Prices of four out of 10 Korean stocks rise after new issues

South Korean stocks with stable financial structure and robust investment prospects have seen prices rise after issuing new shares to raise capital.

According to an analysis by Maeil Business Newspaper and the Korea Exchange into 76 stocks with 500 billion won ($383 million) or more market capitalization as of Friday that have issued new shares after 2018, 31 stocks, or 40 percent, saw prices rise six months after disclosure.

The analysis found 32 cases where the stock prices rose after one year, and 29 cases after one week.

The average return on the stocks that conducted capital raising remained low at -2.7 percent one week after the disclosure. The return, however, jumped to 10.6 percent after six months and 25.6 percent after one year.

The surge was led by a rise in the stocks of secondary battery stocks, which suggests that companies with large growth potential are more likely to see their share prices increase following capital raising.

Issuing new shares to raise capital often leads to a decline in the stock prices as they are offered at a discounted price, diluting share value.

Analysts, however, noted that capital raising may affect short-term return but it may serve as the foundation for companies to secure growth engines or rebound from hardship.

“Companies with large debt and poor cash flow usually end up conducting capital raising to secure funds,” said an unnamed analyst from a local brokerage firm.

“The time of disclosure tends to be the lowest point in stock prices,” the analyst added.

For instance, Samsung Heavy Industries Co., one of Korea’s three major shipbuilders, announced a capital raising in August 2021 to secure 782.6 billion won for business operations and 500 billion won for debt repayment.

Since obtaining the funds, the local shipbuilder has successfully reduced its deficit and improved its balance sheet. The company is expected to swing into the black this year with a surge in orders.

Secondary battery makers have also accelerated growth with a capital increase.

POSCO Future M Co. disclosed a plan for capital raising in November 2020. The move, which raised funds worth 1.27 trillion won, was to make secondary battery equipment one of the key businesses in the company. The stock price of the battery manufacturer soared by 89.8 percent over the year after the announcement.

However, companies saw their stock prices decline when they failed to make any improvement in financial conditions following capital raising.

Lotte Chemical Corp., for example, announced in November last year that it will raise 610.5 million won through new share issuance for operation funds and 605 billion won to cover part of the acquisition fund for Iljin Materials Co.

The outlook appeared positive as the manufacturing industry in China, Lotte Chemical’s primary export market, displayed promising signs of revival at the beginning of this year.

However, the anticipated rebound in the Chinese economy did not materialize as expected, reducing earnings expectations. As a result, Lotte Chemical’s stock price declined by 4.9 percent from the offering price and has decreased by 15.3 percent this year.

“If large shareholders fail to share the responsibility, companies may have difficulty gaining market trust and raising funds,” said Lee Sang-ho, a researcher at Korea Capital Market Institute.