Korea’s 2nd-half IPOs expected to hit 15-year high

Korea’s top equity underwriter is anticipating the best second half for deals since at least 1999 as Samsung Group takes more businesses public and new stock sales deliver returns three times the Asian average.

Credit Suisse Group AG, which ranked ahead of Citigroup and Samsung Securities, says companies may raise 30 percent more from initial and secondary public offerings in the second half versus the same period in 2013. That would be about 8.4 trillion won ($8.2 billion), the most in 15 years. Korean IPOs this year rose an average of 79 percent, versus a mean gain of 21 percent for the region and a 0.9 percent drop in the benchmark Kospi index.

Samsung Group, whose listed units comprise about 24 percent of the Kospi, is planning to take two more of its companies public amid speculation that billionaire Chairman Lee Kun-hee will use the deals to maintain his family’s control over the biggest conglomerate in Korea. The offerings may lure more foreign money to Asia’s fifth-largest stock market after overseas investors added $6.7 billion since March, said Daewoo Securities.

“A larger pool of competitive companies will be open for investment,” Kim Sang-tae, head of the corporate finance division at Daewoo Securities, said. “This will get attention of foreign investors.”

Daewoo, which ranked fifth in the first half of this year, is lead arranger on the IPO of Samsung Everland, the de facto center of the Samsung Group due to a network of cross-shareholdings.

Foreign demand

There were 19 domestic equity sales by Korean companies in the first half - including IPOs, additional public offerings and block deals. The underwriter rankings are based on deals in which the securities firm was the lead arranger.

BGF Retail, operator of the nation’s No. 1 convenience store franchise, completed this year’s biggest IPO, raising the equivalent of about $242 million in May. The stock has surged 66 percent from its offer price, while the MSCI Emerging Markets Retailing Index was little changed during the period.

“There was a lot of foreign interest in the BGF retail IPO,” said Shim Jae Man, managing director of the corporate finance unit at Samsung Securities, which was lead arranger on the deal. Overseas investors bought about 80 percent, versus 20 percent for locals, Shim said.

He predicts Korean companies will raise about 9 trillion won from share sales for all of 2014.

Increased supply

The Kospi has lagged behind its emerging-market peers this year as the strongest won in nearly six years erodes export earnings. The currency strengthened 4.6 percent against the dollar since March 31 and the yield on 10-year government notes declined about 44 basis points to 3.09 percent.

The Bank of Korea has cut its growth outlook for 2014 to 3.8 percent from 4 percent, while Samsung Electronics, the nation’s biggest company, posted second-quarter operating profit that trailed analysts’ estimates.

An increase in the supply of new shares may weigh on the market as investors unload existing holdings to free up room for the deals, according to Lee Jin-woo, a Seoul-based money manager at KTB Asset Management, which oversees about $7.9 billion.

As investors buy new shares such as Samsung Everland, “they will have to sell other stocks, since there is limited money piling into the market these days,” Lee said.

Relative valuations

While local institutional investors have pulled the equivalent of $3.3 billion from Korean shares this year, foreigners added almost the same amount as valuations reached nine-year lows versus global peers. The Kospi trades for 1.03 times net assets, a 50 percent discount versus the MSCI All- Country World Index.

“Investor sentiment is most likely to improve with the entry of competitive firms in the market,” Heo Pil-seok, the chief executive officer at Midas International Asset Management, which oversees about $9.4 billion, said. “The scale of IPOs will be bigger and the quality will also be better.”

Samsung Everland said it plans to list shares on the South Korean bourse by the first quarter of next year, while Samsung SDS, in which the conglomerate’s heir-apparent Jay Y. Lee owns more than 11 percent, is planning an IPO by year-end.

Improving outlook

The transactions will ease Samsung Group’s transition to a holding-company structure, according to analysts at Morgan Stanley and CLSA Asia-Pacific Markets. Scrutiny of the group has intensified after President Park Geun-hye’s government banned family-owned chaebol from creating new cross-shareholdings and the elder Lee was hospitalized following a heart attack in May.

An IPO of Samsung SDS, which provides technology for the construction and manufacturing industries, may help the younger Lee pay the inheritance tax on assets passed down from his father, according to corporate watchdog CEO Score.

The sales are also helping revive the fortunes of Korea’s stock arrangers after the second-worst start to a year for deals since the first half of 2008.

The outlook is “expected to get better,” Tan Kang, a director at Credit Suisse, said. Large listings will “create a momentum in the struggling IPO market.”

Bloomberg