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Asia CommentGC Asia View

Korea ECM: investors miss the point

Korea_575px_adobe_24Feb21

South Korea’s financial regulator has stepped up scrutiny of big IPOs recently, disrupting a few listings and stoking concerns about a pullback in deal flow. Investors have so far been undeterred — but it’s time they start paying attention.

The Korean IPO market has been on fire this year, with investors pumping record amounts of cash into deals, the benchmark index soaring and companies rushing for listings.

The year of snowballing demand and supply in the local equity capital markets may seem par for the course, but the rising valuations of some deals are less so. All the signs show the Korean market has got ahead of itself.

It’s little surprise the developments have caught the attention of the local regulator.

Among the Financial Supervisory Service’s recent targets is Kakao Bank, which priced a W2.55tr ($2.2bn) IPO last week and wrapped up a two-day retail investor subscription for the deal on Tuesday. The Kakao Corp subsidiary is a digital bank that only began operating in 2019. But when listed, the company will be the third largest financial institution in the country, with an W18.5tr market capitalisation.

When the FSS scrutinised Kakao Bank’s deal, the issuer’s chief executive inferred that the regulator was challenging the IPO terms; he responded by publicly defending the post-listing valuation, as GlobalCapital Asia reported last week.

His stance was ultimately vindicated. Institutional investors were clearly comfortable with Kakao Bank’s price, as close to 1,700 accounts ploughed in more than $2tr worth of bids into the order book, setting a new record for a Korean IPO.

It has been a different story for other issuers, though. The FSS has managed to interrupt some large IPOs within the past month, including local game developer Krafton, which was forced to cut its deal size from W5.6tr to W4.3tr. Covid-19 test maker SD Biosensor, meanwhile, slashed its target from W1.32tr to W776bn after a rebuke from the authorities on its lofty valuations.

For some, the regulator appears to be flexing its muscles to extraordinary levels, by ordering companies to revise their filings, explain valuation methods and elaborate on risk factors, among other points. This is after their initial IPO applications were approved by the authorities. The FSS did not respond to a request for comment for this article.

Kakao Bank’s response and successful deal shows the limited effect of regulatory pressure on IPOs — but the FSS’s concerns should not be dismissed.

The Korean IPO market could already be in dangerous territory, with many worried about a bubble forming.

The FSS has not been alone in its concerns about issuers that are seeking multi-billion-dollar valuations. Krafton’s terms, for example, drew scepticism from investors, given the company relies on one video game series — PlayerUnknown’s Battlegrounds — for more than 90% of its revenue.

Analysts have also questioned Kakao Bank’s market cap because of the issuer’s lack of real assets, compared with local financial groups. But with more than 15m users, the online bank compares itself to international digital financial services companies, rather than traditional banks, it said.

Investors clearly bought Kakao Bank’s story — but they should tread with caution, especially as more industry-leading companies prepare IPOs this year.

Too many IPOs with stretched valuations could negatively impact Korean’s ECM. For instance, Big Hit Entertainment, now called Hybe and behind K-pop band BTS, slumped immediately after its debut in late 2020 before bouncing back. Another company, Kakao Games, also dropped on its debut in September last year, before recovering.

SD Biosensor, in comparison, soared on its maiden trading day earlier this month.

Krafton will debut on the Korean bourse on August 10 and Kakao Bank on August 6.

Although the FSS appears to be using a heavy-handed approach, it is right to try chipping away at the problems around high valuations now before things escalate.

But the onus is also as much on investors and ECM bankers to keep issuers and possible bloated valuations in check. Only then can investors see more upside potential from new listings — and help Korea’s markets grow further.


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