 billion won issue was placed with China's Chery Automobile. In July, the company also took out 109.9 billion won in short-term loans to cover technology royalty payments and other costs.
Behind the increase in outside funding is cash generation that remains weak. The company broke a chronic cycle of operating losses and returned to profit in 2023, and has stayed in the black through last year. But its annual earnings fall short of covering its heavy fixed costs and the funds needed for future investment.
KG Mobility posted revenue of 4.3036 trillion won and operating profit of 36.1 billion won last year. Operating profit rose each year, from 12.5 billion won in 2023 to 14.3 billion won in 2024, but the operating margin never climbed out of the sub-1% range. In the first half of this year, the operating margin was 0.62%, down 0.1 percentage point from a year earlier. FnGuide projects revenue of 4.3036 trillion won and operating profit of about 36.2 billion won this year.
Fundraising through mezzanine instruments — securities linked to equity — adds concerns about shareholder dilution on top of financial instability. The convertible bonds KG Mobility issued this year could be converted into 96,130,093 shares in total, equal to 47% of its 202,374,912 outstanding shares. The conversion price on those bonds ranges from about 2,710 won to 2,760 won, above KG Mobility's current share price of 2,500 won at the close on the 25th. The company carried out a bonus share issue last year, citing an improvement in its financial structure, before proceeding with a paid-in capital increase.
Ultimately, observers say KG Mobility must raise the earnings capacity of its core business to build a solid financial structure. The first requirement is commercial success for the new models it plans to roll out in stages. The company plans to launch seven eco-friendly sport utility vehicles by 2030, including electric vehicles, hybrids and plug-in hybrids. The SE10, under development for sale next year, is expected to be the brand's first model fitted with a plug-in hybrid powertrain.
KGM is also moving faster to expand its overseas knock-down (KD) assembly business to improve profitability. The company aims to reach annual sales of 200,000 vehicles and revenue of 10 trillion won by increasing knock-down kit exports to the Middle East and Southeast Asia. It sold 110,535 vehicles last year. Industry watchers say the benefits to profitability could begin in earnest next year once knock-down production plans take concrete shape in Saudi Arabia and Indonesia, following Vietnam.