Brokerage research coverage of KOSDAQ-listed companies declined again in the third quarter after rising through the second quarter, with reports concentrating further on a handful of stocks. As the stock market weakened, the number of companies covered fell while reports clustered around stocks drawing strong investor interest, raising concerns about an information gap for small- and mid-cap shares. With financial regulators moving to introduce a minimum research coverage ratio for small- and mid-cap stocks to revitalize the KOSDAQ, analysts say brokerages must expand research staff and budgets for the measure to work.
A total of 1,479 research reports on KOSDAQ companies were published in the third quarter, down 16.8% from 1,777 in the second quarter, according to FnGuide data released on the 5th. Reports on KOSPI companies fell 5.0% over the same period, from 4,621 to 4,392, making the KOSDAQ decline steeper.
KOSDAQ research had been on an upward trend through the first half of the year. The count more than doubled in five months, from 364 in December last year, when the government encouraged broader coverage, to 736 in May. It then fell to 429 in June and 427 in July, rebounded to 677 in August, and dropped again to 375 last month — the lowest level this year and close to the December figure. Quarterly output followed the same pattern, rising from 1,428 in the first quarter to 1,777 in the second before returning to first-quarter levels in the third.
The range of companies covered also narrowed. The number of KOSDAQ companies with at least one report during the quarter rose from 404 in the first quarter to 512 in the second, then fell to 405 in the third — a drop of 107 companies, or 20.9%, in a single quarter. Over the same period, the number of KOSPI companies covered fell from 362 to 342, a far smaller decline.
While overall output fell, reports piled up on a small group of stocks. Coverage of the 10 most-covered KOSDAQ stocks rose from 238 reports in the second quarter to 265 in the third. Their share of all KOSDAQ reports climbed 4.5 percentage points, from 13.4% to 17.9%.
JYP Entertainment drew the most coverage in the third quarter with 35 reports, followed by SM Entertainment (041510.KQ) with 34. YG Entertainment (122870.KQ) and Hugel (145020.KQ) each had 32, Pharma Research (214450.KQ) 25 and Classys (214150.KQ) 24. Also among the top 10 were Silicon2 (257720.KQ) with 22, Simmtech (222800.KQ) with 21, and ST Pharm (237690.KQ) and HK inno.N (195940.KQ) with 20 each.
Industry officials attribute the trend to a combination of a weakening market, limited research staff and the workload of initiating coverage on new companies. Monitoring earnings and share-price moves at existing names while identifying new ones requires additional time for site visits and data verification, they said, and as market uncertainty grows, analysts prioritize existing stocks that investors are watching, pushing new coverage down the list.
In response, the Financial Services Commission plans to require full-scope investment banks to meet a minimum small-cap coverage ratio as part of a package to improve research. At least a quarter of annual report output would have to go to stocks ranked below 300th by market capitalization on the KOSPI and below 150th on the KOSDAQ. Brokerages with strong small-cap coverage records would receive incentives when their mandatory venture capital ratios are calculated, and the reporting requirement for companies that complete initial public offerings would be tightened from at least twice within one year to at least twice a year for three years.
The question is whether these incentives will translate into broader coverage and sustained follow-up analysis. Of the 655 KOSDAQ companies with at least one report from January through September, 181, or 27.6%, had only a single report. Industry officials worry that because some companies disclose too little data to support earnings estimates, a focus on meeting quotas could produce formulaic reports that amount to little more than company introductions. For wider coverage to meaningfully support the KOSDAQ, they said, the depth and continuity of analysis that informs investment decisions must improve alongside the volume of reports. Small- and mid-cap KOSDAQ companies that have been reluctant to disclose information also need to change their approach.
"Simply adding more reports on stocks that are already well covered will not shrink the blind spots around small- and mid-cap shares," an official in the financial investment industry said. "Identifying new companies and sustaining follow-up analysis requires several conditions to come together, including more research staff and budget at brokerages and more active disclosure by listed companies."
