[Newsmaker] Policy drive, biotech boom bring Kosdaq to 16-year high

South Korea’s second-tier Kosdaq hit a 16-year high, crossing 900 points at Tuesday’s close for the first time since the decline of the US-led information technology boom of the early 2000s, this time on lofty expectations for state policy support and an ongoing biotech boom.

The Kosdaq closed at 901.23 Tuesday, up 1.1 percent from Monday’s close. The index has jumped 36.7 percent in three months. The closing mark topped 900 for the first time since March 2002.

On Wednesday, the index reached an intraday high at 905.95 in early morning trade, but retreated 1.63 percent from Tuesday in closing.

In 2017, the value of shares traded yearly on the Kosdaq reached an all-time high, with a sharp surge in the volume of stock transactions since November.

At the center of the bullish run was biotech momentum. Among the top 10 Kosdaq-listed shares by market cap Wednesday, seven were biotech firms.

As of Tuesday, the 10 largest Kosdaq-listed biotech firms’ combined market cap extended to 72.2 trillion won ($67.5 billion), about 25 percent of the entire market cap of the Kosdaq in 2017.

None of the top 10 shares as of March 29, 2002, when it closed at 927.3 was in the biotech industry. Three were telecom firms, two were financial firms and two were broadcast stocks.

At the time, the Kosdaq was on the verge of another round of plunges. For a year following March 2002, the Kosdaq sank by nearly 60 percent. In 2000, the Kosdaq plunged 80 percent over nine months.

The Kosdaq, modeled after the US tech-heavy Nasdaq Composite, kicked off at 1,000 in July 1996.

“The policy drive and subsequent cash influx into Kosdaq firms will continue, even considering the rapid upsurge in a short time period,” wrote Lee Kyoung-min, an analyst at Daishin Securities, in a note Wednesday. He said the momentum would go on at least until the first quarter of 2018, despite investor pressure from the latest rapid surge of the index.

Lee added, however, that investors should brace for cash flight from Kosdaq’s biotech sector, which he said suffers valuation pressure. According to Daishin Securities’ estimate, the sector’s 12-month forward price earnings ratio is 57. The lower the figure, the more undervalued stocks could be.

Instead, Lee picked the IT sector, policy-themed stocks and stocks related to business with China as alternatives in the market.

Kim Yong-gu, an analyst at Hana Financial Investment, expressed anticipation for an increased cash flow into the Kosdaq market with the advent of the new benchmark composite KRX 300 later this year.

“The Kosdaq market would not need to hinge on cash inflow from passive portfolios based on exchange-traded funds,” Kim wrote in a report Tuesday.

Moreover, Kim expected advances in investors’ conventional strategic approach toward Kosdaq stocks with the arrival of the new composite index.

“Investors will consider more than market caps when buying Kosdaq stocks,” he said.

The Korea Exchange, operator of both the first-tier Kospi and Kosdaq, expects in February to announce components of the KRX 300from both markets -- 232 from the Kospi and 68 from the Kosdaq -- following pangovernmental plans unveiled on Jan. 10. The components will be selected from the top shares from nine categories following the guidance of the Global Industry Classification Standard.

Some analysts, however, have raised concerns that downward risks are not limited to the biotech sector.

Kim Hyoung-ryoul, an analyst at Kyobo Securities, wrote in a report Tuesday that the Kosdaq market “cannot be seen as undervalued.” He cited estimates such as the 12-month forward price-earnings ratio of the index at 19 and the forward price-to-book ratio at 2.6.

The high figures represent the “lack of investors’ trust and optimism toward the market,” Kim wrote.

Kim of Kyobo also cited the declining operating income per share on the Kosdaq market, which poses hurdles in drawing more investments from institutional investors. As of 2017, the operating profit per share came to 281 won, down nearly 15 percent from 328 won in 2015.

“Structurally, Kosdaq firms’ lowering profitability indicates potential downside in the firms’ performance,” he wrote.

Another analyst, Cara Song of Nomura Securities Korea, pointed to vulnerability in performance of the local biosimilar industry, while adding the earnings growth prospect remains strong.

“Despite stunning growth outlook, we disagree with current valuation (on Celltrion and Celltrion Healthcare),” Song wrote in a report Tuesday. “Their current lofty valuation may face downward pressures if there are any negative news flows on their earnings growth, such as delays in product launch schedule and/or slower-than-expected market share gains in the US.“

All three listed firms under Celltrion Group on the Kosdaq took losses Wednesday. Celltrion slid 9.8 percent, Celltrion Healthcare dropped 14 percent and Celltrion Pharm sank 10.1 percent.

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