South Korean investors are pulling back their investments in the auto sector as the Covid-19 pandemic hits auto sales hard, sources said on July 24.
IBK Securities Co Ltd’s private equity unit earlier this year signed a deal to invest 35 billion won ($29 million) in auto parts company Gummoon Industry Co Ltd, a supplier of the country’s two biggest car makers Hyundai Motor Company and Kia Motors Corporation, through a project fund with half the fund coming from the state-backed fund-of-funds Korea Growth Investment Corporation. But the deal has yet to close as several other investors in the private sector canceled their investments in the fund.
“Gummoon Industry is temporarily experiencing financial hardship but its EBITDA (earnings before interest, tax, depreciation and amortization) is still positive which is rare to see among restructuring deals,” a source said. “However, the deal eventually failed to attract investors as they limit their investments in the auto sector.”
The deal is not alone in showing domestic investors’ growing skepticism about the auto sector.
“We sounded out some investors a few months ago about investing in a relatively well-positioned auto parts company but received a chilly response,” said a chief executive of one private equity firm. “We decided not to invest in the company and plan to focus on sectors other than auto for the time being.”
The country’s auto industry heavy reliance on exports has contributed to investors shunning the sector. As the Covid-19 situation continues to worsen globally, exports of domestic complete cars experienced an unprecedented decline during the second quarter with May exports plunging 59.7% year-on-year to 95,971. Auto parts suppliers seeking financial support are also increasing.
As a result, more domestic institutional investors appear to have adopted a cautious approach to investing in the sector, industry watchers said.
“Institutional investors now seem more pessimistic than before about the auto sector’s recovery under the current (Covid-19) situation and they are turning to investment opportunities in other sectors,” an industry insider said.
The so-called Corporate Restructuring Fund, which is a public-led fund of funds focused on domestic distressed companies, has also been reluctant to allocate money to the auto sector in the recent months, further discouraging private investment. The fund of funds has invested in only one company in the auto sector — JM Advanced Materials — since Covid-19 took hold.
“There could be hardly any more restructuring deals in the auto sector unless the government and financial institutions take measures to change the mood,” another source said. (Reporting by Se-hun Jo)