As financial authorities decided to include stocks priced under 1,000 won, or "penny stocks," in delisting criteria starting in July, some are raising concerns that even corporations with sound finances could be swept up for expulsion. The worry is that if delisting is determined solely by share price, even corporations with stable operations could be labeled "zombie companies," chilling investor sentiment.
According to the securities industry on the 9th, the Korea Exchange (KRX) on the 3rd gave advance notice of an amendment to listing rules that clarifies delisting criteria for penny stocks. This is a follow-up to the "delisting reform plan for swift and strict exit of insolvent corporations" announced by authorities in Feb. The exchange is collecting industry opinions on the matter through the 10th.
However, it has been confirmed that many corporations among penny stocks have stable performance and finances. For example, CU Medical Systems, a specialist 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 consecutive years, and net profit also swung to a surplus last year. Its price-to-book ratio (PBR) is 0.48, making it a "low PBR" stock under 1.
CU Medical Systems' interest coverage ratio is 3.9, not low. The interest coverage ratio shows how well interest expense can be covered by operating profit. Corporations with this ratio below 1 for three consecutive years are commonly called "marginal corporations" or "zombie corporations."
In some sectors such as public services and broadcasting, stock prices are relatively low due to business structures that draw less attention, yet management can still be 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 5.6 billion won, turning to profit. The two corporations' interest coverage ratios are about 34 and 4, respectively.
Operating profit at regional broadcaster TBC also grew 2% from a year earlier. Notably, TBC's debt ratio was 4.54% last year, 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 fall 29% from a year earlier, but its debt ratio was a stable 7.8%.
In a market where "undervalued penny stocks" exist, uniform delisting standards could distort the market, critics say. Some corporations are pursuing reverse stock splits or capital reductions without consideration to avoid delisting, but there are limits because if the post-split share price falls below the new par value, they still face delisting.
An official at a KOSDAQ-listed company said, "As funds have recently flowed into information technology (IT) and other sectors, there is a tendency for other industries to be shunned," adding, "Even among penny stocks, there are many corporations with solid fundamentals, so rather than applying delisting criteria across the board, 'targeted regulations' to screen marginal corporations are needed."
Experts noted that detailed standards that comprehensively consider financial soundness and business competitiveness, rather than a simple share price threshold, are needed.
Lee Nam-woo, chair of the Korea Corporate Governance Forum, said, "When judging whether a company is a zombie corporation, you should look at whether operating profit and cash flow are stable in addition to the stock price," adding, "The KOSDAQ market relatively has many insolvent corporations, so penny stocks warrant attention, but qualitative judgment of the financial statements is necessary."