By Kim Da-ye
The Korean bourse saw a record volume of initial public offerings (IPOs) last year, but experts warn that a large portion of them were overpriced, ultimately causing losses to investors.
Lee Seok-hoon, a research fellow at Korea Capital Market Institute, said in a report that more than a half of the IPOs between 2007 and 2010 saw a drop in the stock price below the public offering price one month after the firm went public.
Some 29 percent of the IPOs during the same period saw their stock price closing below the public offering price on the first day of trading. Lee says that the closing price on the first trading day is a good measure of the stock’s potential market price.
Samsung Life Insurance, which launched last year’s largest IPO worth 4.88 trillion won in May, saw its public offering price of 110,000 won plunge to 97,000 won in November. It closed at 109,500 won Friday.
Korea Life Insurance also executed a 1.78 trillion-won IPO in March, and the stock price has remained below the public offering price of 8,200 won most of the time, closing at 7,910 won Friday.
Hyundai Home Shopping made a fancy debut with its public offering price at 90,000 won skyrocketing 38 percent on the first trading day in September, but the stock price soon skidded downhill, ending at 94,500 won Friday.
In general, IPO stocks are considered a highly risky investment because their public offering prices aren’t decided by the market. Often undervalued for that reason, they can be considered attractive to bargain hunters.
Lee says that overpriced IPO stocks reached 29 percent between 2007 and 2010 ― far more than 13.4 percent between 2003 and 2007.
“Concerns about ‘IPO overpricing’ have tormented Korean financial authorities since the Financial Supervisory Service (FSS) unveiled its plan to advance the market in July 2007,” Lee said.
The FSS said last month that most of the companies that went public between 2008 and 2009 determined their public offering price based on the ratio of the stock price to the per-share earnings ratio or PER. On average, those companies set the ratio 20 percent higher than the market value.
The companies that set the ratio above the market average had a low rate of return at five percent one month after going public while those that estimated theirs below the market value had a high return at 24.6 percent, the financial watchdog said.
Lee said that in the U.S. between 1983 and 2009, about 28 percent of IPOs were overpriced ― the portion is similar to that of Korea. The average rate of return was, however, low at minus 2.5 percent on the first trading day, compared to Korea’s minus 13.4 percent.
“If few stocks are overpriced, or the loss from overpriced stocks is insignificant in the IPO market just as in the U.S., investors in the market would have reasonably high confidence in public offerings,” Lee said.
The researcher says that financial industry officials ― unlike financial authorities and academic circles ― argue that concerns about IPO overpricing are unnecessary because returns on IPO stocks were still high.
In fact, some shares showed stellar growth since listing. Mando, a car part manufacturer, saw its public offering price of 83,000 won nearly doubling in a year. Mando stock closed at 154,500 won Friday.
Fila Korea also soared from 35,000 won in September to 61,600 won, and Woongjin Energy rose from 9,500 won to 15,400 won within less than eight months.
Lee said that the role of lead managers is important in determining a reasonable public offering price through proper due diligence, investor relations, demand forecast and stock allotment processes.
In addition, the FSS urged lead managers to prioritize mid- or long-term investors in distributing IPO stocks.
Between 2008 and 2010, about 65 percent of the 13.6 trillion-won IPO stocks were allocated to institutional investors who, on average, sold about a third of the stocks on the first trading day and nearly a half within four weeks. Brokerages and asset management firms, in particular, led massive selloffs of stocks shortly after IPOs.
In 2010, the size of IPOs reached a record high at 10.09 trillion won. Ninety six firms ― up 45 percent up from a year earlier ― went public, and 74 of them got listed on the tech-heavy KOSDAQ market.
As of Dec. 20, 2010, the market cap of the newly listed firms reached 42.78 trillion won, which represents 3.5 percent of the market cap of both the KOSPI and KOSDAQ markets.