'KOSDAQ Falls to the Lowest Globally' Trust Undermined More Than Performance... Tense Ahead of Delisting Season

[Asia Economy Reporter Lee Seon-ae] Amid the global stock markets' continued decline due to various adverse factors this year, the domestic KOSDAQ index has experienced a notably steep drop. It ranks among the lowest worldwide. Even considering the Korea Discount (undervaluation of the Korean stock market), the scale of the decline is striking. While some analyses attribute the index's weakness to the earnings shock of KOSDAQ-listed companies in Q4 last year, experts believe that 'trust' has had a greater impact than 'performance.' This implies that the entire KOSDAQ market is being discounted due to moral hazard.

According to the Korea Exchange on the 2nd, the KOSDAQ index, which closed at 1037.83 on the first day of the new year, ended February at 881.07. The decline rate exceeds 15%. Considering that the average decline rate of major global stock markets such as Brazil, Indonesia, the UK, Hong Kong, Taiwan, China, Japan, Germany, and the US was less than 10%, the drop is significant. Except for Russia, it is effectively the lowest worldwide.

What caused the KOSDAQ's decline? Among 147 KOSDAQ-listed companies that announced their Q4 2021 earnings and had analyst earnings forecasts, the operating profit deviation rate for Q4 2021 was -11%. However, experts view the earnings shock as not the main cause. Typically, a "Big Bath" (reflecting losses all at once) occurs in Q4, leading to a higher rate of earnings shocks where results fall short of forecasts. Over the past decade, the average Q4 earnings surprise rate for KOSDAQ has been around -20%, and the last quarter actually showed improvement compared to the historical average.

Overall, earnings forecasts for the KOSDAQ market this year remain robust, with operating profits expected to reach a record high of 14.2 trillion KRW. Nevertheless, the current index level is below the average valuation during periods when KOSDAQ operating profits exceeded 10 trillion KRW.

Accordingly, the prevailing view is that the entire market is being discounted due to moral hazard risks such as embezzlement and breach of trust that have surfaced in the KOSDAQ market since the beginning of the year. Companies like SillaJen and Kolon TissueGene have had their trading suspended for extended periods due to clinical, embezzlement, breach of trust issues, and component controversies, while Celltrion affiliates are embroiled in accounting fraud allegations. This year alone, there have already been three public disclosures of embezzlement and breach of trust on the KOSDAQ (Ostem Implant, Seyoung D&C, Hucentec). Embezzlement disclosures among KOSDAQ-listed companies have been on the rise in recent years. There were only eight cases in 2016, increasing to 11 in 2017. Since 2019, the number has exceeded 20 for three consecutive years (23 in 2020, 21 in 2021). Notably, the amounts involved this year are substantial. Ostem Implant's embezzlement amount is 221.5 billion KRW. Seyoung D&C's breach of trust amount was confirmed at 13 billion KRW. Hucentec's embezzlement amount is 25.91 billion KRW.

Researcher Kim Jae-eun of NH Investment & Securities explained, "The KOSDAQ's sluggishness is judged to be linked to trust issues amid the overall strengthening of ESG (Environmental, Social, and Governance) management, involving suspicions such as embezzlement, delisting reviews, accounting fraud, insider trading allegations, 'muk-twi' (exit scams), and physical division."

The problem is that restoring market trust will not be easy going forward. In March, companies submit business reports and audit reports intensively. If a company fails to submit these reports or receives an adverse audit opinion (qualified, adverse, or disclaimer), it immediately becomes subject to a delisting review. Since last year, 38 KOSDAQ companies have been added to the management list, with 19 currently still trading. If a KOSDAQ-listed company designated as a management item fails to resolve issues and submits an audit report, it will be immediately subject to a delisting suitability review, requiring caution. Lumens, Seojin Automotive, Someage, Daehan Green Power, Dongbang Sunki, and Kolon Life Science have been designated as management items due to consecutive operating losses over the past four years. If they record losses again this year, they will be subject to a delisting review.

This content was produced with the assistance of AI translation services.