[Why&Next] SGI Seoul Guarantee Reattempts IPO, How Will It Thaw the Cold Investor Sentiment?

Seoul Guarantee’s Demand Forecast for Institutional Investors Set for June 20-26
Offering Price Range Announced at KRW 26,000 to 31,800
Stock Price May Fall Due to Weak IPO Market and Overhang Concerns

Seoul Guarantee Insurance (SGI Seoul Guarantee) is set to conduct a demand forecast for institutional investors starting on the 20th, ahead of its KOSPI listing next month. Seoul Guarantee previously attempted an initial public offering (IPO) in 2023 but withdrew its listing after failing to achieve the desired results in the demand forecast. This year, the company is determined to succeed in its relisting by lowering the offering price and announcing a shareholder return plan, but the situation remains challenging. Both domestic and international market conditions are not optimistic, and the investment appeal to attract institutional and individual investors is limited.

Seoul Guarantee Lowers Offering Price but Success Is Not Guaranteed

Seoul Guarantee, founded in 1969 based on Daehan Guarantee Insurance, is the largest comprehensive guarantee company in South Korea. It took its current form after Daehan Guarantee Insurance and Korea Guarantee Insurance, both financially troubled during the 1998 foreign exchange crisis, merged. The company operates various businesses including contract performance guarantees, identity guarantees, and jeonse (key money deposit) loan guarantees.

The largest shareholder of Seoul Guarantee is the Korea Deposit Insurance Corporation (KDIC), holding 93.85% of the shares. From 1998 to 2001, KDIC injected approximately KRW 10.25 trillion of public funds into Seoul Guarantee, of which KRW 5.6364 trillion has yet to be recovered. While IPOs typically aim to raise capital for the company, Seoul Guarantee’s IPO is more focused on KDIC’s recovery of public funds. In this IPO, Seoul Guarantee will sell 6,982,160 shares, representing 10% of the total issued shares held by KDIC, through a secondary sale without issuing new shares. All proceeds will be used to repay public funds.

The desired offering price range per share is KRW 26,000 to KRW 31,800. According to the securities registration statement submitted to the Financial Supervisory Service, Seoul Guarantee selected Samsung Fire & Marine Insurance, DB Insurance, and Hyundai Marine & Fire Insurance as comparable companies and calculated their average price-to-book ratio (PBR) at 0.61 times. The offering price was then determined by applying the company’s financial status and discount rates. During its first IPO attempt in 2023, Seoul Guarantee included not only domestic non-life insurers but also overseas insurers from the U.S. and France as comparables, as the undervalued domestic insurers alone could not secure the desired offering price. However, the high offering price range estimated then (KRW 39,500 to KRW 51,800) led to a disastrous reception, causing Seoul Guarantee to withdraw its listing. This time, it appears the company deliberately excluded foreign firms to quell concerns about overvaluation. Nonetheless, the domestic major non-life insurers selected as comparables were embroiled in accounting issues last year that inflated their earnings, followed by record-high earnings announcements that boosted their stock prices, suggesting that the current offering price may still face overvaluation criticism.

Seoul Guarantee Persuades Institutions... Is the 'KRW 200 Billion Annual Shareholder Return Plan' Achievable?

Since the beginning of the year, Seoul Guarantee has been working hard to ensure a successful demand forecast by traveling domestically and internationally. From the 3rd to the 7th, it held a deal roadshow (DR) for institutional investors in Hong Kong and Singapore. From the 10th to the 19th, it has been conducting DRs for domestic institutional investors. A Seoul Guarantee official stated, "About 30 institutions have participated in the domestic DR so far," and added, "We plan to hold a DR for analysts starting on the 18th."

Seoul Guarantee is understood to be actively emphasizing its shareholder return plan to institutional investors to encourage long-term investment. On the 23rd of last month, the company’s board of directors approved a dividend payout of KRW 200 billion for the previous year. It also set a goal to guarantee shareholder returns (cash dividends plus treasury stock repurchases and cancellations) of KRW 200 billion annually for three years until 2027.

For Seoul Guarantee to properly implement its shareholder return plan, stable earnings must support it, but recent conditions are unfavorable. The company’s net income has steadily declined from KRW 491.5 billion in 2021 to KRW 438.7 billion in 2022 and KRW 416.4 billion in 2023. Although the full-year net income for last year has not been finalized, the cumulative net income for the first three quarters was KRW 127.8 billion, a significant drop compared to previous years. While Seoul Guarantee still holds a strong position in the domestic guarantee market, its market share is gradually decreasing. Its total guarantee market share fell from 26% in 2020 to 24.1% in 2023. The private guarantee market share also declined from 61.4% to 56% during the same period. The investment risk factors listed in Seoul Guarantee’s securities registration statement note that "if the guarantee insurance market opens up in the future, non-life insurers may enter the market leveraging their capital strength and sales channels," and "the entry of new market participants could lead to a decline in Seoul Guarantee’s market share and changes in its market position."

Among 11 Listed Companies This Year, 8 Saw Their Stock Prices Fall Below Offering Prices on Listing Day... Some Dropped by Up to 40%

The domestic public offering market is also not favorable for Seoul Guarantee’s stock market debut. A survey of 11 companies listed on the KOSPI and KOSDAQ from the beginning of this year through the 14th found that 8 companies closed below their offering prices on their listing day. Day One Company’s closing price plunged 40% below its offering price on the listing day. Others such as iGnet (-37%), WiseNut (-36.5%), and Meatbox (-25%) also fell more than 20%. Generally, institutional investors seeking short-term gains offloaded large volumes, causing sharp price drops.

Financial authorities recently announced IPO system reforms to improve the public offering market, which has been dominated by short-term trading. Going forward, qualification requirements will be strengthened to prevent indiscriminate participation by small-scale institutions lacking capabilities. Indirect participation through re-investment funds or overseas paper companies will also be prohibited. As a result, there is a possibility that many institutions aiming for short-term gains will rush to participate in Seoul Guarantee’s demand forecast before the regulations tighten, potentially inflating the offering price and causing a sharp price drop after listing due to large-scale sell-offs.

After listing, when the lock-up period (12 months) on KDIC’s shares expires, there is also a risk of overhang (potential selling pressure). KDIC plans to sell up to 33.85% of Seoul Guarantee’s shares in multiple tranches until the liquidation date of the Deposit Insurance Fund Bond Repayment Fund on December 31, 2027. This could significantly offset the effects of Seoul Guarantee’s treasury stock repurchases and cancellations. A Seoul Guarantee official said, "Since April last year, we have been working with external consultants to enhance corporate value," adding, "We will do our best to achieve a successful listing and continuous corporate value growth through management efficiency improvements and market-friendly shareholder return policies."