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Hero to zero: Korean IPO-hopefuls should learn from the past

Seoul Korea_575px_adobe_25Feb21

Three pulled listings in a week show that shooting for rich valuations will only backfire on issuers

The fact that South Korean companies are still aiming for lofty valuations for their IPOs is baffling considering the number of hot deals from the past year that have slumped from the heights of their trading debuts.

Within the past week alone, three issuers have pulled deals, each citing difficulty determining valuations for their shares.

SK shieldus, the cybersecurity arm of network carrier SK Telecom, cancelled its IPO after bookbuilding on May 5-6 generated lukewarm demand from institutional investors. On Wednesday, domestic app marketplace One Store Co, and Tailim Paper, which makes and distributes paper products, filed IPO cancellation notices with the market regulator.

SK shieldus, an affiliate of One Store, was aiming to raise up to W1.05tr ($823.8m) for a market capitalisation of W3.5tr. The valuation was far above its top domestic competitor, S1 Corp, which had a W2.66tr market cap by Wednesday’s close in Seoul.

Investors appeared to see through SK shieldus’s bloated target: bids were mainly placed below the firm’s W31,000 to W38,000 IPO price guidance during the two-day bookbuild.

One Store and Tailim Paper were looking to raise up to W277.7bn and W178.3m, respectively. Both companies held a two-day bookbuild on Monday and Tuesday, before scrapping their listing plans.

The three firms follow a string of shelved listings in the first quarter — delayed mostly due to poor market conditions and lack of investor interest.

This begs the question as to why SK shieldus, One Store and Tailim Paper still ventured out with steep valuation targets at a time when investors are bearish and markets turbulent.

Issuers should tread carefully. Any company keen to come to the market now should look at the past 18 months before setting the terms for their IPO.

Despite somewhat better conditions in 2021, overvaluation has already been plaguing the Korean market. Last year, the country’s Financial Services Commission became concerned about the potential for a bubble and began pressuring some issuers to trim IPO sizes and valuations.

Despite that, most of the headline-grabbing deals were a success. Among the hottest deals last year were SK IE Technology’s W2.29tr listing in April, game developer Krafton’s W4.3tr in July and the W2.55tr float by digital bank KakaoBank Corp in the same month.

But although the three are still trading above their IPO prices, their stocks have all fallen significantly from their debut levels. By the end of Wednesday, SK IET had lost 18.44% from its first close; Krafton was down 41.19%; and KakaoBank 42.55%.

In 2021, Korea was one of the main IPO markets to benefit from China’s crackdown on offshore listings and its heightened tensions with the US. As Chinese deal flow slumped, Korean issuers stepped into the limelight and bagged hundreds of billions of dollars from eager investors through a run of bumper listings.

It’s a different story this year though. The Korean market is now trending downwards. The benchmark Kospi index is down 13.27% year-to-date. The bearish sentiment among investors is no longer just limited to China, but has instead grown into a global problem, with Korean issuers also not immune.

If Korean issuers are determined to list despite the state of the market, they will have to rein in hopes of high valuations and be as flexible as possible. What has become increasingly clear is that market stability is a long way off, and investors now have the upper hand. Issuers should pay attention.

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