Financial audits drag on lackluster IPO market

Longer-than-expected financial audits are posing hurdles to privately-held companies seeking initial public offerings on South Korea’s stock markets, amid a sharp fall in the volume of total investments through IPOs this year through the third quarter.

Following the withdrawals of lubricant oil maker SK Lubricant and game software developer Kakao Games from plans to go public in April and in September, respectively, investors’ attention is on whether refiner Hyundai Oilbank, projected to be the biggest deal this year, will manage to finish listing on the top-tier Kospi market by end-2018.

Both SK Lubricants and Kakao Games, which have been touted as mega IPO deals expected this year, announced they would delay their IPOs to a year later, while undergoing audits by the Financial Supervisory Service and Korea Institute of Certified Public Accountants, respectively.

These came in spite of gaining preliminary approval from preliminary reviews by the Korea Exchange a month prior.

There are growing concerns that Hyundai Oilbank, which gained KRX approval in August, might face similar circumstances, as the financial audit by the FSS did not end by August as planned. The FSS is currently looking into the eligibility of joint venture Hyundai and Shell Base Oil’s change of status from subsidiaries to associates in Hyundai Oilbank’s balance sheet. Hyundai Oilbank owns 60 percent shares of the joint venture.

Hyundai Oilbank has made a strong case for listing by the end of this year, but as of Monday it had yet to kick off the public offering procedure.

In the Korean stock market, privately held companies are obliged to finish external audits and the listing procedure -- from registration documents to stock allocation to subscribers -- within six months after obtaining KRX preliminary approval. The listing procedure is preceded by the KICPA’s external audit. But starting this year, the FSS, a financial watchdog, began to examine large privately held companies seeking IPOs.

Moreover, if Hyundai Oilbank fails to wrap up the listing procedure by October, a foreign investor subscription is unlikely, as it is past the cutoff date of the comfort letter -- 135 days or more after the date of the most recent financial statement, which is June in Hyundai Oilbank’s case.

Beset by earlier failures in mega deals, coupled with the lackluster performances of some newly-listed companies, the local IPO market is struggling to come up with a breakthrough.

As of end-September this year, four companies had been newly listed on the Kospi, drawing 549.1 billion won ($494.2 million) in public offering and marking a four-year low, while 38 firms that went public on the Kosdaq raised 943.5 billion won, the lowest in three years, according to data compiled by the KRX.

The figure includes the volume of investment raised through listings of special purpose acquisition companies, while excluding those through companies that are relisted or transferred from other markets, as well as real estate investment trusts.

The volume of investment through public offerings in the first three quarters shrank by 85.9 percent on the Kospi and 65.1 percent on the Kosdaq on-year, respectively.

Without the IPO of Hyundai Oilbank, which is estimated to draw at least 2 trillion won of investments in IPO during the fourth quarter, this year will mark the first since 2013 when no company raised over 1 trillion won in either the Kospi or the Kosdaq by year-end.

In 2017 alone, insurance firm ING Life Insurance -- now known as Orange Life Insurance -- game software maker Netmarble Games and drug distributor Celltrion Healthcare raised more than 1 trillion through IPOs.

Moreover, some newly-listed companies are seeing a drop in stock prices compared to initially offered prices. T’way Air, a Kospi-listed low-cost air carrier, and Digital Imaging Technology, a Kosdaq-listed maker of edge grinding machines for display panels, fell 20 percent and 23.3 percent respectively as of Friday, compared to initial prices in August.

By Son Ji-hyoung (consnow@heraldcorp.com)