Developing A New Market for Developing A New Market for SMEsSMEs- KOSDAQ- KOSDAQ

COSRA SME ForumMiami, May 15-16, 2006

JaeHoon Yoo

The World Bank

2

1. KOSDAQ OVERVIEW1. KOSDAQ OVERVIEW

2. CONTRIBUTORS to EARLY SUCCESS2. CONTRIBUTORS to EARLY SUCCESS

3. COLLAPSE and3. COLLAPSE and RESTRUCTURINGRESTRUCTURING

4. REMAINING CHALLENGES and FUTURE4. REMAINING CHALLENGES and FUTURE STRATEGYSTRATEGY

5. CONCLUSION5. CONCLUSION

3

Comparing KOSDAQ Success with Other New MarketsComparing KOSDAQ Success with Other New Markets

ListedCompany

NewListing

(00-04 avg)

MarketCapital

Annual Trading Value (00-04 avg)

KOSDAQ 890 124 30 288

GEM(Taiwan)

204 42 9 6

Sesdaq(Singapore) 163 24 4 3

SOMA(Brazil)

94 6 13 0.2

SiTec(Poland) 32 6 13 1.7

Nasdaq 3,229 219 3,743 46,830

AIM(UK)

1,021 193 61 15

Jasdaq(Japan) 944 81 113 71

As of Dec. 2004 (companies, US$ bil.)

Source :World Federation of Exchanges

4

Market DynamicsMarket Dynamics

• Rapid growth of listed companies

- New listings (‘98) 8 (‘99) 104 (‘00) 178

(‘01) 167 (‘02) 153

• High fertility and high mortality

• Small market capitalization but high turnover

* Listed Companies and Listings/Delistings

* Market Cap and Turnover

-

20

40

60

80

100

120

'97 '98 '99 '00 '01 '02 '03 '04 '05

(US

$ bil.

)

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

(mil.

share

s)

Annual Trading volume Market capitalization

0%

10%

20%

30%

40%

'97 '98 '99 '00 '01 '02 '03 '04 '05

(%)

-

200

400

600

800

1,000

(com

pani

es)

No. of Listed companiesNew listings / Total listed companiesDelistings / Total listed companies

5

KOSDAQ CompaniesKOSDAQ Companies

• Venture companies: more than 40%

　 00 01 02 03 04 05

Venture(%)

45.2 50.3 45.3 43.5 41.6 44.2

Non-Venture(%

)54.8 49.7 54.7 56.4 58.4 55.8

Percentage of total no. of companies

* No. of companies * Market Capitalization

• Balanced industrial distribution

- IT : 42%

- Manufacture : 34%

Financials2%

BT6%

Others11%

Manufacture34%

IT42%

CT5%

Others12%

CT7%

Manufacture20%

IT53%

BT6%

Financials2%

6

KOSDAQ InvestorsKOSDAQ Investors

• Individual investors (57%) continue to dominate

• Foreign investors’ interests (15%) are low but increasing

• Financial institutional investors (9%) are increasing

* Trading value by Investors -

* Ownership by Investors -

0%

20%

40%

60%

80%

100%

00 01 02 03 04

Individual Foreign Institutional Etc.

50%

60%

70%

80%

90%

100%

00 01 02 03 04 05

Individual Foreign Ins titutional Etc .

7

1. KOSDAQ OVERVIEW1. KOSDAQ OVERVIEW

2. CONTRIBUTORS to EARLY SUCCESS2. CONTRIBUTORS to EARLY SUCCESS

3. COLLAPSE and3. COLLAPSE and RESTRUCTURINGRESTRUCTURING

4. REMAINING CHALLENGES and FUTURE4. REMAINING CHALLENGES and FUTURE STRATEGYSTRATEGY

5. CONCLUSION5. CONCLUSION

8

Supply for New SME SharesSupply for New SME Shares

• Increased new entrepreneurs as result of corporate restructuring after 97 crisis (Jeng and Wells, 1988)

• Needs for equity financing to lower debt ratio

* New & Dishonored Companies

* Source : Bank of Korea

* Manufacturing Industry Debt Ratio

* Source : Bank of Korea

30,074

49,31053,363

49,377 52,587

6,718 6,693 5,277 4,244 5,308 4,445 3,416

61,455 62,168 61,852

22,828

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

98 99 00 01 02 03 04 05

(com

pani

es)

No. of new enterprise No. of dishonored companies

0

100

200

300

400

500

'95 '96 '97 '98 '99 '00 01 02 03 04

(%)

KOSDAQ Companies Manufacturing indusrty Avg.

9

Demand for New SME SharesDemand for New SME Shares

• Affluent liquidity by easy money policy

• High investment appetites after market crash and high interest rates

* Composite Index Fluctuations

* Source :Bank of Korea

* M2/M3/ Call Rates

0200400600800

1,0001,2001,4001,600

199501 199609 199805 200001 200109 200305 200501

(US$

bil.

)

0

5

10

15

20

25

30

Call

Rate

(%)

M2 M3 Call Rate

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

97 98 99 00 01 02 03 04 05

KOSPI KOSDAQ

10

International EconomyInternational Economy

* Nasdaq & Kosdaq Indices

* IT/GDP Ratio (Korea)

• Global IT Boom

• Synchronized market with NASDAQ

0.0

2.0

4.0

6.0

8.0

10.0

1995 1996 1997 1998 1999 2000

IT/G

DP(%

)

-

100

200

300

400

500

600

700

GD

P(U

S$

bil.

)

GDP IT/GDP(%)

0

1000

2000

3000

4000

5000

6000

NA

SD

AQ

0

500

1000

1500

2000

2500

3000

KO

SD

AQ

NASDAQ KOSDAQ

11

• New Market Architecture for SME financing

- Designed a new market (KOSDAQ)

- Introduced a new concept of innovative SMEs (venture certification)

- Developed diverse government-sponsored financial programs for venture investment

- Revitalized venture capital companies

Government Capital Market Policy Government Capital Market Policy

12

• Comprehensive approach to promote innovative SMES

- Tax incentives (National and Local)

- Business consulting services

- Human resources development (e.g., exemption from military service for venture employees)

- Public awareness campaign (e.g., Presidential Committee for Venture promotion)

- Companies Act amendment (e.g., stock options, pubic offerings)

Government Industrial PolicyGovernment Industrial Policy

13

1. KOSDAQ OVERVIEW1. KOSDAQ OVERVIEW

2. CONTRIBUTORS to EARLY SUCCESS2. CONTRIBUTORS to EARLY SUCCESS

3. 3. CRISISCRISIS and and RESTRUCTURINGRESTRUCTURING

4. REMAINING CHALLENGES and FUTURE4. REMAINING CHALLENGES and FUTURE STRATEGYSTRATEGY

5. Conclusion5. Conclusion

14

Collapse of KOSDAQCollapse of KOSDAQ

• Boom bust

- Highest: 2,834 (March 00)

- Lowest: 448 (Dec. 02)

• Similar trend with other new markets but more severe downturn

0

1,000

2,000

3,000

99/01 00/01 01/01 02/01

KO

SD

AQ

0

400

800

1,200

KO

SP

I

KOSDAQ KOSPI

* Composite indices of Korea Market

0

1000

2000

3000

4000

5000

6000

NA

SD

AQ

0

500

1000

1500

2000

2500

3000

KO

SD

AQ

NASDAQ KOSDAQ

* Nasdaq & Kosdaq Indices

15

Collapse of KOSDAQCollapse of KOSDAQ

• Financial gridlockin venture capitalcompanies

• Disappearing angel investors

( In US$ Mill )

* Venture Capital

17%33%

44%52%

47% 50%

* Source : Small & Medium Business Administration

* No. of Angel Investors

* Source : Korea Development Institute

2,563

564

105

'04

2,1412,737 3,032 3,036 2,869 1,485 InvestmentBalance

665 612 617 889 2,008 950 New Investment

102 117 128 145 147 87 No. of Venture

Capital

‘05'03'02'01'00'99

2,563

564

105

'04

2,1412,737 3,032 3,036 2,869 1,485 InvestmentBalance

665 612 617 889 2,008 950 New Investment

102 117 128 145 147 87 No. of Venture

Capital

‘05'03'02'01'00'99

1,640

28,875

12,002

4,717 3,964

-

10,000

20,000

30,000

'99 '00 '01 '02 '03

(pers

ons)

16

Crisis of KOSDAQCrisis of KOSDAQ* Investing Population at Kosdaq

• Loss of market confidence

• Increased migration to KSE market

• Identity crisis as a new market

* Source : Korea Exchange

* No. of migration companies

* Source : Korea Exchange

1,5741,692

1,594

1,384

1,775

94.4%95.8%

93.1% 92.6%

89.8%

-

500

1,000

1,500

2,000

00 01 02 03 04

(tho

usand p

erso

ns)

80%

90%

100%

Investing Population Individual Trading Capacity

1

5

3

2

76

3

1

0

2

4

6

8

(com

panie

s)

98 99 00 01 02 03 04 05

17

1. KOSDAQ OVERVIEW1. KOSDAQ OVERVIEW

2. CONTRIUBUTORS to EARLY SUCCESS2. CONTRIUBUTORS to EARLY SUCCESS

3. CRISIS and3. CRISIS and RESTRUCTURINGRESTRUCTURING

4. REMAINING CHALLENGES and FUTURE4. REMAINING CHALLENGES and FUTURE STRATEGYSTRATEGY

5. CONCLUSION5. CONCLUSION

18

Crackdown on market abusesCrackdown on market abuses

• Increased market abuses and regulatory responses

( In US$ Mill )

* Sanctions in market abuse cases

17%33%

44%52%

47%

50%

* Source :Financial Supervisory commission

0

100

200

300

400

500

(cas

es)

2000 2001 2002 2003 2004 2005

KSE KOSDAQ Non Listed

19

More stringent listing policy More stringent listing policy

　 '99 '00 '01 '02 '03 '04 '05

Major Shareholders‘OwnershipPercentage

　 No changeBefore 6 months

No changeBefore 12 months

ROE 10% (VB 5%)

Capital Stock 500 million KRW 1 billion KRW

Debt ratio

1.5 times of

the same

business

sector(A)

Max(A or 100%)

Max( A or 1.5

times all Listed

Companies

Lock-up of major shareholders’

shares

For 6 months

For 1 year

For 2 years(after 1 year

Set free 5%/a month)

For 1year(after 6 mth.

5%)

• Strengthening the lock-up rules for major shareholders

• Raised financial requirements

20

Harnessing de-listing driveHarnessing de-listing drive

　 '00 '01 '02 '03 '04 '05

Insolvent Company within 1yrhalf

yearwithout delay

NegativePaid-in capital

2 consecutive yrs without delay

Low Market Price(less than "A"

percentageOf par value)

　 20% 30% 40%

Low Market Capitalization

(less than "A" billionKRW)

　 　 　 1 2

Ordinary Loss and LowMarket Capitalization

For 2 years, MC less than

5 billion KRW & OL

Consecutive OrdinaryLoss (more than half of

Capital)

For3 years

• No leave for insolvent companies• Raised financial maintenance requirements

21

Revamp government policiesRevamp government policies

• Restructured venture capital companies by strict licensing and supervision policies

• Re-organized duplicated venture business promotion policies

• Applied minimum requirements for financial reporting and corporate governance

• Improved the self-regulatory capacity of market operator

22

Recovery of market activitiesRecovery of market activities

• IPOs resurged in 2005

• Mezzanine finance reactivated earlier

- SME equity related bond/total corp. bond:

(‘00) 29% (‘01) 5% (‘02) 18% (‘03) 22% (‘04) 25%

* Financing Activities in Kosdaq

* IPOs in Korea market(US$ mil.)

8

556

46

436

04

9

525

70

578

03

4521,227218-1,720Amount

67122166179105Number

Number

Amount

3

1,313

01

11

1,116

02

-

2,551

00

KOSPI1115

8502,111KOSDAQ

0599

8

556

46

436

04

9

525

70

578

03

4521,227218-1,720Amount

67122166179105Number

Number

Amount

3

1,313

01

11

1,116

02

-

2,551

00

KOSPI1115

8502,111KOSDAQ

0599

0

1,000

2,000

3,000

4,000

5,000

6,000

1999 2000 2001 2002 2003 2004 2005

(US

$ m

il.)

IPOs in Kosdaq Rights Issue Corp. Bonds

23

Results of Restructuring 1Results of Restructuring 1

(35)

(27)

(45)

(29) (30)

(50)

(40)

(30)

(20)

(10)

(Ranki

ng)

0201 03 04 05

• Corporate governance improved

• Market monitoring function recovered

* De-listing to total listed companies

* Ranking of Business efficiency

* Source : IMD World competitiveness yearbook 2005

10.4

16.715.6

13.8

5.5

1.23.0 3.1

4.5 4.3

0.22.0

0

5

10

15

20

00 01 02 03 04 05

(%)

NASDAQ KOSDAQ

24

Results of Restructuring 2Results of Restructuring 2

• Corporate performance recovered

• Market Performance restored* ’05 World Market Rising Rate(%)

* Period : 2005.1.1 – 2005.12.31

* Sales & Net profit/Sales Curve

0

10

20

30

2000 2001 2002 2003 2004

Sal

es G

row

th(%

)

0

1

2

3

4

Net

pro

fit/S

ales

(%)

Sales Growth Rate Net Profit/ Sales

1.4 - 0.66.7

13.6

40.2

16.7

54.0

84.5

- 10

10

30

50

70

90

KO

SD

AQ

KO

SP

I

Nasd

aq

Do

wJo

nes

FTS

E

NIK

KE

I

TW

I

STI

(%)

25

1. KOSDAQ OVERVIEW1. KOSDAQ OVERVIEW

2. CONTRIUBUTORS to EARLY SUCCESS2. CONTRIUBUTORS to EARLY SUCCESS

3. CRISIS and3. CRISIS and RESTRUCTURINGRESTRUCTURING

4. REMAINING CHALLENGES and FUTURE4. REMAINING CHALLENGES and FUTURE STRATEGYSTRATEGY

5. Conclusion5. Conclusion

26

A Divide among KOSDAQ firmsA Divide among KOSDAQ firms

• Low liquidity companies

• Limited foreign investment

* Trading Volume

* Ownership by Foreign investors

*as of 2005. 12. 29

19.28.3Bottom 500 stocksin terms of trading vol.

36.256.7 Top 100 stocksin terms of trading vol.

Trading Value(% )

Trading volume (% )

2005

19.28.3Bottom 500 stocksin terms of trading vol.

36.256.7 Top 100 stocksin terms of trading vol.

Trading Value(% )

Trading volume (% )

2005

11.7

109

10-30%

3.2

30

30-50%

61.1

570

0 –10%

Ratio(% ) 0.623.4

6218Companies

Over50%

Non

11.7

109

10-30%

3.2

30

30-50%

61.1

570

0 –10%

Ratio(% ) 0.623.4

6218Companies

Over50%

Non

27

New market abusesNew market abuses* No. of Back door listings

* Third Party Issues/Total equity issue

• Increased back door listings to avoid tightened listing requirement

• Private placements with malpractices

* Source: Financial Supervisory Commission

1016

12

24

37

67

-

10

20

30

40

50

60

70

80

'00 '01 '02 '03 '04 '05

(Cas

e)

-

1,000

2,000

3,000

4,000

5,000

2000 2001 2002 2003 2004 2005

Rig

hts

Iss

ue(U

S$m

il)

0%

10%

20%

30%

40%

50%

Third P

art

y /

Tota

l(%

)

Total Issue Third Praty/ Total(%)

28

Future development strategyFuture development strategy

• Maintain the identity as an SME market in merged Korea Exchange

• Keep high-tech profile with IT, BT, NT, CT

• Reduce compliance costs and improve capacity of listed companies

• Cross-listing and cross-trading with other exchanges

• Develop a sustainable eco-system for fostering new SMES

29

Conclusion (Lessons Learned)Conclusion (Lessons Learned)

• Develop a distinct (not inferior) character of New Market [Market Architecture]

• Re-regulate disclosure and listing/de-listing systems for SMEs [Optimal Regulation]

• Strengthen supporting services to listed SMEs [Response to Compliance Challenges]

• Foster investor base for high-risk and high-return assets [Deregulation of Institutional Investments and Retail Investor Protection]

• Develop industrial policies for Innovative SMEs [Government Policy Coordination]

30

:: thank you