The 'myth of infallibility in public offerings' has ended due to the greed of new corporations and underwriters that seek to inflate the initial public offering price, even slightly. The securities industry notes that models calculating the public offering price solely based on revenue are particularly problematic.
In the process of preparing for an IPO, corporations can choose a public offering price calculation model they desire. They may select a valuation model based on revenue, profit, or net worth. However, revenue-based valuation models tend to be used primarily by companies that are currently operating at a loss, despite showing high growth potential. Revenue can be temporarily inflated before an IPO, as it can be raised somewhat by accepting large losses. This is seen as a reason why companies that chose other models tend to have poorer initial performance after going public.
On the 10th, ChosunBiz analyzed the stock price trends of 85 corporations (excluding special purpose acquisition companies) that went public on the KOSPI and KOSDAQ markets from January last year to this month, finding that the first-day stock prices of companies that opted for the price-to-sales ratio (PSR) fell by an average of 12.36%. This represents a decline of more than 10% from the public offering price, marking the poorest performance among all evaluation models.
Stock prices have gradually deteriorated over time. A week after the IPO, prices were down 21.46% from the public offering price, and after one month, they dropped 24.23%. The education content corporation Day 1 Company, which went public last month, saw its price collapse to the limit of a minus (-) 40% drop on the first day, pulling the average down.
MeatBox Global only engages in the domestic distribution of livestock products, yet it forced its IPO under the PSR, similarly diminishing investor returns. Its stock price fell by 25.26% on the listing day and recorded a 38% decline a week later.
The PSR indicates how many times a company's stock price is per share of sales. When a company uses PSR, it calculates the desired public offering price by multiplying the annual sales before the IPO (convertible figures) by the PSR of peer companies, then dividing by the number of shares. Thus, sales figures critically influence market capitalization post-IPO. Consequently, many companies using PSR are currently operating at a loss. Day 1 Company reported a net loss of 1.5 billion won before its IPO (in the first three quarters of 2024), and energy company Gridwiz also incurred a net loss of 1.5 billion won in the quarter immediately preceding its IPO.
Conversely, the valuation model that performed the best on the first day was the price-to-book ratio (PBR). The PBR indicates how many times a company's stock price is per share of net worth, which suggests that the higher the net worth, the greater the public offering price.
A total of three companies (NOBLAND, OSANG Healthcare, HYUNDAI HYMS) calculated their desired public offering prices using the PBR, with their average stock price increase on the first day of trading being 211.54%. This indicates that recent participants in the IPO market favored companies with sound financial indicators.
On the first day, the stock price of the shipbuilding equipment company HYUNDAI HYMS soared by 300% compared to the public offering price, while retailer NOBLAND rose by 287.86%, and biomedical device company OSANG Healthcare increased by 46.75%. However, similarly to the PSR, the upward momentum of these stock prices weakened over time. Comparing stock prices one week, one month, and three months after the IPO shows increases of 96.84%, 72.44%, and 33.62%, respectively, declining over time.
Among the 85 corporations, the 73 that selected the price-to-earnings ratio (PER) showed trends similar to the enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), which is obtained by dividing the operating profit (EBITDA) by the enterprise value. The stock price of companies that calculated the desired public offering price using PER rose by 33.03% on the first day. EV/EBITDA recorded a slightly higher figure at 38.53% compared to PER. This suggests that while EV/EBITDA bases its value assessment on operating 'profit,' PER bases it on net 'profit' after deducting corporate taxes, resulting in similar movements.
Although stocks of companies that calculated their desired public offering prices based on revenue lag, financial authorities are not actively intervening. They consider market pricing to be more accurate, and as long as institutional investors find the demand prediction process acceptable, they do not particularly impose restrictions.
Companies preparing for an IPO must submit an investment prospectus to the Financial Supervisory Service (FSS) detailing the selection process of their evaluation method. If they opted for PSR, they must explain why they did not choose PER, PBR, or EV/EBITDA. If the explanation is deemed incomplete, the FSS will issue a corrective order for the company to rewrite the investment prospectus.
An FSS official noted, "We respect the autonomy of companies regarding the calculation of public offering prices," adding that the review of the investment prospectus examines whether the contents and their rationale are reasonable.
Meanwhile, the desired public offering price is not necessarily the final public offering price that investors submit when subscribing. The final public offering price is determined based on the desired price proposed by the company after conducting demand forecasting for institutional investors. If the competition ratio is low during the forecasting, the final public offering price will be lower than initially hoped by the company, and vice versa.