March KOSDAQ Delisting and Management Item Issues Arise... "Beware of Stock Price Declines"

[Asia Economy Reporter Ji Yeon-jin] Every March, companies listed on KOSDAQ frequently face issues such as delisting or designation as a management item, drawing attention to which stocks will be affected this year as well. This is because companies with a December fiscal year-end must submit their business reports by the end of March.

According to the securities industry on the 6th, the criteria for designation as a management item or delisting include ▲ four consecutive years of operating losses ▲ capital erosion of 50% or more ▲ continuing business losses before corporate tax expenses ▲ and adverse audit opinions. Companies meeting these criteria are either designated as management items or become subject to delisting review.

However, designation as a management item is an exclusion criterion for stocks included in the KOSPI 200 or KOSDAQ 150 indices. Since 2017, there have been a total of nine instances where stocks were excluded from the KOSDAQ 150 index due to designation as a management item (investment caution item). Of these nine cases, eight occurred in March.

In particular, since the full revision and strengthening of the "Act on External Audit of Stock Companies, etc." (New External Audit Act) implemented in November 2018, the number of KOSDAQ companies receiving adverse audit opinions has significantly increased. According to the Financial Supervisory Service’s analysis of listed companies for the 2019 fiscal year released in August last year, the number of KOSDAQ companies with adverse audit opinions rose annually from 21 companies in the 2016 fiscal year to 65 companies in the 2019 fiscal year.

Shinhan Financial Investment reviewed KOSDAQ companies that may face designation as management items or delisting reasons and estimated around 20 companies. However, this assessment uses financial statement data up to the third quarter of 2020, so results may vary depending on the fourth quarter financial statements. Analyst Kwak Seong-hoon of Shinhan Financial Investment said, "If such issues arise, stock prices may fall, so it should be understood as companies to be cautious about trading," adding, "If a company included in the KOSDAQ 150 index faces such issues, it will be excluded from the index, so it is necessary to pay attention."

Companies recording operating losses for four consecutive years (on a consolidated basis for holding companies) are designated as management items. However, companies listed as technology growth companies or those subject to the ‘KOSDAQ Pharmaceutical and Bio Company Listing Management Special Cases’ introduced in December 2018 (such as Medipost, Cha Biotech, Oscotec, CMG Pharmaceutical, Kolon TissueGene) are exempt. Companies that recorded operating losses for three consecutive years in 2017, 2018, and 2019 and have cumulative operating losses up to the third quarter of last year are at risk of being designated as management items.

However, among companies included in the KOSDAQ 150 index, Mezzion recorded operating losses cumulatively from 2017 to 2019 and up to the third quarter of 2020. But the company announced on February 16, 2021, through a disclosure of ‘sales or profit structure changes of 30% or more’ that on a separate basis at the internal settlement date, it recorded an operating profit (2.5 billion KRW) in 2020. Since a turnaround to operating profit exempts a company from designation as a management item, it is necessary to monitor until the audit report is finalized.

Companies with capital erosion of 50% or more at the fiscal year-end or half-year-end are designated as management items. Among companies with capital erosion of 50% or more as of the third quarter of last year, those not yet designated as management items are at risk of designation.

Additionally, companies that have incurred pre-tax continuing business losses of 1 billion KRW or more, amounting to 50% or more of their equity capital, two or more times in the past three years are designated as management items. Based on cumulative data up to the third quarter of 2018, 2019, and 2020, companies meeting these criteria may be subject to designation.