[Beginner's Guide] Socar's IPO Flop... What Is an IPO?

[Asia Economy Reporter Kwon Jae-hee] Until last year, the Initial Public Offering (IPO) market was booming, but it has now frozen. Companies that were considered major IPO candidates this year, such as CJ Olive Young, Hyundai Engineering, and SK Shieldus, have all withdrawn their listings due to poor demand forecasts. Amid this, Socar is proceeding with its IPO as planned, drawing market attention. What exactly is an IPO that causes such a stir?

What is an IPO?

A non-listed company, that is, a stock company not registered on the KOSPI or KOSDAQ market, must go through a public offering to be officially traded on the securities market. This public offering is called an IPO (Initial Public Offering).

An IPO means that a company publicly discloses its shares and management details so that external investors can purchase its stock openly. In short, it refers to the process of registering to enter the KOSPI or KOSDAQ market.

Why do companies do IPOs?

[Image source=Reuters Yonhap News]

For a company to grow, it must continuously invest. Investment requires funds. To raise funds, companies may borrow from banks with interest or issue bonds. However, the best way is to raise capital directly from the market. Since it is not debt, there is no burden.

By conducting an IPO, companies can easily raise large-scale funds. The funds raised can be used to repay loans, build new factories, or invest in research and development (R&D) of new businesses. Of course, since all company information is disclosed during this process, investors can also build trust in the company.

It is also beneficial for investors. It opens the door to directly invest in rapidly growing industries and companies. Although trading can be done in the over-the-counter market, taxes are high, finding trading partners is difficult, and information is hard to obtain. Popular companies often have prices so high that they are "whatever you ask," which carries significant risk.

·So, how does an IPO take place?

An IPO is simply carried out in six steps: ▲ Listing application ▲ Review ▲ Approval ▲ Preparation of securities registration statement ▲ Demand forecasting ▲ Subscription.

First, a non-listed company must apply for listing with the Korea Exchange. The Korea Exchange reviews the companies that have applied for listing. If the review criteria are met, approval is granted, and the company begins the full-scale practical work for the IPO.

Next, the company prepares the securities registration statement together with the underwriter. The underwriter is the securities company that assists the company with the IPO, and this securities registration statement is very important. It contains crucial information such as the method of public offering, how the offering price is decided, the purpose of the IPO, the company's financial statements, shareholder status, and business status. Investors who invest in newly listed companies must read this document. The securities registration statement can be searched anytime on the Electronic Disclosure System website.

After submitting the securities registration statement, demand forecasting is conducted targeting institutional investors. Simply put, it is like an auction, where institutional investors submit the quantity and price they want based on the public offering price band (a price range set by the company and the underwriter).

For example, suppose the public offering price band is between 40,000 and 50,000 KRW. If most institutional investors apply to receive shares at 40,000 KRW, the public offering price will be set around 40,000 KRW.

[Image source=AP Yonhap News]

Companies with high growth potential and popularity face fierce competition in demand forecasting. Kakao Games recorded a competition rate of an astonishing 14,787.53 to 1. When the competition rate is high, the public offering price is also set high. In fact, Kakao Games' public offering price was set at the upper limit of 24,000 KRW.

Conversely, companies with lukewarm responses from institutional investors have lower public offering prices. For example, AX Corporation, famous for its athleisure brand, had a public offering price band of 12,400 to 15,300 KRW, but the actual public offering price was set around 13,000 KRW.

If demand forecasting fails to attract interest, the subscription competition rate among general investors is also low. Therefore, demand forecasting can be seen as a preview indicating the future success of a company's IPO.

After demand forecasting ends, the public offering price is decided. Usually, the company's fair value is determined by comparing it with competing companies, and the public offering price band is set at a 20-30% discount from that price. The appropriate public offering price is then decided through institutional demand forecasting.

Once the public offering price is set, the company's market capitalization is calculated, and the public subscription begins. The subscription period lasts two days, and investors must have an account with the underwriting securities company.

For example, the underwriters for Kakao Games were Korea Investment & Securities, Samsung Securities, and KB Securities. Investors must have an account with at least one of these three securities companies to subscribe.

[Image source=AP Yonhap News]

For popular companies, many investors subscribe hoping for a "ttasang" (a term referring to a stock price doubling on the first day of listing). However, the more intense the competition, the harder it is to subscribe. For Kakao Games, even if you subscribed with 100 million KRW, you could only receive about five shares.

After the subscription ends, the company officially enters the stock market after a certain period. Investors who missed the subscription can start investing from this point. If the company's prospects are bright and it is undervalued after listing, the stock price may rise, but this is not always the case. Some companies record the highest stock price on the first day and then decline.

Just because the IPO market was good until last year does not mean investors should blindly subscribe expecting a "ttasang" for newly listed companies. The newer the company, the more thoroughly investors need to analyze and study.

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