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South Korea plays foolish game of IPO Whac-A-Mole

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The PlayerUnknown's Battlegrounds video game is seen in this illustration photo November 22, 2017. REUTERS/Thomas White/Illustration

HONG KONG, July 23 (Reuters Breakingviews) - South Korea is learning how hard it is to cool down an overheating stock market. The country's financial regulator has intervened recently on the initial public offerings of video-game developer Krafton (259960.KS) and others. Yet Kakao Bank’s upcoming market debut signals frothy deals will persist.

The benchmark KOSPI 200 is up 47% over the past year, making it the best-performing major index globally. Credit a growing army of mom-and-pop traders, who account for a whopping 90% of daily volumes on local exchanges this year. Of the 10 largest domestic companies by market capitalisation, half trade at over 35 times forward 12-month earnings, per Refinitiv, including $57 billion super-app operator Kakao Corp (035720.KS) and contract-drug maker Samsung Biologics (207940.KS). Their shares fetch 73 times and 142 times, respectively.

Kakao is among those jumping at the opportunity, by listing two financial technology affiliates. Since the start of the year, three companies have raised $4 billion via IPOs, according to Dealogic, nearing the $5 billion in total proceeds from the previous two years combined. Roughly another dozen are readying sizeable floats in the second half, including an LG Chem (051910.KS) spinoff that might be the country's largest ever offering. Its battery business is looking to raise over $10 billion at a valuation of up to $90 billion, IFR reports.

Alarm bells are ringing in Seoul. The Financial Supervisory Service last week asked Kakao Pay to revise its listing document on grounds that it might contain false information, omit important facts or mislead investors. It’s the third time this year the agency has made such a request, versus zero in 2019 and seven in 2020, per local media. Krafton and SD Biosensor (137310.KS) slashed the size and price ranges of their offerings as a result.

Record low interest rates, tough property market restrictions and exuberant investors are formidable forces, however. Kakao Bank escaped regulatory scrutiny and said on Thursday it raised $2.2 billion after pricing shares at the top of the range. An implied $16 billion market cap puts it at 6.5 times book value, according to its first-quarter figures, a whopping premium to traditional banks. That suggests South Korea is playing a hapless game of IPO Whac-A-Mole.

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CONTEXT NEWS

- Kakao Bank, South Korea's largest digital-only lender, has raised 2.6 trillion won ($2.3 billion) in an initial public offering after pricing shares at 39,000 each, the top of the indicative price range, the company said in a filing on July 22.

- The country’s Financial Supervisory Service on July 16 asked affiliate financial technology company Kakao Pay to revise its initial public offering prospectus.

- Kakao Pay was planning to raise up to 1.6 trillion won ($1.4 billion). At the top of the indicative price range, the company would have a market valuation of 12 trillion won.

- The regulator did not give details but said the IPO registration statement fell into one of three categories: having an incorrect format; containing false information or omitting important facts; or containing unclear statements that could mislead investors. Under South Korean rules, failing to revise the registration statement within three months would result in the initial statement being withdrawn.

Editing by Jeffrey Goldfarb and Sharon Lam

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