By Kim Da-ye
What do Hyundai Heavy Industries, NCSoft, NHN, Industrial Bank of Korea and Asiana Airlines have in common?
They initially went public in the KOSDAQ market, the Korean version of the NASDAQ which hosts mainly small or medium-sized technology companies, and moved onto the KOSPI market.
Choi Hong-sik, the newly appointed president of the Korea Exchange (KRX)’s KOSDAQ division, wants to turn that trend around.
Choi’s objective is a renaissance of the KOSDAQ market as a technology-specialized, independent market, he said in an interview with Business Focus.
A big part of the plan is getting blue-chip tech firms listed on KOSDAQ. He names Samsung SDS and LG CNS as ideal candidates.
In Choi’s scenario, listings of blue-chip firms can help solve the structural problem of the KOSDAQ market _ the lack of blue chips companies hampering the composition of indices.
Last year, 10 out of 30 companies that make up the KOSDAQ Star index were replaced and 28 of 100 belonging to the KOSDAQ Premier dropped out.
Ineffective indices lead to weak financial products derived from them such as index-linked futures and options, which institutional investors use as hedging tools.
“It’s a great shame that not a single KOSDAQ Star Index future contract has been traded so far this year,” Choi says.
Without the means to hedge risks, institutions wouldn’t be willing to buy stocks on KOSDAQ and the market would remain a league of retail investors.
On KOSDAQ, institutional and foreign investors have accounted for less than 8 percent of the total trading volume for many years while the portion of retail investors in the KOSPI market has gradually shrunken to about half of the volume, according to KRX.
If a significant number of blue-chip firms like Samsung SDS go public on KOSDAQ, that would help create steady, resilient indices, eventually attracting institution and foreigners, Choi argues.
Why would or should blue-chip companies go public on KOSDAQ?
“It’s sort of an act of self-sacrifice,” Choi says.
The executive says that polarization in the Korean society has been particularly severe in the stock exchange.
The KOSDAQ index has been stagnant at around 500 points in the last four years after plunging from a year-high of 719.25 to a year-low of 261.19 in 2008 amid the global financial crisis.
In the meantime, the size of the KOSPI market surpassed 1 quadrillion won with the index reaching its all-time high of 2,228.96 on May 2, 2011.
In a stark contrast, KOSDAQ’s market cap is stagnant at around 100 trillion won and companies worth some 80 trillion won have moved onto KOSPI since the market opened in 1996.
Choi says that current interests in polarization and “shared growth” have created the right environment to encourage blue-chip businesses to enter KOSDAQ.
“The society is demanding large conglomerates to treat their small and medium-size enterprise (SME) partners fairly by paying on the time with cash. That’s not an act of generosity but a natural responsibility,” Choi says.
“If large companies go public on KOSDAQ, they will be eventually be lending a hand to SMEs.”
To make the plan happen, a task force was recently launched. The task force is now laying out reasons why blue chip firms should have their initial public offerings on KOSDAQ and searching for the suitors. Reach-out strategies will be carefully tailored for each suitor, Choi says.
Apart from technology affiliates of large conglomerates, he is eyeing state-run companies that are planning to be privatized well as foreign companies in emerging markets.
For instance, the task force has named the Korea Racing Authority and Incheon International Airport Corporation as possible candidates.
“The ideal scenario would be that several blue chip companies go public together in a short period of time so that the listing of a single giant player does not cause distortion in the market. Is it too dreamy a strategy?” Choi says.
The president said that the KRX would only buckle down to the plan once it is officially announced with the government backing it up.
Because the KOSDAQ market was created in July 1, 1996, the 16th anniversary this year is being considered for that important occasion.
Investors’ trust in the KOSDAQ market has deteriorated over a series of frauds by listed companies and subsequent delistings.
Since February 2009, KRX has been able to decide whether firms should remain listed or not when they have been found involved in frauds, embezzlement or insincere disclosures.
The number of firms kicked out from the KOSDAQ market soared from 23 in 2008 to 65 in 2009 and 74 in 2010.
“We are letting polluted water flow out and filling this lake with clean water,” Choi says.
In listing new firms, the bourse operator focuses on their growth potential, which Choi says could be measured by their technological capacity.
A group of experts would review the firms’ technology, human resources and investment into research and investment while the KRX evaluate if earnings forecasts suggested by the businesses are reasonable.
Choi joined KOSDAQ in March 2011, and oversaw listing processes before becoming the division’s president. Having reviewed some 90 companies, Choi says he sees improvement in the quality of new firms entering the KOSDAQ market.
He says that many of newly listed KOSDAQ firms including, YG Entertainment, Genic and Sapphire Technology are so good that he would invest in them if he did not work for KRX.
In the case of foreign companies, specifically Chinese entities, Choi says the market needs a newcomer that can turn around investors’ negative perception toward Chinese companies as a whole.
One principal Choi says he would never compromise in listing and delisting businesses is transparency of management, most notably morality of CEOs and major shareholders.
“It is our principal that businesses with problems in their morality shouldn’t be accepted into the stock market,” Choi said.
When a company falls into trouble and gets taken over, the exchange would look into the new owner’s real intention.
“We have a great deal of information — a black list of executives and major shareholders from delisted or disorderly firms. They seem to jump from one company to another like a team,” Choi said.
While evaluating companies for listing on the bourse, Choi says he encountered many poignant moments.
Each time he reviewed a company, he had a meeting with the CEO for an hour or longer. He once came to evaluate a small pharmaceutical firm that was developing several new medicines.
The firm run by a former university professor had no revenue because all the medicines were on clinical trials, and researchers of the companies were making a living by carrying out various government projects. The CEO’s main job had become searching for potential investors.
Choi said that he greatly respected the CEO, but couldn’t allow the firm to get listed on KOSDAQ because it did not have stable cash flow. The CEO even suggested licensing out one of the medicines to generate revenue that would be merely a one-off.
It usually takes 13 years on average for a firm to go public on KOSDAQ. Choi said that running businesses for so long without funding is extremely difficult, so the creation of the Korea New Exchange (KONEX) is essential.
KONEX, an initiative by the Financial Services Commission, would be an official stock market for venture firms that have been around for three to eight years and only institutions will be allowed to invest there
“Investment into small startups could be too risky for retail investors, but institutional investors have better tools to evaluate if they have a future or not,” Choi said.
He believes KONEX can be a preparatory school for KOSDAQ like what KOSDAQ has been for the KOSPI market.
There have been questions over why Korea needs another exchange for SMEs when KOSDAQ and FreeBoard, an over-the-counter market for non-listed firms, have long been struggling.
Choi stresses that KOSDAQ and KONEX won’t compete against each other, but the latter will only eventually contribute to the growth of the former.
“This morning, I envisioned what KOSDAQ would look like if it were a city. If the KOSPI market is Manhattan of New York, KOSDAQ would be a new town with several skyscrapers, surrounding residential buildings, schools and hospitals. It will be an independent, self-sufficient city,” Choi said.