[Initial Insight] Physical Division and Korea Discount

On the 26th, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. On that day, the KOSPI index opened at 2,929.75, up 9.36 points (0.34%) from the previous session. The won-dollar exchange rate started at 1,196.9 won, down 1.7 won. Photo by Moon Honam munonam@

[Asia Economy Reporter Junho Hwang] "Sell the parent company (Heonju), buy the new shares."

On the 23rd, Goldman Sachs made this remark while assessing this year's Korean initial public offering (IPO) market. More precisely, they advised that even if you adopt a long (buy) strategy for IPO shares resulting from a physical division, it is better to take a short (sell) strategy on the parent company undergoing the physical division. Although brief, this sentence perfectly explains the current stock market situation.

A good example is LG Energy Solution, which will be newly listed through a physical division on the 27th. From the perspective of a newly listed stock, it can be seen as a buy candidate. In fact, this stock attracted 1,988 institutional investors in the demand forecast, achieving a competition rate of 2023 to 1 and receiving orders worth 1,520.3 trillion KRW. In the general subscription, it set a record with a deposit of 114 trillion KRW and 4.4 million subscription applications. Various index funds are also expected to pour in during the initial listing period, as LG Energy Solution is incorporated into multiple indices.

However, LG Chem, which is splitting off LG Energy Solution, recorded 644,300 KRW on the 24th, down about 14.83% compared to the 13th. It is not only LG Chem. The secondary battery K-New Deal Index, which includes many secondary battery stocks, has recorded a decline on all but five trading days this month on the KOSPI.

It is not just the downward pressure on the sector that has increased. As large-scale funds are drawn in, a capital vacuum phenomenon is occurring in the stock market. Funds are tied up to subscribe to LG Energy Solution, while passive funds are also preparing ammunition to buy LG Energy Solution shares after listing. This ammunition was prepared by reducing the weight of existing holdings. This flow of funds, combined with the accelerated tightening, has frozen investor sentiment in the stock market, and as of the 25th, the KOSPI has fallen to its lowest level in a year. From a corporate perspective, physical division can be seen as a masterstroke to maximize corporate value and raise funds, but from the overall market perspective, it is an act of increasing the number of shares and diluting the stock price.

Powerless retail investors, whose stock returns have declined, are unilaterally condemning companies that decide on physical divisions and are posting petitions on the Blue House bulletin board to ban physical divisions. In countries like the United States and Europe, where class action lawsuits are active, they are petitioning to expel physical division IPOs from the market?something unimaginable there. Presidential candidates have also stepped forward to save the market, proposing to ban simultaneous listings of parent and subsidiary companies during physical divisions and to grant stock purchase rights or new share subscription rights to parent company shareholders.

However, following last year, this year is also expected to see the largest IPO market ever. Most of these are IPOs due to physical divisions. They include companies in the secondary battery, online shopping, and entertainment sectors, such as Hyundai Engineering, Hyundai Oilbank, SSG.COM, Kurly, and SK Shieldus. Their total public offering amount is estimated to be about 22 trillion KRW, surpassing last year's 20 trillion KRW. Regarding this, Goldman Sachs advised, "In addition to IPO short- and long-term event-focused strategies, funds benchmarked to the Korean stock market need to appropriately adjust portfolio weights considering poor performance and index rebalancing outflows." Before the discount on the Korean stock market deepens further, it is time to slow down the pace.