“Credit Checkpoint” is a column that assesses the credit rating risks of companies preparing to issue corporate bonds by examining their financial structure and cash flows. We evaluate a company’s short- and medium-term financial stability by focusing not only on the numbers in its financial statements but also on the quality and sustainability of its cash flows. We highlight key financial indicators and potential risk factors to help corporate bond investors and market participants assess a company’s creditworthiness from a more comprehensive perspective. <Editor’s Note>

[E-Daily Marketin LEE GEON-EOM Reporter] SAMYANG PACKAGING(272550)Despite strong earnings, the company has fallen into a double bind of declining cash generation and increasing debt burden. While revenue and operating profit rose, particularly in the aseptic filling division, cash flow from operating activities actually decreased significantly. Furthermore, as debt dependency and the net debt-to-equity ratio have risen, concerns about the company’s financial soundness are growing.

According to the financial investment industry on the 27th, SAMYANG PACKAGING will conduct a bookbuilding process on the 28th to issue corporate bonds worth 60 billion won. Depending on the outcome of the bookbuilding, the company plans to increase the issuance amount to a maximum of 100 billion won.

While the market views SAMYANG PACKAGING’s revenue growth and profit improvement favorably, it remains wary of the company’s declining cash generation and rising debt levels.

In fact, SAMYANG PACKAGING’s consolidated revenue for the first half of this year reached 224.7 billion won, a 5.9% increase compared to the same period last year (212.1 billion won). Operating profit (17.5 billion won) and net income for the half-year (12.2 billion won) also surged by 40.8% and 30.4%, respectively, compared to the same period last year, indicating strong performance based solely on profit metrics.

The problem is that, contrary to the improvement in profits, cash generation has actually weakened. Cash flow from operating activities in the first half of this year amounted to just 1.3 billion won, a sharp 36.1% decline from the same period last year (2.0 billion won). In contrast to the more than 40% increase in operating profit, the actual cash inflow to the company has decreased.

The deterioration in free cash flow (FCF)—which is calculated by subtracting essential expenditures from cash generated by operations—is even more pronounced. Capital expenditures (CAPEX) totaling 23.5 billion won—including 23.4 billion won for tangible assets—were incurred in the first half of this year, resulting in a free cash flow (FCF) of negative (-) 22.1 billion won after these expenditures were deducted. This represents a 54.3% increase in the net outflow compared to the same period last year (-14.4 billion won).

Large-scale investments in machinery and equipment, undertaken to upgrade the container business, were the primary cause of the decline in free cash flow. With such capital expenditures continuing, operating cash flow has also decreased, creating a situation where the company’s internal cash generation alone is insufficient to cover investment costs.

Although the level of cash and cash equivalents has increased, a closer look at the underlying factors reveals an unfavorable picture. At the end of the first half of this year, cash and cash equivalents stood at 41 billion won, up from 27.5 billion won at the end of last year; however, this increase stemmed from borrowing rather than operations. During the same period, new short-term borrowings alone totaled 78.1 billion won, resulting in a net cash inflow of 33.8 billion won from financing activities.

This stands in stark contrast to the 23.2 billion won outflow recorded during the same period last year. Furthermore, unlike last year, even one-time cash inflows from investing activities have disappeared this year, resulting in a net outflow of 21.6 billion won. Ultimately, the increase in cash balances is interpreted as a result of relying on expanded borrowing rather than improved operating performance.

Given this situation, SAMYANG PACKAGING’s actual debt burden is also on the rise. Analysts note that as actual cash inflows decrease while the burden of capital expenditures increases, the company’s reliance on external funding is bound to grow. Following past large-scale investments in expanding aseptic production lines and pursuing a packaging recycling business, recent costs associated with facility upgrades have further contributed to a continuous increase in net debt.

In the first half of this year, SAMYANG PACKAGING’s net debt stood at 172.9 billion won, a 20.1% increase from the end of the previous year, and the net debt ratio jumped from 37.3% to 44.3%. Net debt refers to the actual amount of debt after subtracting cash and cash equivalents from total debt. Most notably, the combined amount of short-term debt and corporate bonds maturing within one year is 3.4 times the company’s cash and cash equivalents (41 billion won), indicating a growing burden in managing short-term liquidity.

In detail, SAMYANG PACKAGING’s total debt as of the end of the first half of this year stood at 214 billion won, a 24.7% increase from 171.5 billion won at the end of the previous year. In particular, short-term borrowings and corporate bonds due within one year totaled 139.2 billion won, accounting for 65.1% of the total, indicating that the maturity profile is heavily concentrated in the short term. Consequently, the debt-to-total-assets ratio rose from 26.4% at the end of last year to 30.2%, exceeding the generally accepted appropriate level of 30%.

Moon Jin-in-hu, a senior researcher at NICEHoldings Credit Rating, commented, “Investments in machinery and equipment aimed at upgrading the container business have led to a slower growth in free cash flow and a renewed increase in net debt,” adding, “We plan to comprehensively consider future changes in the business environment, market position, and debt burden levels when determining the credit rating.”