As listed companies are being designated as issues under surveillance for reasons such as "penny stock and falling short of market cap," anxiety is mounting in the KOSDAQ small- and mid-cap market. Some corporations that are turning a profit and improving results are being pushed to the brink of delisting solely because their share prices and market capitalization fall short of the thresholds, critics said.
On the 13th, ChosunBiz analyzed recent disclosed results for 36 stocks that the Korea Exchange (KRX) designated the previous day as issues under surveillance for falling short on share price or market cap, and found that six corporations posted profits in both operating income and net income and improved from a year earlier. Looking at operating income alone, 11 corporations were in the black and improved from the prior year.
In this way, corporations that are generating normal profits and have even improved their results have been pushed into issue-under-surveillance status simply because they failed to meet share price or market cap requirements.
The exchange has been applying tougher delisting standards since last month. If a stock price stays below 1,000 won for 30 straight trading days or market cap falls short of the listing-maintenance threshold for 30 straight trading days, it is designated as an issue under surveillance. If it fails to recover the threshold for 45 straight trading days within 90 trading days thereafter, a formal delisting reason arises.
KOSDAQ-listed JMI(033050) is a representative case. JMI, which makes household goods and automotive interior parts, was designated as an issue under surveillance after its share price stayed below 1,000 won for the past 30 trading days. However, its recently released preliminary results show consolidated operating income of 2.8 billion won in the first half, up 97.8% from the same period last year. Revenue rose 49.8% to 61.7 billion won. Its market cap is around 26 billion won, above the KOSDAQ listing-maintenance threshold of 20 billion won, but it failed to clear the share price criterion.
NUINTEK(012340), a maker of film capacitors for electric vehicles, also posted 257 million won in operating income in the first half, turning from an operating loss of 2.22 billion won in the same period last year to a profit. Net income also swung to a profit, but it was caught by the sub-1,000-won share price condition. Hyungji Elite, Namseong, KUKIL METAL and Fashion Platform also reported increases in operating and net income from a year earlier in recent disclosures.
Corporations are seeking ways to lift share prices and corporate value, such as paid-in capital increases and share buybacks, but some note that with investor demand for small- and mid-cap stocks subdued, it is not easy to meet the tougher standards in the short term through individual corporate efforts alone.
Eom Su-jin, an analyst at Hanwha Investment & Securities, said, "Amid an extreme tilt in flows toward the semiconductor sector and severe volatility, small- and mid-cap stocks have recently been shunned regardless of results or fundamentals," and added, "In this market, applying the raised market-cap standard right away may be excessively harsh on small- and mid-cap stocks." Eom added, "I hope a grace period is granted for the time being, or that flexible consideration is given to the current exceptional market conditions through case-by-case reviews."
Once designated as an issue under surveillance, it is not easy to meet the standard again. Within 90 trading days, the share price or market cap must exceed the bar for 45 consecutive trading days, and if it falls below the standard even for a single day in between, the consecutive count resets to the beginning. For penny stocks that repeatedly rise and fall around the 1,000-won line, defending for 45 straight trading days is virtually impossible.
Response options are also limited for the market-cap standard. In the case of a subpar share price, a reverse stock split can raise the per-share price, but market cap is the share price multiplied by the number of shares outstanding, so even after a reverse split, the aggregate itself does not change. In the end, the share price must rise in real terms to regain the market-cap threshold and exit issue-under-surveillance status.
However, it is also hard to blame the market alone for low share prices and market capitalization just because results are good. If corporations are making profits yet fail to meet listing-maintenance standards for a long time, it may mean that management and major shareholders have not been proactive about shareholder returns or enhancing corporate value, or that they have failed to gain investor trust in the sustainability of current results.
Lee Sang-jun, an analyst at NH Investment & Securities, said, "The KOSDAQ's 'many births and few deaths' structure—with many listings and few exits of distressed corporations—is behind the loss of market trust," and added, "We expect fundamental structural improvements through tougher exit rules and the introduction of promotion and relegation."