South Korea's initial public offering market has swung sharply from the days, only months ago, when newly listed stocks routinely quadrupled from their offering prices on debut. Investors who piled into IPO shares during the second-quarter rally have pulled out quickly amid the third-quarter market correction, leaving new listings hit harder than the broader market. With a growing number of stocks failing to recover their offering prices after listing, analysts expect a sharper divide between winners and losers in the IPO market.
The eight companies that debuted on the domestic market in the second quarter posted an average first-day return of 132.4% against their offering prices, according to the Korea Exchange on the 25th. Three of them — MakinaRocks, Polled and Cosmo Robotics — quadrupled from their offering prices on their first trading day. The KOSPI surged 67.7% in the second quarter, and that enthusiasm carried straight into the IPO market.
The picture reversed in the third quarter. The 10 companies that listed between July 1 and the 25th posted an average first-day return of minus 4.62%. Lemon Healthcare and Delicious fell to about half their offering prices, while HL Genomics plunged 58.6%.
The abrupt chill in the IPO market has come alongside the correction in Korean equities. Since last month through the 25th, the KOSPI and the KOSDAQ have fallen 20.45% and 9.72%, respectively. Short-term money that flowed into IPO shares during the second-quarter surge has exited as volatility widened, concentrating selling pressure on relatively risky new listings, analysts said.
The KOSPI closed at 6,742.74 on the 25th, up 0.68% from the previous session, but has not closed above 7,000 since the 23rd of last month. The KOSDAQ ended at 827.15 and has stayed below 800 since the 1st of last month.
The IPO market has already contracted sharply on the supply side. Excluding SPAC mergers, transfers from the KOSDAQ to the KOSPI and Konex-related moves, only 17 companies listed on the KOSPI and KOSDAQ in the first half of this year, well below the 27 that listed on average in the first half over the past decade. First-half proceeds totaled 1.1 trillion won, down 48.7% from a year earlier. Whereas four large deals including LG CNS and Seoul Guarantee Insurance came to market in the first half of last year, K bank has been the only sizable IPO this year.
Tighter rules on dual listings have also prolonged the wait-and-see stance among companies preparing to go public. Under guidelines finalized last month, a company seeking to list a subsidiary spun off through a physical division must take additional steps, including securing the consent of minority shareholders in the parent company.
With share prices breaking down from the first day of trading, institutional demand has weakened as well. Skylabs, a maker of ring-type blood pressure monitors that conducted institutional bookbuilding from the 14th to the 21st of this month, set its offering price at 10,000 won on the 25th. That is about 20% below the bottom of its indicative range of 13,000 to 16,000 won, the first case this year of a completed listing priced below the range. The share of bids carrying voluntary lockup commitments, an indicator of longer-term investment intent, came to 0.17% of participating volume, also the lowest among this year's new listings.
Market participants see the fourth quarter as a potential turning point. A cornerstone investor system and a pre-bookbuilding process take effect in November. Companies will be able to gauge institutional demand before filing a securities registration statement and allocate part of an offering in advance on the condition of lockups of six months or longer, which is expected to improve the accuracy of offering prices and reduce sharp price swings in early trading.
Whether large IPOs return is another key variable. Sono International filed for a preliminary listing review for the KOSPI at the end of June, and Goodai Global and Musinsa are also seen as possible candidates. About 40 companies have filed for IPO reviews in the second half. If market volatility subsides and these companies list successfully, sentiment toward IPO shares could revive, analysts said.
"Returns for KOSDAQ investors have deteriorated, and that has fed through to the IPO market," an investment banking industry official said. "If uncertainty in the stock market keeps recurring, the slump in the IPO market will inevitably continue."
