[Inside Chodong] IPOs Must Break Free from the 'Flood-Irrigated Paddy Field' Market

[Asia Economy Reporter Hyungsoo Park] The domestic initial public offering (IPO) market is slowing down. Unlike last year, which saw the largest scale ever, the number of companies withdrawing their listings is increasing this year. Hyundai Engineering, SK Shieldus, and One Store, which had raised expectations, have postponed their listing schedules this year. This delay in listing schedules followed the failure to receive the anticipated corporate valuations during demand forecasting. Due to sluggishness in major domestic and overseas stock markets at the time of demand forecasting, institutional investors could not participate aggressively. This is why the domestic IPO market is referred to as a 'flood-irrigated paddy field' (Cheonsudap).

The success or failure of an IPO is influenced more by the market conditions during demand forecasting and the public offering than by the competitiveness and growth potential of the individual company pursuing the listing. Since the public offering price for an IPO is often compared to the corporate value of listed companies, it cannot be free from the influence of the stock market. However, if domestic market competitiveness is strengthened, promising companies can timely receive capital injections to enhance their competitiveness effectively.

First, institutional measures are needed to prevent excessive bubbles when determining the public offering price. LG Energy Solution, which went public in January this year, recorded an order amount reaching 1,520.3 trillion won during demand forecasting. This was the result of institutions competitively participating to secure even one more share, based on expectations that the secondary battery market would grow rapidly. Unlike individuals who pay subscription deposits, institutions can participate in demand forecasting without deposits, leading to concentration on certain companies. Many institutions participating in demand forecasting focus more on the stock price movement immediately after listing than on the growth potential of the prospective listed company. Many institutions aim to realize short-term profits through hype at the time of listing, but filtering them out is not easy. Financial authorities are hastening to reform the demand forecasting system in response to the LG Energy Solution incident.

Along with institutional reform, discussions on the role of underwriters are also necessary. The stock price trend of newly listed stocks under one year is also one of the factors affecting the IPO market's popularity. The reason why controversies over the appropriateness of the public offering price persist is that, except for immediately after listing, it is not uncommon for prices to remain below the public offering price throughout the year. LG Energy Solution's stock price, which soared to 598,000 won on the first day of listing, is now below 440,000 won. Underwriters receive fees from prospective listed companies. The higher the public offering price and the larger the offering size, the higher the fees. They devote time and effort to finalizing a public offering price that suits the preferences of the prospective listed company.

Securities firms that earn the most profits in the IPO market tend to be lukewarm in issuing analysis reports on IPO companies. Small and medium-sized securities firms such as SK Securities and Eugene Investment & Securities target niche markets by analyzing IPO market trends and actively analyzing IPO companies. Underwriters should also strive to provide objective information about newly listed companies proportional to their earnings from the IPO market. It is problematic that neither the issuer nor the underwriter takes responsibility when there is a significant gap between the projected performance presented during the listing process and the actual performance one to two years later. There is also a need for awareness regarding the issue of presenting aggressive targets for a high public offering price or artificially improving the performance of the year before listing.

From a long-term perspective, strengthening the competitiveness of the IPO market must start with reducing bubbles in the public offering price. If a virtuous cycle is created where companies raise funds through public offerings to lay the foundation for growth and receive appropriate valuations accordingly, the prejudice of the market being a 'flood-irrigated paddy field' can be overcome. When the economy is difficult and stock market volatility increases, the capital market's function of supplying funds should become more active; if it instead contracts, corporate management difficulties will worsen.

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