Analysis: Viability of Kosdaq questionable

By JONG-HEON LEE, UPI Business Correspondent  |  July 30, 2004 at 10:40 AM
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SEOUL, July 30 (UPI) -- Is there no way out for the technology-packed Kosdaq? The South Korean equivalent of the Nasdaq has been rapidly losing steam, with its index sinking to an all-time low throughout this week.

Not a few analysts have voiced skepticism about the future of the country's eight-year-old secondary stock market, predicting further sliding caused by its fragile structure plus operational deficiencies.

Some analysts even believe the country's technology-rich stock exchange may face the same fate with Neuer Markt, once the biggest symbol of Germany's infatuation with the stock market before its death last year.

The shutdown last August of Nasdaq Japan, which also indicated the worldwide slowdown in the information technology industry, cast dark clouds over Kosdaq's future, they say.

The Kosdaq slightly rebounded on Friday after hitting the lowest level throughout this week. Its index rose 0.84 percent to 331.21, after finishing at a lifetime closing low of 328.44 on Thursday in the fourth straight day of breaking the record low.

It has shed nearly 90 percent since the past four years. The South Korean secondary market has been the worst performing stock market among global markets this year.

"The situation is the worst ever. The index can further tumble without stabilization of external factors, such as international crude prices and U.S. stock markets," said Park Dong-myung, an analyst at Goodmorning Shinhan Securities.

So far this year, the Kosdaq index has lost more than 14 percent, extending a slide that began with the end of the technology bubble in 2001 and accelerated by scandals and an exodus of companies to the main Korean Stock Exchange.

Kosdaq has suffered a devastating downward spiral ever since March 2000 when the index hit a record high of 2,834, except for brief rebounds several times. Its total market value has decreased from 93 trillion won ($79.4 billion) to 26.7 trillion won ($22.8 billion).

In the wake of the collapsing market, companies registered on the Kosdaq Stock Market are suffering from business woes mainly caused by liquidity problems. According to market officials, some 27 Kosdaq-listed firms have sold their office buildings or properties in the first half of the year to mobilize 171 billion won ($146 million), up 13 percent from a year earlier.

The prolonged Kosdaq slump has also forced local brokerages to tighten their belts to avoid bigger fallouts. The country's major brokerages, including market leader, Samsung Securities Co., are poised to report sharply falling quarterly profit hit by tumbling commission fees and shrinking stock trading volumes.

Kim Se-jung, an analyst at Dongwon Securities, said the lack of buying interest among investors would continue in the Kosdaq market. "Ongoing economic slump and the pessimistic outlook on the global IT industry have weighed more on Kosdaq investors than those on the main exchange" he said.

"Buying interest has not seen yet despite Kosdaq index has declined to a fresh historic low day by day," said Kim Kyung-shin, the executive director of Hanyang Securities.

Until four years ago, the Kosdaq, an over-the-counter market modeled after the Nasdaq, was one of the world's hottest stock markets, enjoying explosive growth thanks to an unprecedented boom in the country's information technology sector.

Kosdaq, formed in 1996, had been used as the main channel of market capitalization for a number of start-up info-tech ventures. During the technology boom of 1999-2001, private investors flocked to buy shares in the technology start-ups on the Kosdaq market, pushing the index to the 2,800-point level. Its value reached 93 trillion won ($79.4 billion).

But the market has sharply tumbled since the bursting of the technology bubble in late 2001. The market has suffered further setbacks in the wake of a series of scandals ranging from straight-forward bankruptcy and over accounting fraud to fictional operations, which rapidly eroded investors' confidence.

Local institutions and foreigners have left the Kosdaq market, leaving it is more vulnerable to negative factors than the main stock market because more than 90 percent of its investors are individuals.

Analysts say the Kosdaq market can hardly assume its role for capital mobilization, the main function of the stock exchange, citing sharply shrinking market capitalization. Kosdaq's capitalization of 26.7 trillion won ($22.8 billion) is 14 percent of the main KSE market with around 400 trillion won ($342 billion).

"Kosdaq has lost confidence following irregularities, forcing investors and profitable forms to leave the market," said Lee Jong-woo, research chief at Hanhwa Securities.

In April, KTF Co., the country's second largest wireless phone operator which accounted for 9 percent of Kosdaq's total value, fled into the main KSE market. Other blue-chip stocks, including Internet company NCsoft Corp. and the Industrial Bank of Korea, also followed in KTF's footstep, dealing a heavy blow to the Kosdaq market.

"Kosdaq's heavy IT and Internet company-focused index is also attributable to its dull performances," Kim Hyung-gon, the executive director of the Korea Securities Dealers Association.

The operator of the Kosdaq exchange has ruled out phase-out of the technology-laden market, saying more profitable firms would buttress the market.

"Investors have overreacted to recent developments, which made matters worse," said Huh Do-jung, chairman of the Kosdaq Committee.

"We will focus our efforts on restoring investors' confidence by improving market monitoring systems," he said. "We will also try to induce more profitable companies, while driving non-viable players out of the market," Huh said.

Analysts advises the Kosdaq committee to attract profitable biotechnology and nanotechnology companies as new players as well as boosting market monitoring system to restore fading market confidence on its long-term viability.

"Kosdaq must implement more drastic measures to enhance transparency and secure flexibility to kick out fragile companies," said Shin Sung-ho an analyst at Woori Securities Co. "Without sweeping restructuring, the Kosdaq market cannot restore investors' confidence and will remain sluggish in the future as well," he said.

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