Korea’s IPO dilemma: when a bakery outperforms 90% of listed companies

Famous local bakery Sungsimdang’s operating profit reached 31.5 billion won last year - most listed companies in South Korea scored worse

Bakery Sungsimdang's fried soboro bread. / The Chosunilbo

Last year, over 10 million people visited Sungsimdang, a popular bakery in Daejeon, South Korea. The bakery made headlines when it announced that annual sales reached 124.3 billion won ($93 million) last year. This is the first time a single bakery brand in Korea has surpassed the 100 billion won sales mark.

Sungsimdang’s operating profit doubled to 31.5 billion won last year, far exceeding the operating profit of competitors such as Paris Croissant (19.9 billion won), which operates famous Paris Baguette bakery chain, and CJ Foodville (21.4 billion won), which runs the bakery chain Tous Les Jours. The bakery’s operating profit also outperformed that of Theborn Korea, a restaurant franchise led by restauranteur and celebrity chef Baek Jong-won, which is set to go public on the KOSPI in November.

“It’s remarkable how significantly Sungsimdang’s operating profit margin improved last year,” said a domestic asset management firm executive. “The bakery achieved sales growth of over 50% without additional marketing or reductions in raw material prices, which is the ideal growth model every company dreams of.”

An executive at a securities company added, “If Rosso, the parent company that operates Sungsimdang, were to go public, it could be valued at around 300 billion won. Korea has many unlisted gems that have the potential to go public but don’t feel the need because they are cash-rich.”

This raises questions about the performance of publicly traded companies in Korea. Compared to Sungsimdang’s annual 31.5 billion won operating profit, only 373 companies listed on the benchmark KOSPI, which is 46% of the total, topped this figure last year, according to the Korea Exchange on Sept. 18. Leading the pack were Hyundai Motor Company, Kia, Samsung Electronics, KB Financial Group, and Shinhan Financial Group.

On the KOSDAQ, just 161 out of 1,631 companies, or 10%, surpassed the bakery’s operating profit. Over 40% of the KOSDAQ-listed companies reported losses.

Last year, Korean companies experienced a significant drop in operating profits due to a sluggish economy and weak semiconductor exports. Despite these factors, experts argue that the issue runs deeper. “An operating profit of 31.5 billion won is a high standard, but it is still true that a substantial number of listed companies in Korea are struggling to make money,” said an analyst.

The problem, as pointed out by several industry insiders, stems from allowing unprofitable companies to list solely based on their growth potential without ensuring they are financially robust.

“Once a company goes public, it faces a host of complicated and demanding obligations, such as managing stock prices and conducting investor relations events,” said a securities firm executive. “Companies with poor balance sheets often pursue an IPO to either recover funds for major shareholders and existing investors or to lower inheritance and gift taxes.”

While initial public offerings (IPOs) are crucial for startups, problems arise when companies treat listing as the final destination rather than a new phase, neglecting their responsibilities once they go public.

“Some securities firms, with the single goal of ramping up performance, have focused on listing ‘C-grade’ companies,” said an asset manager. “As a result, the market is flooded with insolvent companies that, frankly, perform worse than a bakery.” Experts noted that the Korea Exchange and related institutions need to strengthen their gatekeeping functions to ensure only financially sound companies go public.

The Korea Exchange building in Yeouido, Seoul. / News1

[Lee Kyeong-eun]

- Copyrights ⓒ 조선일보 & chosun.com, 무단 전재 및 재배포 금지 -