As it became linked to the presidential election theme stocks, the stock price of Sangji Construction surged to 14 times its low in April and May, drawing the attention of the real estate industry. Sangji Construction's main business, the development of luxury officetels and villas, has recently been hit hard by the real estate market downturn, resulting in a shift to a deficit in the first quarter of this year. The company has seen numerous changes in its major shareholders since the early 2000s. Currently, the largest shareholder of Sangji Construction has a history of being involved in a past stock manipulation case. With worsening liquidity, the company is also raising cash by reselling its held convertible bonds (CB) and initiating a paid-in capital increase targeting shareholders.
According to the Korea Exchange on the 19th, the stock price of Sangji Construction rose more than 14 times from 3,165 won (based on the closing price) on April 1 to 46,750 won on May 12. The stock price soared as it became associated with Lee Jae-myung, the presidential candidate of the Democratic Party of Korea.
The fact that Im Moo-young, the former outside director of Sangji Construction, joined Lee Jae-myung's campaign during the 2022 presidential election has fueled the surge in stock prices. However, Im has not been associated with Sangji Construction since resigning in March of last year.
Sangji Construction is a company that has grown by focusing on the construction of luxury villas and officetels. Established on June 21, 1979, the company originally started as a manufacturer of video, audio, and communication equipment under the name Changhung Telecommunications Construction.
After being listed on the KOSDAQ market in 2000, it changed its name to Dongmun Information and Communications after being absorbed by Dongmun Construction's telecommunications subsidiary in 2003. As Dongmun Construction went through a workout process, the largest shareholder was changed multiple times, leading to a series of name changes, including Reneco, Forward Companies, and Sangji Kyle Room.
Sangji Construction actively entered the luxury villa supply market centered around Gangnam, Seoul, more than 20 years ago. After adding construction projects to its list of businesses in 2004, it gained prominence in Seoul's luxury villa market with its high-end housing brand "Sangji Ritzville" in areas such as Cheongdam, Bangbae, Seocho, and Samsung.
Since then, the company has continued to launch high-end residential brands, including "Sangji Kyle Room" and "Sangji Kyle Russ," thereby expanding its business area from mere construction to development.
The largest shareholder of Sangji Construction is Joongang Advanced Materials, which held approximately 17.62% equity as of the end of March this year. Joongang Advanced Materials operates in the secondary battery material business and has a history of being involved in a past stock manipulation case. Other major shareholders of Sangji Construction include Hyunjin (14.82% equity) and High-End Holdings (3.3% equity).
Sangji Construction has wholly owned subsidiaries, including Kyle Room D&D, Sangji Green Energy, and Kyle Room Dosan. Among these, Kyle Room D&D and Kyle Room Dosan are promoting development projects to construct luxury officetels and high-end mixed-use buildings in Nonhyeon-dong.
In 2021, when the real estate market boom reached its peak, Sangji Construction successfully sold out the high-end officetel "Sangji Kyle Room M" in the Nonhyeon-dong area, achieving full sales. Kyle Room D&D, which is overseeing the Sangji Kyle Room M project, features a total floor area of 9,402 square meters, with three underground floors and 17 above-ground floors, and unit sizes ranging from 51 to 78 square meters, comprising 88 units. The sale price was approximately 170 million won per 3.3 square meters, totaling about 2 billion won per unit, and despite the high price, it was successfully sold out.
However, following interest rate hikes and a downturn in the domestic real estate market, cases of buyers of Sangji Kyle Room M failing to repay intermediate and final construction loans due to a lack of liquidity have frequently occurred since the construction was completed in December 2023. Out of 88 units, about 10 contracts were terminated, leading Sangji Construction to assume debts worth approximately 10.3 billion won in May of last year.
Similarly, the high-end mixed-use project "Sangji Kyle Room Escala," located at 98-98-1 Nonhyeon-dong, is facing difficulties in transitioning to the main project financing (PF) due to worsening market conditions. Domestic financial institutions reportedly require a certain level of pre-contract rate as a prerequisite for the transition to main PF.
To accelerate the transition to main PF, Sangji Construction adopted a joint implementation approach instead of solo implementation. It added two parcels of land, 98-5 and 98-6 in Nonhyeon-dong, adjacent to the existing two parcels, and included Doosan Future Industrial as a joint implementer. To enhance project viability, the company has changed the apartment unit sizes from the previous range of approximately 40 to 65 square meters, focusing on small units, to large units of over 200 square meters, and reduced the number of officetel units from 28 to 5.
Originally, the development project "Sangji Kyle Room Escala" was planned to cover a site area of 1,058 square meters and a total floor area of 6,704 square meters, consisting of one building with three underground floors and 15 above-ground floors. However, it has expanded to a site area of 2,025 square meters and a total floor area of 15,466 square meters, consisting of one building with five underground floors and 19 above-ground floors. The initial deposit also increased from 26 billion won to 70.2 billion won.
As a result, Sangji Construction has returned to a deficit due to a sharp drop in sales. The consolidated sales for the first quarter of this year were 2.28 billion won, nearly one-fourth compared to 10.72 billion won in the first quarter of last year. The company recorded an operating loss of 1.1 billion won.
Last year's consolidated sales totaled 20.43 billion won, representing a decrease of more than 88% compared to the previous year. In 2023, Sangji Construction reported an operating profit of 32.46 billion won, but this was a shift to an operating loss of 21.77 billion won last year, with the operating loss being greater than the sales.
Cash liquidity is also deteriorating. As of the end of December 2023, the cash and cash equivalents amounted to 42.98 billion won, which sharply fell to 8.89 billion won within a year. As of the end of March this year, cash and cash equivalents stood at 4.7 billion won, dropping more than 4.5 billion won in just three months.
Sangji Construction recently pursued a paid-in capital increase to secure funding for the Kyle Room Dosan development project. On February 7, it initiated a public offering of paid-in capital increase worth 20 billion won to raise funds for business operation and debt repayment. At that time, the stock price was below 5,000 won, so the new shares’ expected issuance price was set at 5,000 won.
However, after April, as it became associated with the political theme stocks and the stock price skyrocketed, the price of the new shares increased from the original 5,000 won to 22,850 won, and the fundraising target also rose from 20 billion won to 91.4 billion won. However, as the stock price surged and the new issue price increased, participation in the paid-in capital increase was limited to a handful of shareholders. Of the 91.4 billion won target for the paid-in capital increase, only about 11% of shareholders participated, contributing 10.2 billion won. This implies that nearly 90% of shareholders opted to forgo the capital increase.
Sangji Construction is also venturing into mezzanine securities investment. Sangji Construction acquired convertible bonds (CB) issued by MERITZ Securities for 12 billion won in November 2023, which it then resold to other investors for 15.3 billion won on the 4th.
Combining the proceeds of 15.3 billion won from the resale of CB with the 10.2 billion won raised through the paid-in capital increase, Sangji Construction managed to secure a total of 25.5 billion won, successfully achieving its initial funding target of 20 billion won, according to a company official.
Sangji Construction stated that the drop in sales and the operating loss last year were mainly influenced by the debt assumption of Sangji Kyle Room M. A company official noted, "The decrease in sales and the operating loss were reflected in last year's performance due to about 10 sales contract cancellations in the Sangji Kyle Room M development project, which had already been booked for 2023. We believe that if the transition to main PF in Kyle Room Dosan is achieved, performance improvement will be feasible."
Despite the recent poor performance, Sangji Construction expressed a burdensome position regarding the rapid surge in stock prices, as it is now associated with political theme stocks. The company official remarked, "When performance was good, the stock price barely rose, but now that Sangji Construction is linked with political theme stocks, it has soared sharply, which feels a bit burdensome."