South Korean IPO market headed into winter after pitiful LG CNS debut

Companies in South Korea are expected to refrain from seeking initial public offerings for a while after the country’s much-anticipated new blockbuster listing LG CNS Co. got off to a weak start last week, upsetting the broader IPO market.

According to the investment banking industry on Monday, of this year’s eight IPOs, seven companies stumbled on their first day of stock trading, with the debut prices dipping below the IPO prices.

LG CNS, which debuted the country’s main Kospi bourse in fanfare on Feb. 5, closed its first trading day with a 9.9% loss, coming as a shock to the market.

“The stock was expected to skyrocket a minimum of 20-30% but the result was the exact opposite,” said an official dealing IPO business at a local brokerage.

Its IPO price was set at 61,900 won, the top of its guided price band, to raise 1.2 trillion won ($826 million), reflecting institutional investors’ high expectations for its market debut.  

Its disappointing first day on the market indicated the Korean IPO market is not sound enough to digest such a blockbuster IPO, market analysts said. 

Lingering uncertainty in the country’s overall financial market has also scared off foreign capital.

Market analysts expect that the country’s move to reform the IPO market with tighter listing rules will make companies more hesitant to go public for a while.

STRICTER LISTING RULES

Last month, Korean financial regulators unveiled stricter rules to make it easier to kick out financially troubled companies from the stock market and more difficult for newbies to join the market.

Under the new rules, starting in 2029 companies listed on the main Kospi bourse must maintain a minimum market capitalization of 50 billion won, a tenfold increase from the current threshold of 5 billion won.

In addition, of total institutional holdings of IPO shares allocated during a book-building session, more than 40% must be locked up for a certain period – three to six months after listing – more than doubled from last year’s average 20% voluntary lock-up shares.  

Such new measures were introduced by the Financial Supervisory Service (FSS), Financial Services Commission (FSC), Korea Financial Investment Association and Korea Exchange (KRX) to encourage long-term investment.

The new set of listing regulations comes in line with moves by the country’s sole stock exchange operator KRX, which last year welcomed a new head who has vowed to tighten the related rules to restore investor confidence in new stocks.

“The junior Kosdaq market’s reputation is tainted with listings of unfit companies,” KRX Chairman and Chief Executive Jeong Eun-bo said during his inauguration ceremony last year.

Since then, he has been seeking to reduce the number of listing companies on the stock market by screening out bad apples with a thorough evaluation process.

As part of his efforts, KRX recently reshuffled senior executives in IPO departments.

The IB industry projects a significant fall in IPOs in the second half of this year, expecting only a handful of additional new listing applicants available besides those already in IPO processes.

LG CNS shares closed down 2.3% at 54,400 won on Tuesday.

Write to Hanjong Choi at onebell@hankyung.com

Sookyung Seo edited this article.