[ANALYSIS] Korea's IPO market expected to bounce back in 2nd half

A trader reacts on the floor of the New York Stock Exchange in New York at the closing bell on Dec. 30. Wall Street stocks marked a gloomy end to 2022, slumping to close lower in their worst annual showing in years. Surging inflation and steep interest rate hikes to cool demand have battered markets and investor sentiment this year, on top of global shocks like Russia's invasion of Ukraine. AFP-Yonhap

In 2023, investors prefer profitable and stable IPO candidates

By Kim Yoo-chul

After a quite active 2021, Korea's initial public offering (IPO) market remained sluggish for the entirety of 2022. Proceeds from IPOs were down last year as high valuations became a thing of the past amid a shaky stock market and rising interest rates.

Only nine companies were listed here last year according to data provided by the Korea Exchange (KRX), the country's main bourse operator. A total of 16 trillion won was raised in IPOs throughout 2022. However, this amount included a mega IPO by LG Energy Solution (LGES) which raised 12.8 trillion won with its shares being sold at the top of an offered range.

While the calendar has changed, investors have shifted their primary focus from riskier investments with potential for growth to businesses with solid financials that could possibly withstand the growing signs of an economic downturn and higher interest rates.

There are still concerns about volatility, considered the key factor behind would-be IPO candidates' decisions last year to hit pause on their market debuts.

Fund managers and analysts expect the IPO backlog to begin breaking in the second half of this year, citing moves by private equity funds (PEFs) and venture capitalists to realign their investment focus and shut down bad companies. However, they said IPO hopefuls should lower their valuation expectations.

"I can say this year will be when the winter comes to an end because a lot of would-be IPO candidates are underway to realign their business focus and, moreover, exit strategies such as M&As will still be in play. As at least six months are necessary for PEFs and venture capitalists to complete their portfolio realignment, I expect the domestic IPO market to start its recovery in the second half of this year," said Kim Il-tae, a vice president at Meritz Securities in Seoul.

During times of economic growth and optimism, when large investors are willing to take on investment risks, the IPO market remains much more active with companies actively pursuing IPOs to raise capital driven by higher valuations. It's a typical pattern for firms to want to go public with their best foot forward, aiming to maximize some level of inflection in their financial strengths.

U.S. dollar bills are curled and inspected during production at the Bureau of Engraving and Printing in Washington in this file photo. Reuters-Yonhap

But in contrast, during times of economic uncertainty and when the stock market is down, the IPO market remains weak as leading investors prefer to pursue a near-term path to profitability. As of 2022, the total market capitalization of the KOSPI and the junior Kosdaq saw declines of approximately 20 percent and 30 percent at 1,767 trillion won and 315 trillion won, respectively, year-on-year, separate KRX data said.

Limited recovery, IPO market rationalizing

Investors are still looking for signs of a bottom.

Regarding when and how, it's still too early to answer. Mainstream thoughts are that once the IPO door opens, investors will place their funds into in larger companies that display profitability and stability. But for this year, it's unlikely for companies which are growing fast and reporting large losses to receive investors' backing.

A recent J.P. Morgan report said the U.S. economy, the world's largest, is being defined by decelerating growth, rapid monetary tightening and moderating inflation. While some Wall Street investors are saying that the U.S. Federal Reserve will cut its rates twice in the fourth quarter of this year despite Fed Chair Jerome Powell's repeated insistence otherwise, the Korean IPO market won't get noticeably better until the second half of this year.

In a separate call, Park Se-rah, an analyst at Daishin Securities, said there are no "clear signs" yet that investors are excited to take on risk.

"What I am seeing is that investors will wait until they see a clear dissipation of market volatility. That also means that investors will put more focus on valuing IPO candidates based on their fundamentals and not valuing high private market valuations. No blockbuster IPOs such as last year's LGES IPO are planned for this year," Park said, adding she expects to see a "limited recovery" in the local IPO market throughout this year.

According to estimates by Shinyoung Securities, the amount of IPOs this year would be between 62 and 74 with their proceeds ranging between 5.2 trillion won and 7.3 trillion won, a significant drop from last year's 16 trillion won worth.

Valuation question remains concern for IPO candidates

For IPO candidates in the pipeline, the central point isn't as easy as addressing bear market challenges and volatility, as they also have to remain fully aware that the desired valuations they hope to receive from private investors don't necessarily reflect the adjustment and change in public market sentiment.

A Tesla Roadster is parked in New York's Times Square following Tesla's initial public offering at the Nasdaq market. Reuters-Yonhap

Investors are preparing for some of the most anticipated upcoming IPOs of this year. Despite recent market weakness, some established names are set to generate investor excitement. Hyundai Engineering, Kurly, Oasis Market, LG CNS, K bank, SSG.com, SK Ecoplant, OneStore, Musinsa, Kakao Mobility, CJ OliveYoung and others are planning to either begin or resume IPOs.

Among the names in the pipeline, the ones that are considered the biggest based on estimated deal value and volume are Kurly, which operates online grocery service Market Kurly, KT's digital banking unit of K bank, Golfzon County, an MBK Partners-backed golf course operator, and Oasis Market, Kurly's chief local rival. The market valuations of Kurly and Golfzon are about 1.2 trillion won and 2 trillion won, respectively, said industry officials.

"Kurly, for example, is trying hard to address investors' concerns over its capital position by entering a non-food category. What matters the most for companies going public is cash flow and the specifics on how to increase their cash flow both to private and public investors. Kurly's priority is how to address lingering concerns over the valuation question," a senior manager at an U.S.-based investment bank in Seoul said on condition of anonymity.

A representative at Kurly declined to comment on the specifics of its IPO plans.

In comparison, Socar, Korea's leading car-sharing platform, priced its IPO below the bottom end of its indicative range. Kurly's external growth remained robust last year as it reported 1.56 trillion won in revenue. However, the company has widened the amount of its total losses to 500 billion won.

"Because markets have to embrace lots of economic challenges, what markets want now is IPO candidates' presentation of short-term cash-flow improvement plans," he said, adding Oasis is better positioned to win more investors' backing when it goes public. Oasis, owned by private investors and venture capitalists, maintains its profitability level despite its rival Kurly's business difficulties.

"Other than 'big ones,' most IPO candidates will wait until the end of the first half of this year because they will interpret the first half of 2023 as the period for getting visibility of the extent, duration and impact of macro-economic factors such as high inflation, interest rate increase cycle, corporate earnings and consumer spending," the manager said, adding once inflation and interest rates are better under control, then the stock market will recover from low valuations.