KOSDAQ Companies- Bankrupt Due to Liquidity Problem

As KOSDAQ businesses go bankrupt due to liquidity problem, there is an anxiety of financial damage on investors.

On the 31st, Air Con listed on KOSDAQ failed to pay a bill of 1 billion won. The company is a manufacturer of plumbing materials and has recorded 2.6 billion won net profits in the first half of this year.

On the 29th, Soft Win retailing software failed to pay bills of 2.7 billion won and become bankrupt finally. Its turnover was 51.1 billion won and net profits was 700 million won in the first half of this year, and bigger than those of the last year respectively. It faced liquidity problems under looking a normal operation. Other companies failed to pay bills such as Sim‘s Velley, IC Cam, Uni C&T were similar cases.

▽ Unreasonable extension of business is the cause= In this year, 9 of KOSDAQ companies failed to pay bills and 7 of them happened after September. The bankruptcy increased rapidly compared to 1 case in 1999, 4 cases in 2000 and 3 cases in 2001. The persons concerned money market are afraid that this kind of liquidity problems would increase further in the end of this year and the early of the next year.

Bankruptcy under profits is analyzed that even if the operation is maintained, liquidity problem happens. In cases of Soft Win and Air Com, the bankruptcies were due to large amount of credit sale and unreasonable extension of business in other fields.

Soft Win recorded 51.1 billion won in the first half of this year, but 37.9 billion won of the total could collect as cash after 4-5 months later. Air Con was the same case. 32.5 billion won of its total revenue of 50.5 billion was credit sale.

However, under the financial difficulties, they tried to extend their business and it damaged them critically. Air Con expended 20 billion on semiconductor business and Internet business in the first half of this year.

Sim‘s Velley, IC Cam, Uni C&T, etc listed after and before of 2000 have overcome financial difficulties by increase of capital or public issues. However, after 2 years, they were unable to avoid the bankruptcy because of the shortage of fund.

▽ investment on blue chip= The investors should be careful to select the items to invest under the circumstance that many KOSDAQ companies face bankruptcy. Oh Sung-jin, Senior Manager of Hyundai Securities spoke “Investors should analyzes the amount of credit sale reflect cash flow rather than the index of turnover or profits.”

However, it is very difficult for private investors to analyze cash flow of a company. An analyst commented “Even if searching the electronic announcement system of Financial Supervisory Service, it is very difficult to find the symptom and the reason after the bankruptcy.” And added “The best way to minimize financial damage is to invest on blue chips.”

Cheol-Yong Lee lcy@donga.com