As the financial authorities decided to include sub-1,000 won "penny stocks" in delisting criteria starting in July, some are raising concerns that even corporations with sound finances could be swept into delisting. The worry is that if delisting is judged solely by share price, even corporations with stable operations could be branded as "zombie corporations," chilling investor sentiment.
According to the investment industry on the 9th, the Korea Exchange (KRX) on the 3rd gave notice of amendments to its listing rules that spell out delisting criteria for penny stocks. This follows the "delisting reform plan for swift and strict removal of insolvent corporations" announced by the authorities in February. The exchange is collecting industry feedback on the matter through the 10th.
However, it turns out that many penny stocks have stable earnings and finances. For example, CU Medical Systems, a corporation specializing in automated external defibrillators (AEDs), increased operating profit 38% last year to 10.8 billion won from 7.8 billion won. Both revenue and operating profit have grown for three straight years, and net income swung to a profit last year. Its price-to-book ratio (PBR) is 0.48 times, making it a "low PBR" stock under 1 time.
CU Medical Systems' interest coverage ratio is 3.9 times, not low. The interest coverage ratio indicates how well operating profit can cover interest expense. Typically, corporations with a ratio under 1 for three consecutive years are called "marginal corporations" or "zombie corporations."
In some sectors such as public services and broadcasting, share prices can be low because of business structures that draw relatively less attention, even when management conditions are sound.
Operating profit at WAVUS, a geographic information system (GIS) software developer, rose 38% year over year to 2 billion won, while Saltware, a cloud implementation specialist, recorded 560 million won, successfully turning a profit. The two corporations' interest coverage ratios are about 34 times and 4 times.
Operating profit at regional broadcaster TBC also grew 2% from a year earlier. Notably, TBC's debt ratio last year was 4.54%, far below the overall KOSDAQ debt ratio of 113.10%, effectively reflecting a no-borrowing stance. Korea New Network in the same industry saw operating profit drop 29% from a year earlier, but its debt ratio was a stable 7.8%.
With such "undervalued penny stocks" in the market, some say uniform delisting standards could distort the market. Some corporations are pursuing reverse stock splits or par value reductions without compensation to avoid delisting, but there are limits because if the post-split price falls below the new par value, they still face delisting.
A KOSDAQ-listed company official said, "Recently, funds have been flocking to information technology (IT) and other sectors, leaving other sectors overlooked," and added, "Even among penny stocks there are many corporations with solid fundamentals, so instead of applying delisting criteria across the board, 'pinpoint regulation' is needed to single out marginal corporations."
Experts noted that detailed standards are needed that consider financial soundness and business competitiveness comprehensively, not just share price.
Lee Nam-woo, chair of the Korea Corporate Governance Forum, said, "When judging whether a corporation is a zombie corporation, you have to look beyond share price to see whether operating profit and cash flow are stable," adding, "There are relatively many insolvent corporations on the KOSDAQ market, so penny stocks warrant attention, but financial statements require qualitative judgment."