Moon’s chaebol coma

Now this is embarrassing. Shares in Samsung Electronics Co. dropped almost 6 percent in two days this week after operating income for the three months ended December missed analyst estimates. But it wasn’t South Korea Inc.’s crown jewel capturing most investors’ attention. That accolade went to SillaJen Inc., a little-known biotech firm with $5 million in sales. Its turnover was more than Samsung’s on the day.
In fact, SillaJen, traded on the nation’s secondary stock board, the Kosdaq, has seen more turnover than Samsung since the start of 2018.
The Kosdaq Index has been on fire of late, outperforming the blue-chip Kospi Index by 8 percentage points over the past month. Another biotech outfit, Celltrion Inc., now has a bigger market cap than Hyundai Motor Co.
Investors are warming to the Kosdaq in part because the government is: It’s not where the bogeyman chaebol are listed.
When President Moon Jae-in came to power last year, it was on the promise of sweeping chaebol reform. Nothing much has happened. Instead, there’s talk the country’s National Pension Service will put more money into the Kosdaq, which currently accounts for just 2 percent of its local shareholdings. Never mind there’s actually little room for the NPS to add new stocks, it’s a populist move.
Authorities have also proposed easing listing rules for the Kosdaq to encourage its development, as well as forming a 300 billion won fund to invest in some of the gauge’s undervalued companies. No surprise, then, that foreign investors are all of a sudden interested.
There are other reasons investors are shying away from the Kospi, too. Chaebol are stingy, paying out just 16.3 percent of their earnings versus 29.5 percent for companies on Japan’s Topix, which itself is undergoing corporate governance reform. The won’s 13 percent rise in 2017 can’t be good news for the export-dominated Kospi either.
Some caution is warranted. The Kosdaq is about twice as expensive as the Kospi, trading at around 20 times 2018 earnings. Celltrion, the Kosdaq’s biggest company, is at 98 times forward earnings, while SillaJen, its third largest, has a market value of more than $6 billion despite its paltry sales.
High valuations draw scrutiny, and corporate governance can be a problem for the Kosdaq too. Of the benchmark’s 1,244 stocks, fewer than 300 are covered by analysts. SillaJen’s shares frequently whipsaw on insider selling talk; Celltrion was accused of accounting fraud in 2016.
The Kospi’s dominance can’t be ignored, however. Celltrion is in the process of trying to move to that index, because, well, it’s still where the big money is.
Moon may want to start anew with the Kosdaq, but he’ll find he has a chaebol coma to fix yet.

—Bloomberg