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Hidden Champions or Hidden Losers?
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Hidden Champions or Hidden Losers?
  • By matthew
  • May 15, 2014, 03:40
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The “Hidden Champion System” is embroiled in controversy over its validity. Under the system, the Korea Exchange (KRX) chooses KOSDAQ-listed companies with growth potential and world-class technology for a program that turns them into a globally-successful enterprise. However, the KRX’s handpicked companies are in a state of limbo with little or no growth. The chosen companies have seen their share prices drop and found themselves getting marginal benefits from the system, while other companies are reluctant to apply for it since their conglomerate partners would not disclose business projects.

A “Hidden Champion” means a KOSDAQ company that has near three percent global market share with their flagship product.

The KRX has been selecting “Hidden Champions” since 2010 by factoring in diverse elements such as market share, profitability, growth, technology, and financial stability. The chosen ones get benefits in terms of annual due exemptions, Investment Relations (IR) hosting, and analysis report publication.

But according to financial information service company FnGuide on May 13, out of 26 KOSDAQ listed companies that were chosen as “Hidden Champions,” 13 companies saw their operating profits drop or go into the red. 

Listed companies saw their operating profits edge up a mere two percent.

Their share prices were no different. As of May 9, out of 26 companies, 18 saw their share prices fall year-on-year. That is a full 70 percent of the total. Also, on average, the 26 companies’ share price drop was 7.45 percent, while the unfortunate 18’s share prices fell on average by 24.52 percent.

The problem at hand is that these chosen companies are endowed with a certain public image. Investors tend to trust the KRX chosen companies with their money. One securities company associate said, “Individual investors who are not well-versed in KOSDAQ-listed companies would rush into investing in these companies, thinking that the KRX is guaranteeing and supporting these companies.” He stressed, “Because of this, in order to prevent investor losses, the KRX’s company selection is vitally important.”

Meanwhile, the companies designated as “Hidden Champions” are not at all thrilled. An associate at a “Hidden Champion” company which has held the title right from the beginning in 2010 said, “To be honest, we did not apply for it because of the benefits and aid. We are extra-busy making Hidden Champion-related documents.” He added, “We honestly do not want to be one, because there are no direct benefits, but since we cannot really refuse the KRX’s request, we apply for it every year.”

In the meantime the KRX has also has its difficulties. KRX team leader Choi Chi-ho said, “Annually, about 50 companies sign up, and the competition is only 2:1, so we mostly accept them as long as they are financially sound. The aid measures are still marginal, and most companies are sub-contractors of large companies. They cannot afford to sign up because conglomerates want to avoid media exposure.”

Another criticism points out that poor-performing listed companies still get picked repeatedly. Out of 13 companies whose performance worsened last year, only six were off the table during the selection process this time. Out of the seven newly-selected companies, two saw their operating profits plummet 30 percent last year.

Choi replied, “Structurally-declining industries were excluded, but we made our selection via in-depth examinations together with securities company analysts. When making the list, we closely examined companies impacted by temporary conditions such as overseas market status, conglomerates, and exchange rates.”