[Inside Chodong] What Analysts Must Do to Become the "Flowers" Once Again

Last week, after Hana Securities published an analysis report on EcoPro, a KOSDAQ-listed company, the credibility of domestic securities firms' research centers was once again called into question. Even during the sluggish stock market in the second half of last year, domestic securities firms' research centers mainly issued 'buy' reports. Many investors, trusting the analysis that the price drop was a buying opportunity, invested only to suffer losses as the stock price fell further. In a situation where trust in securities firms' analysis reports has declined, the effectively 'sell' opinion report on EcoPro was like "pouring oil on a fire."

The distrust toward reports issued by domestic securities firms' research centers is not a recent phenomenon. Due to their business structure, the corporate sales departments of securities firms, which must consider the interests of listed companies that could become future clients, do not welcome negative stock reports from research centers. When opinions differ between the corporate sales department and the research center, the CEO leading the securities firm is more likely to side with the revenue-generating department rather than the cost center.

Previously, in 2016, Kyobo Securities drastically lowered the target price of Hana Tour from 200,000 won to 110,000 won. Hana Tour immediately protested and pressured the analyst who issued the report by refusing to allow site visits. About 30 heads of domestic securities firms' research centers issued a statement titled "Our Position for the Sound Development of the Capital Market," condemning Hana Tour's response. For analysts to issue 'sell' opinion reports requires great courage, to the extent that research center heads had to gather and release a statement over the reaction of Hana Tour, which did not have a large market share in the domestic stock market. Seven years have passed since the Hana Tour incident, but it is still rare to find analysts voicing 'sell' opinions.

The decline in trust is not simply because research centers do not issue sell opinions. At the end of last year, most domestic securities firms' research centers predicted that the stock market would show a "lower start, higher finish" trend this year. In the first quarter, the KOSPI and KOSDAQ indices rose by 10.8% and 24.8%, respectively. The indices have continued an upward trend this month as well. Based on the first quarter, the KOSDAQ index recorded the highest increase among the Group of Twenty (G20) stock markets. Investors who reduced their stock holdings at the end of last year, trusting the "lower start, higher finish" forecast, understandably have significant dissatisfaction.

As the first quarter ended, research centers quietly revised their forecasts. They abandoned the optimistic outlook for the second half, stating that conditions do not seem to improve. With globalization advancing, the domestic stock market is influenced by various external factors. It is not easy to predict the pace of interest rate hikes by the U.S. Federal Reserve (Fed). When the baseline assumptions for forecasts change, the forecasts themselves can change. Mechanically issuing forecasts at the end of a quarter or year makes it difficult to gain trust. If forecasts are revised whenever assumptions change and the reasons for differences from previous forecasts are clearly explained, confusion can be reduced to some extent.

The revenue structure of securities firms has diversified from simple brokerage to investment banking (IB) services. However, research centers are still perceived as 'cost centers.' In such a structure, when the financial situation of securities firms worsens, as it did last year, research centers often become targets for restructuring. Consequently, the number of employees aspiring to become analysts, who are called the 'flowers of securities firms,' has sharply declined.

However, if the existence of research centers is justified only as support for corporate sales, their position will inevitably shrink further. They must publish thorough reports that meet the expectations of individual investors who regard analysis reports as public goods and build market trust. Only then will even the most profit-driven 'bold CEO' be unable to threaten the survival of the research center.

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