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Year-end review

Kosdaq: Perennial bush league as blue chips favor Kospi

With fewer incentives to remain on the junior market, companies move to the bigger market, looking for deep-pocketed investors

By Dec 28, 2021 (Gmt+09:00)

3 Min read

The Kosdaq market has been a minor league for investors
The Kosdaq market has been a minor league for investors

South Korea’s tech-heavy Kosdaq market has been underperforming the main Kospi market for a couple of decades, raising concerns that the junior equity market may not serve its intended purpose of providing capital for promising startups and lesser-known companies with growth potential.

According to the Korea Exchange on Tuesday, the main bourse’s benchmark Kospi index has risen more than fourfold since the end of 2001, while the Kosdaq index has gained 40% over the same period, translating into an annual increase of a mere 1.8% on average.

The Korean junior market’s relatively weak performance contrasts with its US peer Nasdaq, which has risen more than sevenfold in the past two decades.

Analysts say the Kosdaq market has been a laggard as blue-chip companies listed on the junior bourse wanted to move to the bigger local market, looking for deep-pocketed investors.

A total of 98 Kosdaq-listed companies have defected to the Kospi market since the junior market was established in 1996.

The number of companies exiting from the Kosdaq market rises to over 100 when those companies delisted from the junior market as a result of a merger or an acquisition are counted.

Kosdaq-listed companies move to the main bourse looking for big investors
Kosdaq-listed companies move to the main bourse looking for big investors

A recent example is the absorption on Monday of SK Materials Co. by Kospi-listed SK Inc., the investment holding company of SK Group.

The merger of the two SK Group affiliates has erased SK Materials’ market capitalization of 4.24 trillion won ($3.57 billion) from the Kosdaq.

Before delisting, SK Materials, a battery materials maker, was the eighth-largest company on the Kosdaq, leading the index’s semiconductor and display materials sub-sector.

BALLOONING CORPORATE VALUE

Companies relisted on the main Kospi market have seen their enterprise value soar, attracting money more easily from a wider range of investors, including foreign passive funds and local institutional investors tracking blue chips.

The National Pension Service, Korea’s largest institutional investor, fills 97% of its local stock portfolio with Kospi-listed companies with the remaining from the junior market.

NCSoft Corp., a leading game developer, saw its market capitalization rise 23-fold to 14.42 trillion won since switching to the main bourse in 2003.

The Korea Exchange is required to loosen Kosdaq listing requirements
The Korea Exchange is required to loosen Kosdaq listing requirements

Naver Corp., Korea’s top internet portal, saw its market cap increase elevenfold to 62.42 trillion won since it moved to the Kospi in 2008, while digital giant Kakao Corp.’s corporate value has risen sevenfold to 50.37 trillion won since 2017.

In the US, big tech companies such as Apple, Amazon, Google and Tesla, which debuted on the Nasdaq, continue to remain on the tech-heavy stock market, providing firm support for the junior index.

DUAL-CLASS STOCK SYSTEM

Analysts said the Korea Exchange may need to loosen its listing requirements for Kosdaq companies to revitalize the weak market.

Under the current law, a Kosdaq-listed company with four straight years of operating loss is placed on the special watch list and faces a delisting review if its loss extends for another year.

Any company that joins the Kosdaq under eased rules for its promising technology must report annual revenue of at least 30 trillion won after its fifth year of listing. Otherwise, it is subject to scrutiny for delisting.

In comparison, US authorities largely leave the fate of listed companies to the market.

On the Nasdaq, a company faces a regulatory warning if its stock changes hands at less than a dollar for 30 days and is delisted if it remains at that level for additional 90 days.

Big investors favor Kospi-listed firms
Big investors favor Kospi-listed firms

On the ChiNext, the Chinese version of the Nasdaq, a company is subject to delisting if its share price remains below 1 yuan or its market value remains less than 300 million yuan for 20 straight days.

Industry watchers said the Korean bourse operator also needs to adopt a dual-class stock system to attract smaller entrepreneurs and protect their management rights when seeking to raise more capital on the Kosdaq market.

Under the system, a company usually issues two different kinds of shares – Class A and Class B – with one class offered to the general public, and the other to company founders and executives, providing them with greater control and voting rights.

Write to Eui-Myung Park at uimyung@hankyung.com
In-Soo Nam edited this article.
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