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As KOSDAQ Rises, So Do Concerns

Posted November. 28, 2005 05:44,   


The Kosdaq index rose for 20 consecutive days (trading days) up until last week. Given that the chances are roughly 50 percent that any stock market index goes up, the probability of the Kosdaq index rising for 20 days in a row is less than 0.00001 percent.

As the index passed the 700 mark, observers say that the tech-packed stock market has gotten stronger.

Still, others are voicing their concerns that the Kosdaq is not robust enough to deserve such a positive outlook.

In particular, they point out that the Kosdaq market is not as specialized as it should be. Its lack of specialization means that the Kosdaq is turning into a “minor league” to the Korea Stock Exchange.

Kosdaq: “minor-league market?”–

The most noticeable change in the strong Kosdaq market as a whole this year is that the performance of IT stocks is not satisfactory enough.

According to Good Morning Shinhan Securities, the IT sector accounted for just 49.3 percent of the stronger performance of the overall Kosdaq market. In comparison, non-IT sectors such as smokestack industries accounted for 50.7 percent.

In terms of the aggregate value of listed stocks, too, listed IT companies are losing ground in the Kosdaq. In March 2000, when the Kosdaq registered its record high, IT stocks dominated over 75 percent of the market. This percentage went down to around 60 percent last year, and again to around 54 percent this year.

Though armed with innovative entrepreneurship, venture and IT firms lagged behind smokestack-industry businesses, which are similar to those usually traded on the Korea Stock Exchange.

From the perspective of the aggregate value of the Kosdaq, it is more of a minor-league stock market than of a major-league one. Eighty four percent of all Kosdaq-listed stocks are small-cap stocks, which are not included among the 300 major stocks in terms of market capitalization.

In addition, many observe that this year’s bull market is due to prosperous non-IT small-cap stocks. In fact, it was the small caps on the Stock Exchange that rose 120.4 percent this year, compared to the 36.6 percent gain posted by big caps.

Smaller Kosdaq companies hardly staying afloat on their own–

Another reason the Kosdaq is called “minor-league” is that its listed companies are often depend on bigger businesses for survival.

Most Kosdaq-listed IT companies are suppliers to larger Korea Stock Exchange-listed companies such as Samsung Electronics and Hyundai Motor.

“If the Kosdaq-listed companies know that I’m writing a report predicting improved profitability, they tell me not to. That’s because they are worried that the larger businesses would want to cut the unit cost of their goods once the big companies know that they are making more money. They rely on selling goods to larger firms for their survival. So they want to cover up their good performance,” said one securities analyst.

Just as the analyst said, there are not many businesses like NHN capable of surviving on their own. They either stay in or go out of business depending whether they are chosen as suppliers to bigger companies.

Moreover, many of the companies with the ability to stay afloat on their own have left the Kosdaq. Auction was de-listed, and KTF and Kangwon Land moved to the Korea Stock Exchange.

More growth companies armed with innovative entrepreneurship are needed–

Another obstacle the Kosdaq must overcome is that the bubble in the market has yet to burst.

Price-earnings ratio (PER) is the most frequently used index by those who describe Korean stocks as undervalued compared to those on stock markets of developed countries. PER is a ratio of a company’s current share price to its per-share earnings. A higher PER means that a company’s shares are overvalued compared to per-share earnings.

The current average PER of the Korea Stock Exchange-listed companies is 9.24, far behind the average of companies in developed economies, which stands at about 20. This is why there is considerable room for growth in Korea’s stock price index. Even though Korean companies are as profitable as those of developed nations, their stock prices are not as high.

However, the PER of Kosdaq companies is as high as 174.8 as of November. This is 17 times higher than that of the Korea Stock Exchange and more than six times higher than the average PER of 27 of Japan, one of the most overvalued markets.

To sustain the bubble, the Kosdaq needs companies that have powerful growth engines. But almost all Kosdaq-listed firms do not have such growth engines.

“If the players in the Kosdaq fail to distinguish themselves from the small-cap stocks in the Stock Exchange, the tech-packed market itself might become a secondary one to the Stock Exchange,” predicted Kim Hak-gyun, a researcher at Good Morning Shinhan Securities.

Wan-Bae Lee roryrery@donga.com