Stocks on delisting watch surge to daily limit amid market slump

Even as the broader domestic market continues to fall, stocks on the delisting watchlist have been hitting their daily upper price limits. The surge followed a court decision suspending delisting procedures for companies that failed to meet market capitalization thresholds, drawing a rush of buying into the affected stocks. Analysts warn, however, that investors should exercise caution: watchlist designations remain in place, and some companies posting sharp gains have deteriorating earnings.

According to the Korea Exchange, of the 30 instances of stocks hitting their daily upper limit across the three most recent trading days — Thursday, Monday and Tuesday — 19, or 63.3 percent, involved watchlist stocks. On Thursday, 10 of 16 stocks that hit the limit (62.5 percent) were on the watchlist; on Monday, 3 of 6 (50 percent); and on Tuesday, 6 of 8 (75 percent). YeSUN Tech, BioInfra and Hyungji Innovation and Creative each hit the daily upper limit for three consecutive trading days.

The surge in watchlist stock prices became pronounced after the Korea Exchange announced Tuesday that it would suspend follow-up delisting procedures for companies falling short of market capitalization requirements. The exchange said it would maintain the watchlist designations introduced July 1 for companies below the market cap threshold, while suspending the subsequent delisting procedures that had been set to begin Oct. 2. Trading halts already in place for eight companies whose delistings had been finalized — Jooyontech, SHD, Silla SG, Gold&S, Kmpharmaceutical, Pintel, Sejin T.S and A.F.W — will remain in effect.

The exchange had already delayed tightening its market cap standards by six months, and the latest court decision halting follow-up delisting procedures has further stalled the policy of swiftly removing underperforming companies from the market. The Korea Exchange plans to contest the court's decision, but no timeline has been set for resuming delisting procedures. With watchlist designations still in place but delisting procedures on hold, both companies and investors find it increasingly difficult to predict when actual removals might occur.

Market analysts say share prices that had fallen on delisting fears are now recovering in the wake of the procedural suspension. "Companies that fell short of the 20 billion won ($14.9 million) market cap threshold did not start out at the 5 billion won level," said Choi Sung-hwan, chief executive of Research Alleum. "Companies that had been in the 10 billion to 15 billion won range or higher declined due to delisting concerns, so the recent gains appear to be a recovery of those earlier losses."

Analysts caution, however, that earnings vary widely even among the companies that hit the daily limit during the same period. "If a company's fundamentals are solid, the recent gains can be seen as a revival of investment demand that had been suppressed by delisting fears," said Eom Su-jin, a researcher at Hanwha Investment & Securities. "On the other hand, if a company with poor profitability for years and no clear sign of earnings improvement suddenly hits the daily limit, that should be seen as largely driven by short-term speculative buying."

The small market capitalizations and low share prices of watchlist stocks are also cited as factors behind the sharp gains. Stocks with smaller market caps tend to see larger price swings than large-cap stocks when buying pressure concentrates.

"Share prices and market cap reflect market sentiment and do not always stably mirror a company's intrinsic value," Eom said. "It cannot be said that companies whose stocks surged within just a few days of the court ruling have seen any meaningful change in their underlying value in that time."